No amount of flim-flam can conceal that
AT&T has attached conditions to the
annual accruals offered to participants
like the named Plaintiffs that are reducing
the value of those accruals to $0.
ERISA Section 204(g), 29 U.S.C. Section
1054(g), protects the retirement benefits
previously earned under AT&T's pension
plan up to the date of AT&T's conversion
to a cash balance plan (on 1/1/1998) against
any reductions. Because the annual benefit
accruals earned after that date must be
"nonforfeitable," the annual accruals
after 1997 must add to the protected benefits.
AT&T's argument that the annual accruals
may be conditional rests on a counter-intuitive
approach with no legal authority to support
it.
In more detailed form, Plaintiffs rely
on the following facts and legal elements:
- Section 4.04 of AT&T's restated
Plan document offers annual pay credits
and interest as the principal features
of the new cash balance plan. The
Third Amended Complaint uses the benefit
amounts of named Plaintiff Donald
Noerr to illustrate. For Donald Noerr,
the cash balance pay credits and interest
offer annual increases in his accrued
benefits of $1,218, $1,080, and $1,039
for 1998, 1999, and 2000, respectively.
- However, the payment provisions
in Section 4.06 of the restated Plan
document, which were adopted on October
16, 2000, attach a condition to Mr.
Noerr's receipt of those annual retirement
benefits. Although a footnote in AT&T's
Brief contests this (inappropriately
on a motion to dismiss), see Defs.
Br. at 11, n.5, AT&T's Board of
Directors has never approved Section
4.06. Third Amended Complaint, at
¶ 76.
- Section 4.06 of the restated Plan
provides that Mr. Noerr, like the
other plaintiffs, can receive the
annual retirement benefits he has
earned since 1998 if and only if
he does not receive the $18,276 per
year in early retirement benefits
that he previously earned under the
prior plan. Payment of benefits at
early retirement is particularly important
because AT&T employs almost no
management employees past the age
of 60.
- For Mr. Noerr to receive his annual
cash balance accruals from 1998 to
date, Section 4.06 requires that he
defer retirement until close to the
age 65 normal retirement age and thereby
give up the value of the "protected"
early retirement rights that he earned
before 1998.
- Section 4.06 is tantamount to conditioning
receipt of the annual benefits under
the cash balance plan on a release
or waiver of the "protected" early
retirement benefits that he earned
before the cash balance plan went
into effect. Mr. Noerr must either
lose the value of the annual accruals
from 1998 forward or waive receipt
of his previously earned early retirement
benefits.
- Because cash balance plans base
retirement benefits on each year's
annual salary, the "only test" that
a cash balance plan can "satisfy is
the so-called 133 1/3 percent test
under ERISA section 204(b)(1)(B),
[29 U.S.C. Section1054(b)(1)(B)]."
"That test requires that the value
of the benefit accrued in any year
. . . not exceed the value of a benefit
accrued in any previous year by more
than 33%." Esden v. Bank of Boston,
229 F.3d 154, 167 (2d Cir. 2000).
- In order for AT&T to satisfy
ERISA Section 204(b)(1)(B)'s "anti-backloading"
test, Mr. Noerr must have annual benefit
accruals for 1998, 1999, 2000, etc.
See also 26 C.F.R. 1.411(b)-1(b)(2)(i).
- If the accrued benefits for 1998,
1999, 2000, etc., count for compliance
with ERISA Section 204(b)(1)(B), those
accruals must become "nonforfeitable"
under ERISA's vesting rules. ERISA
Section 203(a), 29 U.S.C. Section1053(a),
provides that benefit accruals must
become nonforfeitable once a participant
has the required years of service
to be vested.
- A nonforfeitable right is as an
"unconditional" right. ERISA Section
3(19), 29 U.S.C. Section1002(19).
"A right which, at a particular time,
is conditioned under the plan upon
a subsequent event, subsequent performance,
or subsequent forbearance which will
cause loss of such right is a forfeitable
right at that time." 26 C.F.R. 1.411(a)-4.
IRS Notice 96-8, 1996-1 C.B. 359,
also explains:
If benefits . . . have accrued
[but] those benefits are disregarded
when benefits commence before
normal retirement age, the plan
has effectively conditioned entitlement
to the benefits . . . on the employee
not taking a distribution prior
to retirement age.
- ERISA Section 203(a)(3), 29 U.S.C.
Section1053(a)(3), only allows specified
conditions to be attached to the receipt
of nonforfeitable accrued benefits.
Permissible forfeitures include provisions
that benefits "may not be payable"
on death, reemployment, or if the
employer ceases pension contributions.
See, e.g., Alessi v. Raybestos-Manhattan,
Inc., 451 U.S. 504, 511 (1981).
- A nonforfeitable right to a benefit
cannot be one that has a value of
$1,218 per year under one narrow set
of conditions, but $0 under others.
ERISA Section 203(a)(3) does not contain
a permissible condition under which
payment of benefits earned after a
Plan amendment can be made conditional
on whether a participant foregoes
early retirement benefits earned before
1997.
- If a company sponsoring a retirement
plan was able to offer annual accruals
but condition their receipt at early
retirement so that nothing attributable
to those accruals is paid, it would
defeat Congress' purpose of protecting
participants like Donald Noerr against
forfeitures of benefit accruals.
Reviewing AT&T's motion to dismiss,
it is unclear whether AT&T challenges
that Section 4.06 of the restated Plan
is conditioning Mr. Noerr's right to the
cash balance benefit accruals. If AT&T
is contesting this, it is up against hundreds
of years of contract law. The Restatement
(Second) of Contracts refers to conditions
on an obligor's duty to pay such as "to
be payable if . . ." and "no part of which
shall be due if . . ." Res. (2d) Contracts,
Sections 224-27. Moreover, in the brief
submitted to Judge Politan on leave to
amend, Defendants admitted that the Complaint's
allegation that a participant like Donald
Noerr will not receive the "yearly increases"
in his accrued benefits if he retires
before age 65 is "absolutely true." Def.
Br. filed Aug. 27, 2001, at 21.
In the brief addressed to Judge Politan,
Defendants asserted that the failure to
receive the "yearly increases" is "devoid
of any significance, legal or otherwise."
Id. Defendants' assertion is simply unsupportable.
As described above, the statutory and
regulatory authorities show that AT&T's
cash balance plan is required to offer
"annual rates" of benefit accrual. Those
benefits must become "nonforfeitable"
after the employee has the requisite number
of years of service required under ERISA
Section 203(a). Treasury regulations provide
that "a right which . . . is conditioned
. . . upon a subsequent event, subsequent
performance, or subsequent forbearance
which will cause loss of such right is
a forfeitable right."
Undeterred, AT&T asks that the Court
not consider whether the annual
benefit accruals are conditional, but
look instead only at the total
normal retirement benefit and ask whether
Noerr is receiving at least an actuarial
equivalent of the total benefit. Defendants
state this in various ways:
- "The plaintiffs' focus on each
year's increment to the normal retirement
benefit is wrong. Rather what matters
is the total normal retirement benefit
derived from the Cash Balance formula,
and actuarially reduced for early
retirement pursuant to section 4.06(a)(ii)(A)."
Defs. Br. at 17.
- Mr. Noerr does not "`forfeit'
receipt of those annual increases
in the normal retirement benefit,
because those incremental amounts
are included in the total normal
retirement benefit which is actuarially
reduced pursuant to section 4.06(a)(ii)
of the Amended Plan." Br. at 15.
- "Plaintiffs' allegations . . .
misconstrue the application of the
actuarial equivalence rule, seeking
to have it somehow separately apply
to each year's incremental addition
to the normal retirement benefit.
The proper legal focus is on whether
the total early retirement benefit
is the actuarial equivalent of the
total normal retirement benefit."
Br. at 16.
These sentences offer a good sample of
the rhetorical arguments that Defendants
intend to offer on the merits. But they
are scarcely the basis for a motion to
dismiss.
While compliance with two of ERISA's
minimum accrual schedules could be tested
on the basis of "total" accruals at separation,
ERISA's 133% rule expressly requires "annual
rates" of benefit accruals for each year.
The Treasury Department's regulations
on ERISA's 133% rule, which were adopted
in 1977, specifically reject the notion
that an employer can substitute a yearly
average of a participant's total accrued
benefits for years in which the actual
annual rates of benefit accruals do not
satisfy the 133% test. 26 C.F.R. 1.411(b)-1(b)(2)(iii)
(Example 3) (even if the "average rate
of accrual" looking at accruals over all
years of participation "is not less rapidly
than ratably," a plan does not satisfy
the 133% test when the actual annual rates
of accruals for particular years of participation
do not satisfy the test).
Congress and the Treasury Department
drew these distinctions for sound reasons.
Plans like AT&T's cash balance plan
must provide annual benefits based on
employees' annual salaries. Those benefits
are not computed with the employee's earlier
years of service and salary and they are
not to be conditioned on the same. It
would make a mockery of ERISA's 133% rule
to allow the rule to be satisfied with
"annual rates" of accrual that the employer
does not unconditionally have to pay.
ERISA's vesting rules require that accrued
benefits become "unconditional" after
five years of service.
Even if, for argument's sake, we accepted
AT&T's preferred focus on the "total"
benefit accruals "derived from the Cash
Balance formula," Section 4.06 of AT&T's
restated Plan does not comply with ERISA.
Section 4.06 conditions the payment of
Donald Noerr's total cash balance
benefit accruals for 1998 through 2001
of over $4,400, just as it conditions
his annual accruals in 1998, 1999, 2000,
etc.. When he recently retired on January
31, 2002, Mr. Noerr did not receive one
red cent attributable to the cash balance
accruals for 1998-2001 that were said
to amount to over $4,400 per year.
Defendants act as if they can treat the
accrual rules as a kind of stage play
in which they are allowed to act as if
Mr. Noerr has an annual rate of accrual
of $1,218 in 1998, or a "total" accrual
of over $4,400 per year for 1998-2001.
But when the lights are turned off, AT&T
does not think it should not actually
have to pay those benefits. In advancing
this argument, Defendants cite no authorities
to distinguish the Treasury regulations
on forfeitures. AT&T cannot offer
an employee like Mr. Noerr annual accrued
benefits totaling over $4,400 for 1998
through 2001, but condition the benefits
for those years so no part of them is
actually paid. ERISA was enacted as a
employee pension protection act; it was
not enacted to enable employers to offer
sham accruals.
The same reasoning applies with respect
to Plaintiffs' Eleventh Claim. Defendants
offer no authority for the proposition
that participants like Mr. Noerr can have
nonforfeitable "annual rates" of accrual
totaling over $4,400 per year for 1998-2001,
whose actuarial equivalent is not
actually paid. Accrued benefits cannot
satisfy the test in ERISA Section 204(c)(3),
29 U.S.C. Section 1054(c)(3), if they
amount to $4,400 per year at normal retirement
age but are worth $0 when expressed in
the form of a benefit payable at early
retirement age.
Two other points show how AT&T's
reasoning is faulty:
(1) If Mr. Noerr was a new AT&T
employee hired at the start of 1998
with the same salary, his annual benefit
accruals for 1998 - 2001 would not
be conditional. The condition on payment
that AT&T has imposed by Section
4.06 causes a loss of future benefit
accruals only for the employees like
Mr. Noerr who have years of service
before 1997. There is no legal
or policy reason why Mr. Noerr should
receive less in retirement benefits
for his employment in the years from
1998 to 2001 than a new employee who
makes the same salary.
(2) In addition to being adopted
after the fact, AT&T's conditioning
of the Mr. Noerr's benefit accruals
through Section 4.06 is not an inherent
feature of a cash balance plan conversion.
AT&T converted the pension plan
covering its hourly employees to a
cash balance plan without conditioning
receipt of their annual cash balance
accruals. Even Section 4.06 of the
restated management pension plan has
exceptions to the conditioning of
annual cash balance accruals for certain
groups of employees, such as occupational
employees who are promoted to management
positions.
Ironically, an AT&T representative
succinctly summarized the employees' case
in a videotaped seminar about cash balance,
stating:
"It's a year later. I've got to get
something for that year. Do any of you
want to work for that year and not get
anything for it (indicating to raise
your hand if you do)? I didn't see any
hands go up."
III. Defendants have no basis to dismiss
the Twelfth Claim that the application
of actuarially excessive early retirement
reduction factors takes away part of the
value of protected benefits in violation
ERISA Section 204(g)
ERISA Section 204(g), 29 U.S.C. Section
1054(g), which has a parallel statutory
provision in IRC Section 411(d)(6), 26
U.S.C. Section 411(d)(6), provides that
no amendment to a pension plan shall have
the effect of reducing early retirement
benefits. When early retirement benefits
are modified prospectively, ERISA Section
204(g) requires that participants' rights
to the existing benefits be protected
by allowing them to grow into eligibility
under the prior rules.
Treasury regulations provide that a pension
plan may not be amended to change conditions
in a way that restricts the availability
of a Section 411(d)(6) protected benefit.
The regulations provide that the "any
change to existing conditions that results
in a further restriction" violates Section
411(d)(6). 26 C.F.R. 1.411(d)-4, Q&A
7. More recently, the Ninth Circuit held
in Michael v. Riverside Cement Co.
Pension Plan, 266 F.3d 1023, 1027
(9th Cir. 2001), that a plan
amendment violates ERISA Section 204(g)
when it takes away a "valuable component"
or part of the "actuarial value" of the
protected benefits.
Plaintiffs and AT&T agree that the
prior AT&T Plan document provided
that employees who "reached the age of
50 years and whose Term of Employment
has been at least 25 years" could commence
benefits with no reduction at age 55 or
with a 6% per year reduction for retirements
between ages 50 and 55. See Defs. Br.
at 19. A lower 3% reduction factor was
offered if a participant had 30 years
of service.
AT&T's restated Plan document modified
the Plan to apply the 6% per year reduction
factor to retirements at any age without
regard to whether participants could have
grown into eligibility under the prior
plan rules. This means that a 6% reduction
is now applied to retirements before age
50 and is applied to circumstances in
which the participant could otherwise
have grown into eligibility for unreduced
benefits or benefits subject to the 3%
reduction factor.
A 6% per year reduction for retirements
before the age of 50 is illegal in the
absence of full disclosure to employees
because it excessively reduces the benefit
amounts available at age 55. A 6% factor
is also illegal for retirements before
and after age 50 when participants could
have grown into eligibility for the 3%
reduction.
To give an example, Dollie Dobbins is
a member of the class certified by Judge
Politan who resides in Maryland. Under
a voluntary retirement incentive plan
("VRIP") which resulted in the separation
of over 15,000 AT&T management employees,
AT&T retired Ms. Dobbins in mid-1998.
Using the 6% per year reduction, AT&T
subjected Ms. Dobbins' "protected" age
55 benefits of $2,574 per month to a discount
of 40.5% based on the age when she was
"retired" of age 48 and 3 months. Exh.
2. However, before AT&T's amendment
to the early retirement rules, Ms. Dobbins
would been eligible with only one more
month of employment to commence benefits
at age 55 with no reduction, or to commence
benefits before age 55 with the less steep
3% per year reduction. Thus, in exchange
for speeding up her retirement eligibility
by one month, AT&T's plan amendment
discounted the value of her protected
early retirement benefits by twice as
much than if the 3% reduction had been
applied. This reduced the value of her
"protected" benefit by more than $85,000.
As shown by the declaration of Mr. Claude
Poulin, F.S.A., 6% is a commonly-used
reduction factor for reducing benefit
amounts payable at age 65 to benefit amounts
payable at ages 60 to 64. However, for
retirements before age 50, reduction factors
ranging from 2 to 4% of the age 55 amount
should be applied (with the percentage
dropping for earlier ages). Exh. 3.
The application of a 6% per year reduction
in benefits to retirements before age
50 is analogous to when entrepreneurs
offer individuals with life insurance
policies, annuities, or other deferred
rights more immediate payments based on
sharply discounted values in exchange
for a release or assignment of the individual's
rights. An individual who commences payments
at age 48 subject to a 6% per year reduction
in the benefit amount would be better
off actuarially if he or she could defer
commencement until age 55. As Mr. Poulin's
declaration makes clear, extending the
application of an 6% reduction factor
to the commencement of benefits before
age 50 is not defensible. Indeed, at age
38 and 4 months or younger, the 6% reduction
will wipe out any benefit. Whether the
benefit amount at age 55 is $1,000 or
$10,000, "zero" cannot be an actuarial
equivalent.
AT&T knew that the application of
the 6% reduction to employees retiring
before age 55 drastically reduced the
value of their benefits and had the potential
to wipe out the value of previously earned
benefits: In a posting on the Internet,
AT&T observed that: "For anyone age
38 years 4 months or younger, the Early
Payment discount [of 6% per year] reduces
the benefit available to $0." Exh. 2.
AT&T's counsel unabashedly argues
that this change "actually enhances,"
"significant[ly] increases," and "expands
participants' [distribution] rights."
Defs. Br. at 5, 18, and 20. AT&T's
effort to portray this as a "good deed"
for which Plaintiffs are trying to "punish"
it, Defs. Br. at 4, takes some gall and
should be transparent in light of the
examples given above: Reducing the value
of a benefit in excess of otherwise applicable
reductions, including down to "$0," is
not an increase or enhancement.
Modifying the Plan's rules to take away
part of the value of protected benefits
does not comply with ERISA Section 204(g).
AT&T's violation of ERISA Section
204(g) is egregious because AT&T has
never disclosed the loss of actuarial
value from commencing benefits before
55 subject to a 6% per year reduction.
Instead, AT&T explained the 6% reduction
as if it offered the same "overall value"
considering life expectancies. A booklet
distributed in August 1997 explains:
"If you start receiving payments
early, your monthly check will be
less than if you started at age 55.
But you still will receive payments
for life, and the overall value of
your pension likely will remain the
same. That's because with a discounted
pension, you're stretching the same
pension dollars over a longer time
span."
Exh. 4. Thus, instead of disclosing
the losses in value that can occur with
a 6% reduction, AT&T hid the issue
and suggested that the "value" of the
employees' discounted pensions "remain[s]
the same."
For these reasons, Plaintiffs have stated
a valid claim under ERISA Section 204(g).
The amended rule violates ERISA's disclosure
requirements because AT&T has not
disclosed the disadvantages of commencing
benefits early subject to an actuarially
excessive reduction factor. The amended
rule also violates ERISA Section 204(g)
by applying the 6% reduction to earlier
ages and circumstances in which it would
not have applied before with no disclosure
that the 6% factor takes away part of
the value of protected benefit
IV. Plaintiffs did not err in
repleading claims in the amended Complaint
that Judge Politan dismissed because the
dismissals of those claims are subject
to appeal
Defendants argue that Plaintiffs should
not replead a claim in an amended complaint
that the district court has dismissed--even
though the dismissal of the claim is subject
to appeal so the claim is still part of
the case. Defendants made this argument
before, almost verbatim, in opposing leave
for Plaintiffs to file the Third Amended
Complaint. Compare Defs. Br. at 21-22
with Defs. Br. filed Aug. 27, 2001, at
29-30. Judge Politan rejected Defendants'
argument.
Conclusion
Defendants have not come close to satisfying
the standards for dismissal under Rule
12. Just three months ago, Judge Politan
ruled that Defendants' same arguments
"merely attempt to argue the merits of
the new allegations." This is the "law
of the case." Nothing has changed since.
Defendants have not offered any new legal
authorities to this Court showing that
the Plaintiffs' claims are not valid.
Instead, Defendants rehash arguments
that they unsuccessfully used before Judge
Politan. As demonstrated in the Third
Amended Complaint and above, Plaintiffs
have very strong claims on the merits.
Accordingly, Defendants' motion to dismiss
the new claims under Rule 12 should be
rejected.
Respectfully submitted,
Stephen R. Bruce
805 15th St., NW, Suite 210
Washington, DC 20005
(202) 371-8013
SB 1240
Edgar Pauk
144 E. 44th St., Suite 600
New York, NY 10017
(212) 983-4000
Jonathan I. Nirenberg
Deutsch & Resnick
One University Plaza, Suite 305
Hackensack, NJ 07601
(201) 498-0900
Attorneys for Plaintiffs
