Court upholds PBGC’s benefit determinations for pilots in U.S. Airways’ pension plan

The Pension Benefit Guaranty Corporation (PBGC) properly calculated benefits owed to U.S. Airways pilots who participated in a pension plan terminated pursuant to ERISA’s distress termination procedures, the U.S. Court of Appeals in the District of Columbia (CA-DC) has ruled.

Background

As part of U.S. Airways’ 2002 bankruptcy proceeding, it requested that its pilots’ pension plan be terminated pursuant to ERISA’s distress termination procedures. The PBGC became plan trustee and began making estimated benefit payments to retired pilots pending its initial determinations on asset allocation under the distress termination rules. Under these rules, the administrator distributes assets in accordance with the six-tier priority scheme set forth in ERISA §4044.

The pilots first brought suit in November 2003 challenging the PBGC’s calculation of estimated benefits. In 2011, the district court granted summary judgment to the PBGC on all but one claim.

On appeal, all claims concerned the PBGC’s application of priority category three (ERISA §4044(a)(3)). The benefits in priority category three include annuity benefits that were in pay status before the beginning of the three-year period ending on the date of plan termination, and those annuity benefits that could have been in pay status for participants who were eligible to receive them before the beginning of the three-year period. Allocation is made based on the provisions of the plan (as in effect during the five-year period ending on the termination date) under which such benefit would be the least.

In addition, PBGC Reg. §4044.13(b)(5) provides that automatic benefit increases provided for in plan provisions adopted and effective before the first day of the five-year period will be included in category three if the increases were scheduled to occur during the fourth and fifth years preceding termination.

COLA adjustments

The plan capped maximum yearly retirement income by incorporating the annual benefit limits in Code Sec. 415(b). The PBGC included scheduled COLA increases during the fourth and fifth year prior to plan termination but not those during the following three years. The pilots argued that under ERISA §4044(a)(3), the plan “provision” regarding incorporation of the 415 limits into the plan had been “in effect” prior to the beginning of the five-year period such that all COLA increases occurring during the five-year period should be included in category three. The appellate court favored the PBGC’s interpretation, noting that it “tracked the statute” and was the better interpretation of it. It also rejected the pilot’s assertion that PBGC Reg. §4044.13(b)(5) did not apply because the COLAs were not benefit increase provisions but rather “increases in a benefit limitation.”

Actuarial equivalence

The appellate court also rejected the contention of pilots who could have retired three years before plan termination, but did not, that their benefits should be increased under principles of “actuarial equivalence” to compensate for the value they lost by not having their benefits commence earlier. The pilots’ reliance on the definition of “actuarial equivalence” set forth at ERISA §204 was misplaced as that reference relates to general benefit accrual requirements rather than which benefits are payable after a distress termination.

Other issues

The court rejected the pilots’ argument that a benefit increase under the early retirement incentive program should be placed in priority category three. Further, it ruled that a “minimum benefit provision” in the plan did not require that all benefits included in a prior plan should be included in the minimum benefit calculation with respect to pilots who were on a seniority list under the prior plan.

Finally, the court ruled the pilots produced no evidence to show the PBGC failed to administer correctly plan provisions concerning eligibility for and calculation of disability retirement benefits. Disability determinations are governed by a disability plan that is ongoing and administered by the airline.

Source: Davis v. PBGC (CA-DC).

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