Employer erred when it calculated pension benefit without reference to “compensation”

An employer acted arbitrarily and capriciously when it calculated a former employee’s defined benefit plan benefit amount without reference to the plan’s definition of “compensation,” the U.S. Court of Appeals in Chicago (CA-7) has ruled. However, the district court also erred when it simply accepted the former employee’s view of what his monthly benefit should be, instead of requiring that a new calculation of the benefit incorporate the plan’s definition of compensation.

Compensation

The employer administered its own defined benefit plan, which provides that the pension amount depends on the highest average compensation in any 60-month period of employment. “Compensation” is defined by the plan to include such items as regular salary, incentive compensation and 401(k) plan contributions.

When a former employee turned 65 in 2012, the employer told him his monthly benefit would be $4,200. The employee was unhappy: in 1999, the year he left the employer, he received a benefits statement that calculated his compensation differently, such that his monthly benefit starting at age 65 was projected to be $5,400.

The employee filed suit under ERISA §502(a)(1)(B). The district court found for the employee, and ordered the employer to pay benefits at the higher 1999 rate.

New calculation

The appellate court agreed the employer’s 2012 calculation was arbitrary and capricious. The employer failed to demonstrate the calculation was based upon the plan’s definition of compensation. The employer asserted that the 1999 compensation calculation was not correct, but never explained how it calculated the 2012 version. “An explanation-free decision is arbitrary and capricious,” the appellate court explained.

However, the employee also failed to explain adequately why the higher 1999 amount was correct. Thus, if on remand to the district court the parties cannot agree as to what the correct pension is under the plan terms, the lower court must remand the dispute back to the employer so that the administrator can make a fresh calculation.

Source: Reilly v. Continental Casualty Co. (CA-7).

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