West v. Ak Steel Corp. Retirement Accum. Pension

• Decision Date: 08 April 2004
• Docket Number: No. 1:02CV0001.,1:02CV0001.
• Citation: 318 F.Supp.2d 579
• Parties: John D. WEST, on Behalf of Himself and All Other Persons Similarly Situated Plaintiff, v. AK STEEL CORPORATION RETIREMENT ACCUMULATION PENSION PLAN, et al., Defendant.
• Court: U.S. District Court — Southern District of Ohio

318 F.Supp.2d 579

John D. WEST, on Behalf of Himself and All Other Persons Similarly Situated Plaintiff, v. AK STEEL CORPORATION RETIREMENT ACCUMULATION PENSION PLAN, et al., Defendant.

No. 1:02CV0001.

United States District Court, S.D. Ohio, Western Division.

April 8, 2004.

Jason R. Bristol, Jori Bloom Naegele, Thomas R. Theado, Thomas A. Downie, Gary, Naegele & Theado, Robert D. Gary, Lorain, OH, Allen C. Engerman, Law Office

of Allen C. Engerman PC, Northbrook, IL, for Plaintiff.

Michael A. Roberts, Graydon, Head & Ritchey, Cincinnati, OH, Christopher M. Denig, Robert D. Wick, Stuart J. Evans, Covington and Burling, Washington, DC, for Defendant.

ORDER

BECKWITH, District Judge.

This matter is before the Court on Plaintiffs' Motion for Partial Summary Judgment (Doc. No. 37) and Defendants' Motion for Summary Judgment (Doc. No. 39). Plaintiffs' filed a joint memorandum in opposition to Defendants' motion and a reply in support of their own motion (Doc. No. 42) to which Defendants filed a reply (Doc. No. 44). The parties filed a number of supplemental filings of recent authority relating to the issues raised in this case. (Doc. No. 45, 47, and 48).

I. BACKGROUND

This class action¹ was brought by former participants of the AK Steel Corporation Retirement Accumulation Pension Plan ("the AK Steel Plan")² against the AK Steel Plan and the AK Steel Corporation Benefit Plans Administrative Committee ("the AK Steel Committee") for violations of the Employee Retirement Income Act of 1974 ("ERISA") and the Internal Revenue Code ("I.R.C.") (Doc. No. 1, ¶ 31).

The AK Steel Plan is a cash balance plan, a hybrid of a traditional defined benefits plan and a traditional defined contribution plan.³ Under a cash balance plan, an employee has a hypothetical account balance which periodically increases by a specified percentage of the employee's salary ("a compensation credit") plus an interest credit. When an employee reaches the normal age of retirement (usually age 65), his or her pension benefit is the value of the hypothetical account balance in the form of a single life annuity and/or a lump sum disbursement.

The issue in this case is the manner in which a participant's benefit is calculated in the event his or her participation in the AK Steel Plan is terminated prior to reaching normal retirement age.⁴ Under the AK Steel Plan, such a participant may elect to receive his or her pension benefit in the form of an immediate lump sum disbursement. The amount of the lump sum disbursement is equal to the amount of a participants's hypothetical account balance.

Plaintiffs have brought the current action alleging that the manner in which their lump sum disbursements were calculated under the AK Steel Plan violated ERISA and the I.R.C. Plaintiffs are seeking partial summary judgment on the issue of liability and Defendants are seeking summary judgment on all of Plaintiffs' claims.

II. SUMMARY JUDGMENT STANDARD

Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The party opposing a properly supported summary judgment motion" `may not rest upon the mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968)). The Court is not duty bound to search the entire record in an effort to establish a lack of material facts. Guarino v. Brookfield Township Trs., 980 F.2d 399, 404 (6th Cir.1992); InterRoyal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir.1989), cert. denied, Superior Roll Forming Co. v. InterRoyal Corp., 494 U.S. 1091, 110 S.Ct. 1839, 108 L.Ed.2d 967 (1990). Rather, the burden is on the non-moving party to "present affirmative evidence to defeat a properly supported motion for summary judgment...," Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80 (6th Cir.1989), and to designate specific facts in dispute. Anderson, 477 U.S. at 250, 106 S.Ct. 2505. The non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The court construes the evidence presented in the light most favorable to the non-movant and draws all justifiable inferences in the non-movant's favor. United States v. Diebold Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962).

III. DISCUSSION

ERISA classifies retirement plans as either defined contribution plans or defined benefit plans. See ERISA §§ 3(34), (35), 29 U.S.C. §§ 1002(34), (35). If a plan does not meet the definition of a defined contribution plan, it is considered a defined benefit plan by default. ERISA § 3(35). Cash balance plans fall into this category. As such, the terms and administration of a cash balance plan must comply with the same ERISA requirements as those for a traditional defined benefit plan.

The issue before the Court is whether the lump sum disbursements received by Plaintiffs complied with ERISA's requirements relating to the early payment of pension benefits.⁵ Generally, a pension benefit under a traditional defined benefit plan is in the form of an annual benefit beginning when a participant reaches retirement age. Consequently, ERISA defines a participant's accrued benefit under a defined benefit plan as an "individual's accrued benefit determined under the plan ... expressed in the form of an annual benefit commencing at normal retirement age." ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

While ERISA defines an accrued benefit in the form of an annual benefit, it does not actually mandate that pension benefits be paid in such a form. Thus, plans are permitted to disburse benefits in other forms, such as a lump sum disbursement. To protect a participant who receives his or her benefit in the form of a non-annuity, ERISA requires that when a pension benefit takes some other form than an annual benefit, the alternative form must "be the actuarial equivalent" of an annuity commencing at normal retirement age. See ERISA § 204(c)(3), 29 U.S.C. 1054(c)(3). See also, Berger v. Xerox, 338 F.3d 755, 759 (7th Cir.2003) ("ERISA requires that any lump sum substitute for an accrued pension benefit be the actuarial equivalent of that benefit."); Esden v. Bank of Boston, 229 F.3d 154, 163 (2nd Cir.2000), cert. dismissed, 531 U.S. 1061, 121 S.Ct. 674, 148 L.Ed.2d 652 (2001). Consequently, a lump sum disbursement, like the ones received by Plaintiffs under the AK Steel Plan, must be the actuarial equivalent of the annual benefit the participants would have received at normal retirement age.⁶

In the case of a cash balance plan, the actuarial equivalent is calculated by projecting a participant's hypothetical account balance to normal retirement age using the rate at which future interest credits would have been calculated if the participant had remained in the plan until retirement age and then discounting it back to its present value. See Xerox, 338 F.3d at 760; Esden, 229 F.3d at 159. If the rate at which a participant's hypothetical account balance is projected forward is the same as the rate at which it is discounted back, the amount of the participant's lump sum disbursement will be equal to the amount of his or her hypothetical account balance. However, if the projection rate is higher than the discount rate, the amount of the participant's lump sum disbursement will be larger than his or her hypothetical account balance. Such a situation exists if a cash balance plan's rate for calculating future interest credits is higher than the discount rate established by ERISA. This is commonly referred to as a "whipsaw" calculation. See Esden, 229 F.3d at 159, fn. 7.

Administrators of cash balance plans are naturally reluctant to engage in whipsaw calculations because participants whose participation in a plan is terminated prior to normal retirement age would receive lump sum disbursements larger than their hypothetical account balances. Despite the existence of regulations upholding whipsaw calculations, sponsors of cash balance plans have argued that whipsaw calculations are not required under ERISA. See T.R. § 1.411(a)-11 (d), 26 C.F.R. § 1.411(a)-11(d); I.R.S. Notice 96-8, 1996 WL 17901. Several courts have addressed this issue and have consistently held that ERISA's valuation rules are valid and that cash balance must comply with these valuation rules even if such compliance results in a whipsaw effect. See Xerox, 338 F.3d at 763; Esden, 229 F.3d at 165-68.⁷

Based on these authorities, Plaintiffs argue that the administrators of the AK Steel Plan were required to engage in a whipsaw calculation when calculating their early lump sum disbursements. Under the current administration of the AK Steel Plan, lump sum disbursements paid prior to normal retirement age are equal to the amount of a participant's hypothetical account balance at the time he or she stopped participating in the plan. Plaintiffs' contend that this practice violates ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), because such lump sum disbursements are not the actuarial equivalent of the annual benefit to which Plaintiffs would have been entitled if they had remained in the AK Steel Plan until age 65.

Defendants disagree, arguing that the facts of the present case distinguish it from the case law upholding whipsaw calculations. Specifically, Defendants argue that, under the AK Steel Plan, the projection rate is a statutory rate established by ERISA rather than the rate established by the AK Steel Plan. Furthermore, Def...