The U.S. Court of Appeals for the Sixth Circuit has revived claims by retirees against Kellogg Company and FedEx Corporation over the computation of their pension benefits. In each case, the retirees claim that their former employers used outdated actuarial information to calculate their pension benefits, in violation of the Employee Retirement Income Security Act (ERISA) actuarial requirements. The plaintiffs in each case seek to recover underpayments of their benefits resulting from improper calculations and require that the plans use updated actuarial data in the future. The cases of Reichert v. Kellogg Co. and Watt v. FedEx Corp. were consolidated for appeal.
Both cases involve allegations that the companies underpaid benefits to married workers under their defined benefit pension plans by using life expectancy data that had become obsolete. More specifically, the plaintiffs in each case accused the companies of failing to update the mortality tables or statistical life expectancy projections that they used to calculate benefits and determine equivalence between payment options. ERISA requires plans to maintain actuarial equivalence or ensure that different forms of pension benefits offer equal value to plan participants. Therefore, if plans offer optional forms of benefits, they must be actuarially equivalent to the normal form of benefits.
For married plan participants, the pension calculation converts a single life annuity into a qualified joint and survivor annuity (QJSA) to provide continued payments to a surviving spouse at a rate of at least 50% of the participant’s lifetime benefit. This conversion process requires life expectancy projections for both the participant and spouse. Plans that use outdated life expectancy information provide married workers with benefits that are less than what they should receive.
Under ERISA, married plan participants must elect to receive benefits in the form of a QJSA unless both the participant and their spouse agree to make a qualified election. Since the companies only converted married workers’ benefits to a QJSA, using life expectancy figures for both the worker and their spouse, the plaintiffs also claimed that the companies were engaging in impermissible discrimination against married workers.
The district courts hearing the two cases both dismissed the claims for failure to state legally sufficient ERISA claims. However, on appeal, the Sixth Circuit reversed the dismissals. It revived the plaintiffs’ claims based on a finding that they adequately alleged facts concerning the usage of outdated actuarial assumptions that could plausibly violate ERISA’s actuarial equivalence requirements. In other words, plan administrators may not be acting reasonably if they use outdated mortality tables that fail to meet ERISA’s requirements, which may be an abuse of discretion sufficient to hold the companies liable for the underpayment of benefits.
If the plan participants in Reichart and Watt succeed in their claims, the companies may face significant liability. For example, plans may have to recalculate benefits for all affected retirees using proper actuarial assumptions. Based on this recalculation, the companies may have to pay retroactive pension benefits to workers whom they previously underpaid. If these cases proceed as class-action lawsuits, thousands of workers could be owed back pension benefits.
Furthermore, ERISA authorizes penalties against plan administrators who violate ERISA. The courts also have the discretion to award reasonable attorney’s fees to the prevailing party.
The takeaway from the Sixth Circuit’s decision is to ensure that your defined benefit plan is using updated mortality tables and/or other actuarial assumptions. More specifically, companies should engage actuaries to audit the data used and immediately update it if it is outdated to ensure compliance with ERISA’s actuarial equivalence standards. Not only is actuarial data necessary to comply with these standards, ERISA also requires that the duties of a fiduciary are carried out with reasonable care, skill, prudence, and diligence under the circumstances.
Plans also should keep detailed records of the actuarial basis for pension benefit calculations, including the data used and the regulatory or actuarial authority for their use. Summary plan descriptions and other written communications with plan participants must explain how benefits are calculated and what actuarial assumptions underlie those calculations.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
