Tilley v. Mead Corp.

927 F.2d 756, 1991 WL 22789

• Court: Court of Appeals for the Fourth Circuit
• Decided: February 26, 1991
• Docket: No. 86-3858
• Status: Published

Opinions

MURNAGHAN, Circuit Judge:

The case involves whether funds that remain in a single-employer defined benefit pension plan may, upon termination of the plan, revert to the employer prior to satisfaction of the plan’s unreduced early retirement benefits. After the Mead Corporation (“Mead”) recouped funds that remained in a pension plan without paying such benefits, employees brought suit alleging that Mead had violated the Employees Retirement Income Security Act (“ERISA”). In an earlier decision, we held in favor of the employees, requiring Mead to pay the unreduced early retirement benefits. An ERISA created benefit was deemed to have arisen. However, the Supreme Court reversed us on the issue, determining that the relevant language of ERISA did not itself create benefits but only protected those benefits arising from other sources. The Supreme Court nevertheless remanded the case so that we could consider two alternate theories that might support a judgment in the employees’ favor. We, therefore, proceed to consider whether either of the alternate theories requires a holding that Mead must pay to the plaintiffs the value of their unreduced early retirement benefits.

I.

B.E. Tilley, William L. Crotts, Jr., William D. Goode, Chrisley H. Reed, and J.C. Weddle, collectively referred to as the plaintiffs or the pensioners,¹ were employees of the Lynchburg Foundry Company, which Mead had acquired in 1968 as a wholly-owned subsidiary. They were covered by the Mead Industrial Products Salaried Retirement Plan (“Plan”), which was established by Mead and funded entirely by its contributions.

The Plan offered both normal retirement benefits and early retirement benefits. Normal retirement benefits, payable at age 65, were calculated with reference to a participant’s earnings and years of service. Participants became eligible for early retirement benefits at age 55. Early benefits were calculated in the same manner as normal retirement benefits, but the amount payable was discounted by five percent for each year that the participant retired prior to the normal retirement age of 65. However, if a participant had 30 years or more of credited service, then he or she could retire at age 62 and still receive the normal retirement benefits payable at age 65 without any reduction. These “unreduced” early retirement benefits provide the bone of contention in the present dispute.

In 1983, Mead sold the Foundry and terminated the Plan. Participants who were age 55 or older were paid their age 65 benefit reduced five percent for each year they were under age 65. Mead paid the “unreduced” early retirement benefits only to those employees who satisfied both the age (62) and service (30 years) requirements. Tilley, Goode, Reed, and Weddle had over 30 years of credited service but had not yet reached age 62; Crotts had 28 years of service. Each of them received from Mead the present value of his normal retirement benefit — reduced by five percent for each year the participant was under age 65. The lump sum payments they received ranged from $50,000 to $87,000. If the pensioners had received the present value of the “unreduced” early retirement benefits — which they expected to receive upon reaching age 62 — each of them would have received, on average, $9,000 more. After the Plan’s liabilities, as determined by Mead, were satisfied, nearly $11 million in assets remained in the Plan. Mead recouped the remainder.

The pensioners filed suit in Virginia state court alleging that Mead’s failure to pay the present value of the unreduced early retirement benefits violated ERISA. Mead removed the case to the United States District Court for the Western District of Virginia. The district court granted summary judgment for Mead, holding that the plaintiffs were not entitled to the value of the “unreduced” early retirement benefits.

We reversed the judgment of the district court and held that Mead was required to compensate the plaintiffs for the unreduced early retirement benefits. Tilley v. Mead Corp., 815 F.2d 989 (4th Cir.1987). We reasoned that 29 U.S.C. § 1344(a)(6), which provides for the payment of “all other benefits under the plan” upon termination, encompassed the early retirement benefits at issue. 815 F.2d at 991.

The Supreme Court reversed our decision. Mead Corp. v. Tilley, 490 U.S. 714, 109 S.Ct. 2156, 104 L.Ed.2d 796 (1989). The Supreme Court reasoned that § 1344(a) merely provides for the orderly distribution of plan assets to satisfy benefits that have already been earned under either the Plan or ERISA. It does not create additional benefit entitlements. 109 S.Ct. at 2163. In other words, § 1344(a) has a limited function; it is only an allocation mechanism.

But, significantly, the Supreme Court declined to rule on the two other theories advanced by the pensioners in support of their position: (1) that the unreduced early retirement benefits qualify as “accrued benefits,” which vested upon termination of the Plan; and (2) that the unreduced early retirement benefits are “contingent rights or liabilities,” which under ERISA must be satisfied prior to an employer’s recoupment of surplus assets. 109 S.Ct. at 2164. Because we had not reached those issues in our original opinion, the Supreme Court remanded the case so that we could consider them.

Justice Stevens wrote the sole dissent in the case. He agreed that the Fourth Circuit erred in interpreting § 1344(a)(6) as the source of the pensioners’ rights to recover the unreduced early retirement benefits. Id. at 2164. But he thought that the Court should have considered the plaintiffs’ other two arguments instead of remanding the case back to the Fourth Circuit. He concluded that our decision should have been affirmed because he considered the benefits at issue to be “contingent liabilities.” Id. at 2165. The dissent thus was confined to a protest of the Court’s failure to address the other two arguments and the expression of a proposed resolution as to one of them not considered by any other member of the Court.

On remand from the Supreme Court, the pensioners advance the two theories which the Supreme Court declined to consider. They argue that the unreduced early retirement benefits are “accrued benefits” under ERISA. They also contend that the benefits are “contingent rights or liabilities,” which should have been paid prior to Mead’s recoupment of the surplus assets.

II.

Under § 411 of the Internal Revenue Code, enacted by Title II of ERISA, Pub.L. No. 93-406, 88 Stat. 901 (1974) (codified as amended at 26 U.S.C. § 411), “accrued benefits” become “nonforfeitable” (vested) upon termination of a qualified pension plan. Code § 411(d)(3). If the unreduced early retirement benefits at issue here are “accrued benefits,” then the pensioners had a vested right to those benefits upon plan termination. An analysis of the statutory scheme convinces us, however, that the unreduced early retirement benefits should not be considered “accrued benefits” within the meaning of ERISA.

Section 411(a)(7) defines the “accrued benefit” as

the employee’s accrued benefit determined under the plan and ... expressed in the form of an annual benefit commencing at normal retirement age.

26 U.S.C. § 411(a)(7); see also 29 U.S.C. § 1002(23) (same definition of “accrued benefit”). The language of the definition seems to consider only the annual benefits that begin at normal retirement age as “accrued benefits.” The definition does not mention the unreduced early retirement benefits that companies, such as Mead, offer to veteran employees in addition to the normal retirement package.

The House Report that accompanied the House version of the bill ultimately enacted as ERISA contains the following:

The term “accrued benefit” refers to pension or retirement benefits and is not intended to apply to certain ancillary benefits, such as medical insurance or life insurance, which are sometimes provided for employees in conjunction with a pension plan, and are sometimes provided separately.... Also, the accrued benefit to which the vesting rules apply is not to include such items as the value of the right to receive benefits commencing at an age before normal retirement age, or so-called social security supplements ....

H.R.Rep. No. 807, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Admin. News 4670, 4726 (emphasis added). The Conference Report, accompanying the final version of the bill, seems to echo the understanding that early retirement benefits were not to be considered accrued benefits:

Also, the accrued benefit does not include the value of the right to receive early retirement benefits, or the value of the social security supplements or other benefits under the plan which are not continued for any employee after he has attained normal retirement age.

H.R.Conf.Rep. No. 1280, 93d Cong., 2d Sess., r&printed in 1974 U.S.Code Cong. & Admin.News 5038, 5054. Nothing in the legislative history supports the pensioners’ argument that early retirement benefits are “accrued benefits.”

The IRS has promulgated a regulation that accords with the understanding that early retirement benefits are not “accrued benefits” under the statute:

In general, the term “accrued benefits” refers only to pension or retirement ben-efits_ For purposes of this paragraph a subsidized early retirement benefit which is provided by a plan is not taken into account....

Treas.Reg. § 1.411(a)-(7)(a)(l)(ii) (1989).

Indeed, we have previously held that unreduced early retirement benefits are not “accrued benefits.” In Sutton v. Weirton Steel Div’n of Nat’l Steel Corp., 724 F.2d 406 (4th Cir.1983), cert. denied, 467 U.S. 1205, 104 S.Ct. 2387, 81 L.Ed.2d 345 (1984), employees sued National Steel, claiming that the company’s modification of their pension benefits violated ERISA. Id. at 409. Although National Steel had guaranteed the payment of the employees’ normal retirement benefits in an agreement to sell the division, it had not provided for the payment of the plan’s early retirement benefits, which were unfunded and only payable in the event of a plant shut-down. Id. We held that the early retirement benefits at issue were not “accrued benefits,” and therefore, the company’s modification did not violate ERISA. “Any right to payment of benefits before normal retirement age must be found in pertinent employment agreements.” Id. at 410.

The pensioners, however, cite our opinion in Collins v. Seafarers Pension Trust, 846 F.2d 936 (4th Cir.1988), for the proposition that the early retirement benefits at issue here were accrued benefits. In that case, employees had sued a multiemployer pension plan, claiming that an amendment to the plan had violated ERISA by excluding past service credits from the calculation of “early normal pension” eligibility. Id. at 937. We reversed the district court’s grant of the defendants’ summary judgment motion, concluding that procedural noncompliance had invalidated the amendment. In doing so, we agreed with the district court that “the right to receive a pension for past service is an accrued benefit even before actual retirement.” Id. at 938. We did not decide, however, that unreduced early retirement benefits are accrued benefits under ERISA. To the extent that the district court opinion in the case, 641 F.Supp. 293 (D.Md.1986), which was reversed on other grounds, can be read to support such a rule, we reject it as inconsistent with the language and legislative history of ERISA as well as Sutton. Rather, we hold that the unreduced early retirement benefits at issue here are not “accrued benefits” within the meaning of ERISA. See Bencivenga v. Western Pa. Teamsters & Employers Pension Fund, 763 F.2d 574, 580 (3d Cir.1985). But see Amato v. Western Union Int’l, 773 F.2d 1402, 1414 (2d Cir.1985), cert. dismissed, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986).

III.

We thus are brought to the question of whether the unreduced early retirement benefits at issue are “contingent liabilities” that must be satisfied prior to reversion of the Plan’s surplus assets to Mead. In harmony with Justice Stevens,² we conclude that the terms of the Plan itself, as enforced by ERISA, only permit reversion of the surplus assets after Mead has paid the pensioners the value of the unreduced early retirement benefits. Accordingly, we have no need formally to adjudicate the issue, beset with problems, of whether, in the absence of such terms in the Plan, the provisions of ERISA would still require payment of the benefits here.

A.

Both parties, along with four groups participating as amici curiae, have brought forth a mishmash of statutory provisions, regulations, legislative history, and actuarial lore in an attempt to persuade us that ERISA does, or does not, include the unreduced early retirement benefits as “liabilities" of the Plan. 29 U.S.C. § 1344(d)(1) provides that funds may be recouped by an employer only if “all liabilities of the plan to participants and their beneficiaries have been satisfied." Similarly, § 401(a)(2) of the Code requires qualified pension plans to satisfy “all liabilities” before surplus assets may revert to the employer. The pensioners contend that “liabilities” includes “contingent liabilities” and that the unreduced early retirement benefits are contingent liabilities. In that vein, the pensioners point to a Treasury regulation that interprets § 401 of the Code as including both fixed and contingent liabilities. See Treas.Reg. § l-401-2(b)(2) (1989). They also roll out the legislative history of Code § 401 to demonstrate that the original understanding of Congress was that only the surplus resulting from actuarial computational error was revertible, thereby mandating the satisfaction of the unreduced early retirement benefits—for which funds had been set aside. See S.Rep. No. 1567, 75th Cong., 3d Sess. 24 (1938).

Mead, however, argues that the unreduced early retirement benefits were not liabilities because no obligation to pay the benefits arose until the employees satisfied both the age and service requirements. Mead also contends that ERISA’s notion of liabilities includes only “accrued benefits” under ERISA. See supra Part II. They assert that the longstanding administrative practice of the Pension Benefit Guaranty Corporation (“PBGC”) and the Internal Revenue Service has been not to treat the unreduced early retirement benefits as liabilities that must be satisfied prior to asset reversion. The PBGC, as amicus curiae, argues in support of Mead’s position. Both the American Society of Actuaries and the American Academy of Actuaries have submitted amicus curiae briefs, arguing that the actuarial profession’s understanding of ERISA has always been that unearned early retirement benefits are not “liabilities of the plan.”³

We find it unnecessary to resolve the apparent conflict between current practice and legislative and regulatory history because we conclude that the terms of the Plan itself, as enforced by ERISA, compel payment of the unreduced early retirement benefits to the pensioners.⁴

B.

Section 1344(d)(1) provides that the residual assets in a single-employer pension plan may be recouped only if “the plan provides for such a distribution in these circumstances.” 29 U.S.C. § 1344(d)(1). Article XIII, § 4(f) of the Plan provides that in the case of discontinuance of the Plan:

Any surplus remaining in the Retirement Fund, due to actuarial error, after the satisfaction of all benefit rights or contingent rights accrued under the Plan (including any benefits accrued under any Pre-existing Plan), and after distribution of any released reserves as above provided, shall, subject to the pertinent provisions of federal or state law, be returnable to [Mead].

Id. (emphasis added). Thus the Plan itself only allows recoupment of surplus funds that result from “actuarial error,” and then only after the satisfaction of all “contingent rights accrued under the Plan.” We conclude that reversion of the Plan’s surplus funds to Mead is only permissible after satisfaction of the pensioners’ unreduced early retirement benefit rights because: (1) the funds in the Plan that had been set-aside in expectation of fulfilling the unreduced early retirement benefits did not remain in the Plan “due to actuarial error”; and (2) the benefits at issue are “contingent rights” that must be paid prior to any reversion.

Mead contributed to the Plan in expectation of having to satisfy the unreduced early retirement benefits. When the Plan was terminated, only those employees who had satisfied both the age and service requirements were paid. The employees who, with reason, expected to receive the unreduced early retirement benefits in the future, such as the plaintiffs here, were not paid. The funds that had been set aside in expectation of paying those benefits were recouped by Mead. That surplus, which remained in the Plan only because the value of the unreduced early retirement benefits were not paid, was not “due to actuarial error.”

“Actuarial error” seems to reference computational error resulting from inaccurate statistical assumptions. If the Plan’s actuary had used precise statistical assumptions regarding the future value of Plan assets and the requirements of its beneficiaries, the Plan would have still contained a surplus on termination — the amount contributed in expectation of satisfying the pensioners’ unreduced early retirement benefits, which Mead later decided not to pay.

Mead argues that the contributions made to the Fund in expectation of paying the benefits at issue did constitute actuarial error because the actuaries could not have foreseen termination of the plan or nonpayment of the unreduced benefits. But if “actuarial error” means the cause of whatever remains in the Plan when a class of benefits, reasonably expected by participants and funded all the time the Plan is in operation, is terminated, then the phrase contributes no meaning to the contractual provision and is utterly redundant.⁵ More importantly, used in such a way, the word “actuarial” is rendered unnecessary. We interpret “actuarial error,” as used in Article XIII of the Plan, so as not to mean the error of correctly calculating the contribution to a fund in expectation of paying a benefit that the company later decides to cancel.

Furthermore, we think that Mead was obligated to pay the unreduced early retirement benefits because the Plan mandated the satisfaction of “contingent rights accrued under the Plan.” The unreduced early retirement benefits were “contingent rights” because the Plan was liable to pay them on a contingency, i.e., the plaintiffs’ satisfaction of the age and service requirements. “Contingent” means nothing less. In the lay world, it is defined as “likely but not certain to happen.” Webster’s New Collegiate Dictionary 243 (1981). Black’s Law Dictionary defines “contingent liability” as a liability “which is not now fixed and absolute, but which will become so in the case of the occurrence of some future and uncertain event.” Black’s Law Dictionary 291 (5th ed. 1979). In the ERISA world, the concept of “contingent” is used in a similar fashion:

[I]f 1,000 employees are covered by a trust forming part of a pension plan, 300 of whom have satisfied all the requirements for a monthly pension, while the remaining 700 employees have not yet completed the required period of service, contingent obligations to such 700 employees have nevertheless arisen which constitute “liabilities”....

Treas.Reg. § 1.401-2(b)(2) (1989) (emphasis added). The terms of the Plan were written in light of the regulation, which was first promulgated in 1943—long before establishment of the Plan, and conform to the plain meaning of the word “contingent.” The plaintiffs would have had a fixed right, a vested right, upon reaching age 62, to the unreduced early retirement benefits. At times before the attainment of age 62 that right still existed though future and uncertain. Therefore, the plaintiffs’ rights in the unreduced early retirement benefits were “contingent,” as the word is commonly used and as it is specifically used under ERISA.

Mead argues, however, that the Plan requires satisfaction of “contingent rights accrued under the Plan,” and that the unreduced benefits were not accrued under the Plan, because the employees had not satisfied the conditions for the benefit rights they seek—the age and service requirements. But requiring the employees to have satisfied the conditions for the benefit, making it vest, would make a nullity of the concept of contingent rights, which are protected by the terms of the Plan.

Mead might have also argued that “contingent rights accrued” refers to the technical ERISA concept of “accrued benefits,” and that because the unreduced early retirement benefits should not be deemed accrued benefits under the statute (see supra Part II), they need not be satisfied prior to the reversion of surplus assets. All in all, such an interpretation would require a tremendous leap of faith. The Plan incorporates no such reference to Code § 411(a)(7)’s concept of “accrued benefit,” nor does the Plan manifest an intent to effect such an incorporation.

Furthermore, such an incorporation would make little sense. Upon termination of a single-employer defined benefit plan, all accrued benefits vest. “Post-termination contingent ‘accrued benefits’ ” is an oxymoron. If we were to conclude that the Plan’s protection is coterminous with the scope of ERISA, the word “contingent,” as used in the Plan, would become devoid of any meaning. Rather, § 4(f)’s protection of “contingent rights” leads us to conclude that Mead must pay the value of those pension benefits for which it would otherwise have become liable “but for” its termination of the Plan. Because Mead’s termination of the Plan was what prevented the pensioners from satisfying the conditions so that the unreduced early retirement benefits could vest, the terms of the Plan allow the surplus funds to revert to Mead only after the unreduced early retirement benefits are satisfied.

Indeed, Justice Stevens, the only Supreme Court justice to reach the issue, also considered the early retirement benefits to be “contingent rights.” He noted that the pensioners “have far more than an expectancy interest in early retirement benefits.” 109 S.Ct. at 2165. “Their right to payment is contingent only upon their election to retire after reaching age 62.” Id.6 Justice Stevens also noted that the pensioners’ rights were frustrated entirely by the unilateral actions of Mead. Finally, he recognized that Mead was required, both by IRS rulings and prudent actuarial practice, to accumulate the funds necessary to pay the early retirement benefits at issue. Id.

In interpreting the provisions of the Plan, we recognize that ERISA’s central policy goals are to protect the interests of employees and to guard against the termination of retirement benefits for which employees have been working. See 29 U.S.C. § 1001; Shaw v. Delta Air Lines, 463 U.S. 85, 90, 103 S.Ct. 2890, 2896, 77 L.Ed.2d 490 (1983). We hold that the Plan’s provisions compel satisfaction of the unreduced retirement benefits prior to reversion of the surplus assets.

We reverse the decision of the district court and remand for further proceedings consistent with this opinion.⁷

REVERSED.

1 . A sixth plaintiff, David H. Wall, died while the action was pending in the district court. The Supreme Court denied a motion to substitute his executor.

2 . The other eight Justices did not reject the theory of Justice Stevens’ dissent. Rather they did not resolve, but left to another day, the issue presented.

3 . Another complication is the Retirement Equity Act of 1984, Pub.L. No. 98-397, 98 Stat. 1426 ("REA”), which amended ERISA, effective July 30, 1984, to require that pension plans treat early retirement benefits as if they were "accrued benefits” in some instances. See 29 U.S.C. § 1054(g)(2). The present case is governed by pre-REA law; the requirements added by REA are inapplicable. But Mead and the PBGC argue that holding early retirement benefits to be accrued benefits would render REA an unnecessary enactment. They conclude that the enactment of REA sheds light on what ERISA's use of "liabilities” means and that Congress did not think "liabilities” included unreduced early retirement benefits or else it would not have passed some of the provisions of REA. Yet the legislation might have been enacted to remove all doubt where there previously had been uncertainty as to what was meant.

4 . The dissent’s position that our opinion disregards the Supreme Court's mandate is incorrect. The Court directed us to consider on remand whether the pensioners are entitled to payment of their unreduced early retirement benefits under either of their alternative theories: (1) that the benefits are accrued benefits under ERISA; and (2) that the benefits are liabilities of the plan under 29 U.S.C. § 1344(d)(1)(A). We reject the first theory. Nevertheless, we accept the second theory, that the benefits are liabilities of the plan, because we hold, consistent with Justice Stevens' position, that the language of the plan itself compels payment of the benefits. Whether ERISA would compel payment of the benefits in the absence of such language in the plan is a question that is unnecessary to answer and one whose answer has not been compelled by the Supreme Court.

5 . It drastically stretches plain meaning to hold that calculations and set asides, correct when made, later, retroactively, became actuarial computation errors when termination made re-coupment to the employer possible.

6 . For four of the five plaintiffs, the expectancy has endured and matured into a reliance for more than 30 years.

7 . We deny the appellee's pending motion for leave to file a revised statutory appendix as it is unnecessary in light of the availability of the materials the revised appendix includes.