The Sixth Circuit Court of Appeals this week, in Jensen v. Moore Wallace North America, included cash balance jail in their reasoning on why participants in Moore Wallance North’s cash balance plan were not entitled to the plan’s surplus. Jenson v. Moore Wallace North America, No. 06-4388, (6th Cir. Aug. 21, 2007). (hat tip to AltLaw.org)
Cash balance jail is pension geek speak for the moratorium imposed by the IRS on issuing determination letters for cash balance. This moratorium began quietly with a Field Directive issued by the IRS’ Director of Employee Plans on September 15, 1999. In that directive, the Director of Employee Plans required that all open determination letter applications and examination (audit) cases involving defined benefit plan converting to cash balance plans be submitted for technical advice.
In 2003, the moratorium became official when the IRS issued Announcement 2003-1, stating that plans subject to the 1999 Field Directive would not be processed pending issuance of regulations addressing age discrimination in cash balance plans. As of today, those regulations have not been issued.
On August 17, 2006, Congress passed the Pension Protection Act, statutorily validating hybrid plans, including cash balance plans. Earlier this year, in Notice 2007-6, the IRS lifted the moratorium and announced that determination letter applications will now be processed for plans caught in cash balance jail, with many applications completed before the end of 2007.
This brings us to the Sixth Circuit’s decision on August 21, 2007, affirming the district court’s dismissal of the participants’ class action suit seeking $200 million in surplus plan assets. The Court states that they affirm the lower court’s decision because Moore Wallace North America has not terminated or discontinued the plan, and because the wasting-trust doctrine does not apply.
The Court’s reasoning on why the plan is not terminated is this:
To satisfy ERISA’s requirements for terminating a pension plan, the plan administrator must (1) issue to “affected part[ies]” a “written notice of intent to terminate,” which includes the “proposed termination date,” 29 U.S.C. § 1341(a)(2); see also 29 C.F.R. § 4041.21(a)(1); (2) issue “notice to each person who is a participant or beneficiary under the plan . . . specifying the amount of the benefit[s]” to which the individual is entitled, 29 U.S.C. § 1341(b)(2)(B); see also 29 C.F.R.§ 4041.21(a)(2); (3) file a standard termination notice with the PBGC, 29 U.S.C. § 1341(b)(2)(A);see also 29 C.F.R. § 4041.21(a)(3); and (4) distribute the plan assets, 29 U.S.C. § 1341(b)(2)(D); see also 29 C.F.R. § 4041.21(a)(4). The administrator has 180 days from the expiration of the PBGC’s 60-day review period, see 29 C.F.R. § 4041.26(a), to distribute the assets, see id. § 4041.28(a)(1). But if, prior to filing the termination notice with the PBGC, the administrator seeks a request from the IRS for a determination of the plan’s tax-qualification status upon termination, ERISA extends the asset-distribution deadline to 120 days after the IRS provides a favorable determination. Id.
The Court found that the plan never terminated as a matter of law because the plan did not complete the 4 steps required for termination. Because the plan never terminated as a matter of law, any possible claims the plaintiffs might have had stemming from the termination are eliminated. The reason the plan did not complete these 4 termination steps is because it was languishing in cash balance jail.
On April 13, 2001, the plan administrator requested a determination letter from the IRS. Due to the 1999 Field Directive referring determination letter applications for technical advice in cases where the application involved a defined benefit plan which converted to a cash balance plan, the IRS did not issue the plan a determination letter. Instead, the Moore Wallance North America plan went to sit in cash balance jail.
On May 14, 2004, the plan administrator notified retirees with annuitized benefits that the company would not terminate the plan. The Court does not state if the IRS was officially notified that the determination letter application was being withdrawn or if the plan remains in cash balance jail.
On December 22, 2004, the participants filed their class action lawsuit against Moore Wallace North America, contending that the plan had, in fact, terminated, and they were entitled to the surplus assets of roughly $200 million. The district court disagreed, and granted the company’s 12(b)(6) motion to dismiss.
The theoretical question not addressed by the Court is whether the plaintiffs should have a cause of action against the IRS due to the plan’s determination letter application languishing in cash balance jail. Without the 1999 Field Directive and the moratorium, the plan would have been issued a determination letter in 2001 or 2002, and the plan would have terminated, entitling the plaintiffs’ to the surplus. Because of cash balance jail, this did not happen, and the plaintiffs were directly harmed.
[tags]Pension Protection Act, ppa, pension, retirement, cash balance, 1999 Field Directive, Announcement 2003-1, Notice 2007-6, defined benefit, ERISA[/tags]
