Verizon Hit for Cash Balance Conversion Error

U.S. Magistrate Judge Morton Denlow of the  U.S.District Court for the Northern District of Illinois issued the ruling in a lawsuit filed by plaintiff Cynthia N. Young who challenged her opening balance calculation when the company’s pension plan was converted to a cash balance program in December 1995. Denlow ruled that the benefits committee abused its discretion by opting todisregard the mistaken language and deny Young’s request that her benefits be calculated by using the transition factor twice.

According to   Denlow, once the scrivener’s error was discovered, the committee should have sought to reform the plan documents in court. Denlow said even though the committee had power to resolve plan document ambiguities, it still remained bound by that document and was not given the power to modify or reform the plan to resolve any scrivener’s errors.

“ERISA was created to give employees access to the court system to bring claims arising out of their benefits plan,” Denlow wrote. “Accordingly, a dispute regarding whether specific plan language should be modified, language which employees may have relied upon and the modification of which could result in the gain or loss of hundreds of thousands of dollars for an employee, and billions of dollars to a class of employees, is more appropriately reserved for decision by the court.”  

Denlow agreed with Young that the plan language regarding the second reference to the transition factor was unambiguous and the committee should have gone to court to reform the plan.Young argued in her lawsuit that Verizon incorrectly calculated her opening balance by multiplying her applicable “transition factor” by her lump-sum cashout value only once, saying her opening balance would have increased by nearly $400,000 to $640,321 if they had calculated it according to plan terms.

“When faced with language that appears to have been mistakenly included in the plan, courts expect plan administrators to treat the language as a mistake or scrivener’s error, rather than a mere ambiguity,” Denlow asserted.

However, in a setback for Young, the court found that Verizon did not abuse its discretion when it calculated plan participants' opening account balance by using 120% of the Pension Benefit Guaranty Corporation (PBGC) interest rate, instead of 100%.

According to the ruling, the Verizon   plan provided pension benefits expressed as a specific dollar amount to be paid upon retirement in any number of forms, including a lump-sum or an annuity. For employees with the company before the cash balance conversion and who accrued benefits under the traditional defined benefit plan, the cash balance plan devoted a separate section of the plan to the calculation of the opening balances of their cash balance accounts.

Young alleged in her suit that her opening account balance should have been calculated using 100% of the applicable PBGC interest rate because a provision in the plan referencing "present value" called for use of 100% of the PBGC rate. If this rate had been used, Young's opening account balance would have increased from $240,127 to $292,383.

The court noted that if Young succeeded on her claims, Verizon would owe as much as $2.5 billion to plan participants and this factor would call for the court to place greater importance on the committee's conflict of interest than it might otherwise do in other Employee Retirement Income Security Act (ERISA) cases.

The case is Young v. Verizon's Bell Atlantic Cash Balance Plan ,   N.D. Ill., No. 05 C 7314, 8/28/08.