Method of Offset for Prior Distributions Violates Anti-Cutback Rule

In addition, according to the opinion, the appellate court rejected a lower court’s ruling that the plan always contained its “phantom account” offset.   The court also determined the “phantom account” was not properly added to the plan through amendment until 1998 and that the amendment was made without proper notice to participants.

In the ruling, the judges defined a plan amendment as occurring once participants are properly notified and not when the operation of the plan changes.

Under the Xerox Corporation Retirement Income Guarantee Plan, retiree benefits are determined by a comparison of three calculations or three ‘accounts’.   The plan always mentioned that benefits would be reduced by prior distributions and a “Benefits Update” issued to participants in 1995 mentioned the phantom account offset, according to the opinion. First adopted in 1977, Xerox converted the plan to a cash balance plan in 1989.

However, it was not until a 1998 Summary Plan Description was issued to participants that the method for offsetting participant benefits by prior distributions was explained in full.

Participant Paul Frommert first resigned from Xerox in 1986 and received a lump sum distribution of his retirement account benefits at that time.   He was rehired in 1989.

Frommert received a statement in 1989 letting him know of the retirement benefit he had earned up to that point.   The statement did say that the benefit would be reduced by any prior distributions.   In 1996, Frommert received a statement that said his monthly retirement benefit, taking into account his prior distribution, would be $5.31.   The prior statement said he had earned $2,842 per month.

Frommert sent a memo to the Director of Benefits explaining that he had expected his benefit to be the amount in prior statements he had received.   He received back an explanation of why his benefit amount was reduced and was told he could appeal to the Plan Administrator for additional benefits.   His appeal was denied.

Frommert and other plaintiffs filed a lawsuit in the US District Court for the Western District of New York.   In June 2002, the judge dismissed the rehired Xerox employees’ claim that the company violated ERISA by failing to permit them when rehired to repay their prior pension plan distributions.

The district court ruled in July 2004 that Xerox did not illegally reduce the rehired workers’ benefits by applying the phantom account offset. Among other things, the district court found that although the plan went through several modifications, the plan in one manner or another provided that employees’ benefits would be offset if they took a lump-sum distribution and then were rehired by the company. The district court found that there was no plan amendment made by Xerox that would have triggered the company’s responsibility to notify employees of the phantom account offset provision

In remanding the case back to the lower court, the appellate court commanded the district court to review whether the plaintiffs’ have stated a claim for equitable relief for breach of fiduciary duty by the defendants’ misrepresentation of the plan.

The opinion in Frommert v. Conkright is  here .