Frank v. Aaronson
| Decision Date | 18 July 1997 |
| Docket Number | D,No. 1393,1393 |
| Parties | -5641, 97-2 USTC P 50,563, 21 Employee Benefits Cas. 1394, Pens. Plan Guide (CCH) P 23,937 Joel L. FRANK, on behalf of all those similarly situated, * Plaintiff-Appellant, v. Melvyn AARONSON, Alan G. Hevesi, Irene Impellizzeri, Joseph J. Lhota, Sandra March, Luis O. Reyes, Dr., Phyllis Wallach, Individually and as Trustees of the Funds of the Teachers' Retirement System of the City of New York, Defendants-Appellees. ocket 96-9456. |
| Court | U.S. Court of Appeals — Second Circuit |
Joel L. Frank, Marlboro, NJ, pro se.
Paul A. Crotty, Corporation Counsel of the City of New York, New York City (Larry A. Sonnenshein, Susan Sanders and Mordecai Newman, of counsel), for Defendants-Appellees.
Before: MINER and CALABRESI, Circuit Judges, and SHADUR, ** District Judge.
Pro se plaintiff Joel Frank ("Frank") appeals from a judgment entered October 25, 1996 in the United States District Court for the Southern District of New York (McKenna, J.) that (1) granted summary judgment in favor of defendants Melvyn Aaronson, Alan Hevesi, Dr. Irene Impellizzeri, Joseph Lhota, Sandra March, Dr. Luis Reyes and Phyllis Wallach (collectively "Trustees"), both individually and as trustees of the Funds of the Teachers' Retirement System of the City of New York ("Funds"), (2) denied Frank's cross-motion for summary judgment and (3) dismissed Frank's Complaint and hence this action. 1 Frank claims that the District Court erred in holding that the distribution-triggering events of 26 U.S.C. § 403(b)(11) 2 must be satisfied in order for Frank's post-1988 contributions to the Funds to be "eligible rollover distributions" within the meaning of Section 403(b)(8)(A)(i). That ruling rebuffed Frank's effort to compel Trustees to effect a direct rollover of his post-1988 Funds balance to an eligible individual retirement plan pursuant to Sections 403(b)(8) and 403(b)(10). We affirm the judgment of the District Court.
Frank is a member of the Teachers' Retirement System of the City of New York (the "System"). Since 1971 Frank has participated in a voluntary tax-deferred annuity ("TDA") program offered by the System. Under that program each System member is permitted to enter into a yearly salary reduction agreement to have a portion of the member's salary put into a TDA account administered by the System. Pursuant to Section 403(b), taxation of both those salary deductions and the accrued earnings on the TDA account is deferred until the year in which amounts are distributed to the member from his or her account.
Understandably Congress has coupled the availability of those tax deferral benefits under Section 403(b) with restrictions on the early withdrawal of such TDA funds. And herein the present dispute lies.
In brief, Frank desires more access to his TDA account funds than Trustees consider to be permitted by law. Specifically Frank hopes to avoid the TDA distribution restrictions of Section 403(b)(11) and to compel Trustees to conduct a "direct rollover" of his post-1988 Fund contributions into another TDA or an individual retirement account ("IRA"). For Trustees the stakes are high. They fear that giving in to Frank will violate Section 403(b)(11) and applicable Internal Revenue Service ("IRS") rulings, thus risking the loss of Section 403(b) status for the System's entire TDA plan. To evaluate those competing positions it is necessary to take a brief look at the statutory and regulatory provisions at issue.
Section 403(b)(11)
To maintain the tax-preferred qualification of the System's TDA program under Section 403(b), Trustees must comply with Section 403(b)(11). That provision, added to the Internal Revenue Code by the Tax Reform Act of 1986 (Pub.L. No. 99-514, tit.XI, § 1123(c)(1), 100 Stat.2085, 2474-75), imposes several alternative requirements to be satisfied before TDA funds attributable to a salary reduction agreement are eligible for distribution:
(11) Requirement that distributions not begin before age 59 1/2, separation from service, death or disability.--This subsection shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement (within the meaning of section 402(g)(3)(C)) may be paid only--
(A) when the employee attains age 59 1/2, separates from service, dies, or becomes disabled (within the meaning of section 72(m)(7)), or
(B) in the case of hardship.
Such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship.
Section 403(b)(11) is applicable to funds contributed to a Section 403(b) plan after December 31, 1988.
Although Section 1035(a)(3) provides that "[n]o gain or loss shall be recognized on the exchange of ... an annuity contract for an annuity contract," the later enactment of Section 403(b)(11) could have been viewed as making such a tax-free exchange impossible. Because Section 403(b)(11) prevents a TDA trustee from distributing any post-1988 contributions and earnings to a participant who does not satisfy that provision's strict distribution requirements, the initial distribution necessary to effect a Section 1035(a)(3) exchange might perhaps be deemed prohibited. IRS issued Rev. Rul. 90-24, 1990-1 C.B. 97 to address that concern.
Rev. Rul. 90-24 permits a TDA plan trustee to direct a tax-free transfer of all or part of a plan participant's interest in a Section 403(b) plan to a successor Section 403(b) plan, so long as the successor plan's minimum distribution requirements are the same as or more stringent than those contained in the first plan. Taking into account the specific language of Section 403(b)(1) and (11), IRS determined that such a transfer between similarly-restrictive Section 403(b) plans was not a "distribution" from the participants' TDA and hence did not violate Section 403(b)(11)'s restrictive distribution provisions (Rev.Rul.90-24)(emphasis added):
If an individual transfers funds from a section 403(b)(1) annuity contract containing funds subject to the early distribution restrictions of section 403(b)(11) to another 403(b)(1) annuity contract ... and the transferred funds continue to be subject to the same or more stringent distribution restrictions, the transfer is not an actual distribution under section 403(b)(1) and consequently is not a taxable transfer.
Although Rev. Rul. 90-24 became effective for transfers of Section 403(b) annuities after December 31, 1991, Trustees were unable to effectuate such transfers until an appropriate amendment could be made to the Administrative Code of the City of New York ("Administrative Code") governing the System's plan. Since that amendment became effective on October 24, 1993, Trustees have been able to implement Rev. Rul. 90-24 and to honor participant elections for that type of direct transfer. Frank has elected such transfers annually since the change in the System's plan.
As its name implies, a "rollover" is an additional tax-deferred method of moving annuity assets from one Section 403(b) plan to another or to an IRA. Before enactment of the Unemployment Compensation Amendments of 1992 (the "1992 Act") (Pub.L. No. 102-318, § 521(b)(13), 106 Stat. 290, 311), the rollover provisions of Section 403(b) were quite limited. Section 403(b)(8) allowed for a TDA distribution to a plan participant to be rolled over to another Section 403(b) plan or to an IRA within 60 days of receipt, but only if the distribution were a total distribution payable on account of one of several triggering events, including death, separation from service, reaching age 59 1/2 or becoming disabled. Even more restrictively, a partial balance of at least 50% of the TDA balance that was payable because of death, separation from service or disability could be rolled over only to an IRA.
Then the 1992 Act changed Section 403(b)'s rollover provisions significantly. First, the statute expanded the definition of "eligible rollover distribution" to encompass all distributions from a TDA to a participant--whether total or partial, and without constraint by the quite limited triggering events of the old law--except for long-term periodic payments and certain minimum distributions (Sections 402(c)(4) and 403(b)(8)). Second, the 1992 Act required Section 403(b) plans to provide participants with a "direct rollover option" under which the distributee could elect a trustee-to-trustee transfer of the eligible rollover distribution (Sections 401(a)(31) and 403(b)(10)). Third, to finance the extension of federal emergency unemployment benefits, the 1992 Act imposed a 20% withholding tax on any distribution from a TDA that would be eligible for tax-deferred rollover treatment but as to which the distributee did not properly effectuate such treatment (Section 3405(c)).
Following action by the New York state legislature and a corresponding amendment to the Administrative Code, the provisions of the System's TDA were brought into conformity with the liberalized rollover rules of the 1992 Act. TDA participants in the Funds are thus now afforded two means of effectuating non-taxable transfers between different Section 403(b) plans: (1) a Rev. Rul. 90-24 transfer, under which any portion of a participant's TDA account may be transferred to another Section 403(b) plan so long as the transferee plan is subject to at least as stringent early withdrawal restrictions as the System's TDA plan, and (2) a 1992 Act "direct rollover," under which any amount that a participant is entitled to receive as a distribution may be transferred through a trustee-to-trustee rollover to an eligible successor plan.
In October 1993 Trustees notified the participants in the System TDA program that, pursuant...
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