In Wetzler v. Illinois CPA Society & Foundation Retirement Income Plan, No. 08-2923 (7th Cir. 2009), the plaintiff, Thomas Wetzler, wanted a lump-sum payment of his entire retirement benefit from the Illinois CPA Society & Foundation Retirement Income Plan (the “Plan”). The Plan is a tax-qualified defined benefit pension plan. The plaintiff was a highly compensated employee. The Plan had always allowed lump-sum payments. However, prior to the plaintiff’s retirement, the Plan had been amended to reflect certain provisions of the Internal Revenue Code (the “Code”) and the underlying Treasury regulations, under which the Plan could not make a lump- sum payment to certain highly compensated employees, such as the plaintiff, when the Plan is not sufficiently funded (the “Amendment”). At the time of the plaintiff’s request for a lump-sum payment, there were not enough assets in the Plan to cover this payment. Therefore, honoring the plaintiff’s request would have caused the Plan to use all of its assets and violate the Code and the underlying Treasury regulations, and to also violate the Plan itself due to the Amendment. Explaining this to the plaintiff, the plan administrator for the Plan (the “Plan Administrator”) refused his request. The plaintiff filed suit in district court, alleging that the Amendment violated the anti-cutback rules of ERISA (found in 29 U.S.C. § 1054(g)) by eliminating a previously available benefit, and that the Plan Administrator acted arbitrarily and capriciously in denying his demands for a lump-sum payment. The district court granted summary judgment in favor of the defendant, and the plaintiff appealed.
In analyzing the case, the Court dealt with several matters. The first issue was whether the Plan Administrator’s refusal to pay the lump-sum should be reviewed de novo or under the arbitrary and capricious standard. Since the Plan documents gave the Plan Administrator discretionary authority to construe the Plan’s terms, the Court found that the arbitrary and capricious standard applies.
The next issue was whether a lump-sum payment would have been available from the Plan in the absence of the Amendment. Resolving this issue involves a review of the Plan Administrator’s interpretation of the Plan, using the arbitrary and capricious standard. The Plan Administrator had interpreted the Plan so that the lump-sum would not have been available, even in the absence of the Amendment, reasoning as follows. The Plan is intended to have tax-qualified status, and therefore must be read so that it complies with Section 401(a) of the Code. In order to so comply, the Plan must not discriminate significantly in favor of highly compensated employees, such as the plaintiff. According to Treasury Regulation Section 1.401(a)(4)-5(b)(3), significant discrimination occurs if payments to a highly compensated employee exceed the payments that would be made under a straight life annuity to which the employee is entitled under the Plan, for example, if the employee receives a lump-sum payment. The Treasury Regulations contain exceptions to this rule, for example, lump-sum payments are allowed if the Plan is sufficiently funded, but those exceptions do not apply here. Thus, the Plan Administrator concluded that the lump-sum payment requested by the plaintiff would have violated the Code and the underlying Treasury Regulations, and thus could not be made by the Plan. As such, the Plan Administrator’s interpretation of the Plan, under which a lump-sum payment would not have been available to the plaintiff even in the absence of the Amendment, is well-reasoned and not arbitrary and capricious.
The remaining issue is whether, in view of the foregoing, the Amendment violated ERISA’s anti-cutback rule. Under this rule, among other things, a plan amendment may not eliminate a participant’s entitlement to take his pension benefit as a lump-sum payment at normal retirement age. Here, however, due to the funding status of the Plan, the plaintiff would not have been able to receive a lump-sum payment, even in the absence of the Amendment, so there cannot be any cutback. The Amendment merely brought the Plan into compliance with the Code and the underlying Treasury Regulations. It did not violate ERISA’s anti-cutback rule. Based on the above, the Court affirmed the district court’s summary judgment against the plaintiff.