Employer Wins One, Loses One in Cash Balance Case

In one decision, U.S. District Judge J. Phil Gilbert of the U.S. District Court for the Southern District of Illinois ruled that Monsanto had not violated the Employee Retirement Income Security Act (ERISA) by directing that cash balance plan “interest credits” stop at age 55. The company did not violate ERISA anti-discrimination provisions because the credits were actually a reversal of a discount taken when the plan was originally converted from a traditional defined benefit plan to a cash balance plan, Gilbert asserted.

Not only that, Gilbert claimed, the interest credits were not “benefit accruals” because even though Monsanto imputed them to participants’ “prior plan accounts,” the interest credits did not increase the value of participants’ age-65 retirement benefit that accrued prior to the plan conversion.

An Interest-Rate Dispute

Later the same day, Gilbert put out a second ruling, turning aside the employer’s request to dismiss claims that it violated the plan terms by refusing to use the plan’s 8.5% interest rate on delayed lump-sum distributions. Gilbert turned down Monsanto’s argument that the interest rate was intended to apply only to situations where participants voluntarily put off their distributions, rather than to situations in which the delayed distribution was caused by administrative processing issues.

The court said the plan clearly mandated that the interest rate for payments delayed by administrative processing must be the same as the rate used for voluntary deferrals of benefits.

Cash Balance Determinations

According to the rulings, Monsanto converted its traditional defined benefit plan into a cash balance program as of January 1, 1997.

In calculating the prior plan accounts, Monsanto at the time of the plan conversion determined the value of the monthly annuity to which the employee would have been entitled under the traditional defined benefit plan at age 65. It based that on an employee’s then-current salary and/or years of service by multiplying that number by 125 to get a lump-sum value for the employee’s accrued benefit at the time of the conversion, the court explained.

Monsanto then reduced the lump-sum by 8.5% per year to its value at the age of the employee at the time of the conversion to arrive at the employee’s opening prior plan account balance.

Gilbert said Monsanto treated all participants as if they would be entitled to a fully subsidized early retirement benefit at age 55 and a discounted early retirement benefit before age 55. The court explained that the result of this treatment was that each participant’s lump-sum accrued benefit under the traditional plan was reduced 8.5% per year for each year the employee was less than 55 years old.

The court further explained that the prior plan account balance would grow by 8.5% annually through “interest credits’ so that by the time the participant reached age 55, the account balance would be equal to the nondiscounted lump-sum value of the employee’s accrued benefit under the prior plan at the time of the conversion.

The case is Walker v. Monsanto Co. Pension Plan, S.D. Ill., No. 3:04-cv-436-JPG-PMF, 6/11/09.