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Jenner & Block Partners Lee A. Freeman, Jr. and James T. Malysiak recently secured an appellate victory for a class of retirees who were denied a cost-of-living adjustment when they chose that their retirement benefits to be paid in a lump sum. In its opinion affirming summary judgment for the retirees, the U.S. Court of Appeals for the Seventh Circuit upheld a district court decision that found the terms of the company’s pension plan violated the Employee Retirement Income Security Act (ERISA) because the adjustment was an “accrued benefit” as defined under ERISA.
The company’s pension plan provided participants with the option to receive either a monthly annuity payment or a one-time lump sum distribution equal to the accrued benefit of the monthly payments. According to the court’s opinion, the plan did not regard the cost-of-living adjustment as an “accrued benefit” necessary to include in its lump sum distributions of employee benefits. Rather, the plan unsuccessfully argued that the cost-of-living adjustment was “an enhancement that is awarded to annuitants, over and above the accrued benefit.”
In its analysis, the Seventh Circuit noted the court’s prior consideration of “a very similar issue” in Hickey v. Chicago Truck Drivers, Helpers and Warehouse Workers Union (7th Cir. 1992), where it held the cost-of-living adjustment to be part of the accrued benefit. The adjustment is “inseparably tied to the monthly retirement benefit as a means for maintaining the real value of that benefit,” the court stated in Hickey.
Emphasizing its determination in Hickey that the term “accrued benefit” has a statutory meaning that cannot be changed by simply labeling certain benefits as “supplementary benefits,” the court concluded that the pension plan violated ERISA when it deemed the cost-of-living adjustment an “enhancement” awarded to individuals choosing monthly annuity payments.
The plan “seeks to disguise a penalty exacted against lump sum recipients as a bonus afforded to annuitants,” the court said.
“If a defined benefit pension plan entitles an annuitant to a cost-of-living adjustment, it must also provide the [adjustment’s] actuarial equivalent to a participant who chooses instead to receive his pension in the form of a one-time lump sum distribution,” the court concluded.