Benefit Plan's Annual Increase Is Not An ERISA "Benefit Accrual" If It Does Not Affect Final Retirement Benefit
WALKER v. MONSANTO COMPANY PENSION PLAN (July 30, 2010)
Prior to 1997, Monsanto's employees had a variety of the retirement plan benefits. All employees had an age-65 benefit, but some employees had a discounted early retirement option while others had a subsidized early retirement option. Monsanto standardized and restructured its retirement plan in 1997 from a traditional plan into a cash balance plan. It created two accounts for each employee -- one that reflected benefits already earned at the time of the restructuring (the Prior Plan Account or PPA) and one to reflect newly earned benefits. The opening PPA balance was arrived at by converting the prior plan annuity amount to a lump sum equivalent and then discounting the amount by 8.5% per year for each year under 55 the employee was at the time of restructuring. Once the PPA was created, its balance increased through pay credits (4% per year law while employed) and interest credits (8.5% per year until age 55). It granted to all employees the subsidized early retirement option that only some of them had previously had. For the first time, it also gave employees an opportunity to receive retirement benefits before the age of 55. A number of Monsanto employees filed lawsuits, which were then consolidated. The employees allege that the restructured plan violates ERISA's prohibition on reducing an employee’s benefit accrual when the employee reaches a certain age. Judge Gilbert (S.D. Ill.) granted summary judgment to defendants. Plaintiffs appeal.
In their opinion, Judges Bauer, Flaum, and Evans affirmed. The plaintiffs claim that the 8.5% interest credit is a "benefit accrual" under ERISA and that termination of that benefit once an employee reaches the age of 55 violates the statute. The Court noted that ERISA prohibits a plan from reducing "an employee’s rate of benefit accrual" but does not define "benefit accrual." Benefit accrual depends, in part, on the type of plan at issue. Many cash balance plans operate like defined contribution plans. In those situations, the court must look to the annual additions to the employee’s hypothetical account. The Monsanto plan, however, operates like a defined benefit plan. Here, the court should look instead to the total accrued benefit at retirement. The Court looked at the total benefit at retirement under various scenarios and concluded that the Monsanto interest credits do not increase the employee’s total benefits. They are therefore not "benefit accruals" under ERISA and their termination at age 55 does not violate ERISA.
