Don’t miss this important decision from the Seventh Circuit written by Circuit Judge Richard Posner which discusses “partial terminations” in the context of when participants must receive 100% vesting: “Matz, et al. v. Household International Tax Reduction Investment Plan.” (An interesting aspect of the case was the fact that the case was in its 9th year of litigation. Many employers automatically vest participants in such transactions in order to avoid the risk of protracted litigation over vesting.) The issue in the case as framed by Judge Posner was this:
The question is the correct approach to deciding whether an ERISA pension plan-in this case a defined-contribution plan in which the employer matched contributions that its employees made by means of payroll deductions to individual retirement accounts-has been partially terminated.
According to the opinion, “as a result of a series of reorganizations of subsidiaries of Household, a total of 2,396 of the 11,955 participants in Household’s plan ceased to be participants.” The issue was whether such reorganizations should result in the participants attaining 100% vesting in the plan. Here’s what Judge Posner had to say:
So where to draw the line? The IRS, which is not famous for encouraging tax windfalls, draws it at 20 percent. As we look back upon the course of this litigation, now in its ninth year and its third interlocutory appeal to this court, we find ourselves drawn back to the IRS’s position. Not because it is entitled to Chevron deference-we adhere to our holding that it is not-but because, having toyed with the alternatives, we think it is the best available and we respect the IRS’s experience in formulating tax rules.
The court provides a table of all of the cases and rulings on the issue of what constitutes a “partial termination” and makes the following statements about the results:
In 20 of the 21 cases and rulings, if 20 percent or more of the participants lose coverage, there is a finding of a partial termination, and if fewer than 20 percent do, a partial termination is not found. The exception is the Sea Ray case, where a 27.9 percent loss of coverage was held not to be a partial termination because the loss was the consequence purely of economic conditions; the employer was not motivated by any desire to obtain a tax benefit or reallocate pension benefits to favored participants in the pension plan.In an effort to make the law as certain as possible without opening up gaping loopholes, we shall generalize from the cases and the rulings a rebuttable presumption that a 20 percent or greater reduction in plan participants is a partial termination and that a smaller reduction is not. How rebuttable? One can imagine cases in which a somewhat smaller reduction in the percentage of plan participants would be tax-driven and might on that account be thought a “partial” termination, and other cases, like Sea Ray, in which the reduction is perhaps not so far above 20 percent that further inquiry is inappropriate. We assume in other words that there is a band around 20 percent in which consideration of tax motives or consequences can be used to rebut the presumption created by that percentage. A generous band would run from 10 percent to 40 percent. Below 10 percent, the reduction in coverage should be conclusively presumed not to be a partial termination; above 40 percent, it should be conclusively presumed to be a partial termination.
The court then vacated and remanded the case, stating that a remand was necessary for the district court to consider additional “facts and circumstances.” The court noted that it had considered whether or not to “invite the IRS to submit an amicus curiae brief” advising the court of its “current view of the proper approach to determining partial termination” but “decided not to do so because of the great age of the case.” The court went on to emphasize that “should the IRS decide on its own to revisit the issue” the court “would give [the IRS’s] views significant weight” and “therefore the rule we have just formulated for deciding such cases as this should be considered tentative.”
Query: With Judge Posner being the likely author of the appeal in the IBM cash balance plan decision, can we glean anything from this Household opinion which could lead us to believe that Judge Posner might uphold the cash balance plan as being not violative of ERISA in the IBM appeal? (Read about the cash balance plan controversy here in an article from the Journal of Financial Planning as well as in previous posts here and here.) Statements in the opinion like–“[W]e respect the IRS’s experience in formulating tax rules,” the IRS’s views should be accorded “significant weight,” and the emphasis in the opinion on “mak[ing] the law as certain as possible,” coupled with the precedence of 3 out of 4 district court opinions upholding cash balance plans, might lead us to speculate that Judge Posner could provide a reversal.
Some related reading: “What Will Judge Posner Do Next? Balm or Bomb for Cash Balance Plans?” by Alvin D. Lurie (via Benefitslink.com). Lurie makes the following statement regarding Judge Posner and ERISA cases:
Judge Posner, who admits to enjoy(ing) ERISA cases which he finds frequently difficult and fascinating (see Posner, How I Approach the Decision of an ERISA Case, NYU Review of Employee Benefits and Executive Compensation 2002, ch. 14, hereafter “NYU”) waded into this unforgiving terrain with gusto and acumen. . . ”
Also, a personal glimpse of Judge Posner here.