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4th Cir. – Published – Top Hat Plan

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  • 4th Cir. – Published – Top Hat Plan

    Here’s a new case out of the Fourth Circuit for publication titled Jeffrey Plotnick, James C. Kennedy v. Computer Sciences Corporation Deferred Compensation Plan for Key Executives, Computer Sciences Corporation. This matter deals with a top hat plan. The plaintiffs, who were key executives, contend that the defendants do not have a right to change the crediting rate. The court first turns to the standard of review. The court provides a good overview of how the various circuits apply the standard of review to top hat non-fiduciary administrators.

    Since top-hat plans involve non-fiduciary administrators, circuit courts have disagreed about whether the Firestone standard applies to a district court’s review of these plans. The Third Circuit explained that since “a top hat plan is a unique animal under ERISA’s provisions,” the ordinary Firestone standard did not apply. Goldstein v. Johnson & Johnson, 251 F.3d 433, 442 (3d Cir. 2001). Instead, the Third Circuit held that top-hat plans are to be “treated as unilateral contracts” and reviewed “de novo, according to the federal common law of contract” and without regard to whether administrative “discretion” is “explicitly written into” the top-hat plan. Id. at 443.

    The Eighth Circuit adopted a similar unilateral-contract approach, but it noted that even under de novo review the court was required to “ultimately . . . determine whether the Plan’s decision was reasonable.” Craig v. Pillsbury Non-Qualified Pension Plan, 458 F.3d 748, 752 (8th Cir. 2006).

    In contrast, the Seventh Circuit extended the logic of Firestone to top-hat plans, reasoning that “Firestone tells us that a contract conferring interpretive discretion must be respected, even when the decision is to be made by an ERISA fiduciary.” Comrie v. IPSCO, Inc., 636 F.3d 839, 842 (7th Cir. 2011). Since top-hat plans lack fiduciary administrators, “[i]t is easier, not harder . . . , to honor discretion-conferring clauses in contracts that govern the actions of [these] non-fiduciaries.” Id.

    The Ninth Circuit also applied the Firestone standard of review to top-hat plans but added an additional analysis for structural conflicts of interest when the plan administrator both determines eligibility for benefits and pays those benefits. Sznewajs v. U.S. Bancorp Amended & Restated Supp. Benefits Plan, 572 F.3d 727, 733 (9th Cir. 2009), overruling on other grounds noted by Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 673–74 (9th Cir. 2011).

    However, after considering each of these approaches to top-hat plans’ standards of review, the First Circuit noted that, at least for cases in which the plan grants discretionary powers to its administrator, applying the Firestone standard (as opposed to a contract-based standard) creates a distinction without a difference. The First Circuit thus declined to decide which standard of review applied and proceeded with arbitrary-and-capricious review of the administrator’s use of discretion. Niebauer v. Crane & Co., Inc., 783 F.3d 914, 923–24 (1st Cir. 2015). The Second Circuit charted a similar course in an unpublished opinion, noting that it was unnecessary to determine the standard of review because, based on the facts in that case, “even making a de novo determination on the administrative record, we reach the same conclusion as did the Administrator.” See Am. Int’l Grp., Inc. Amended & Restated Exec. Severance Plan v. Guterman, 496 F. App’x 149, 151 (2d Cir. 2012).
    The District Court concluded that it did not need to decide what standard of review is appropriate and the Fourth Circuit agrees.

    Here, the district court’s discussion of the standard of review mirrored that of the First and Second Circuits. Because the Plan granted its administrators full discretion to interpret the Plan, the district court reasoned that, under Firestone, an abuse-of-discretion standard would apply. Meanwhile, under a contract-based approach, the district court would evaluate the administrators’ determination by analyzing “whether the exercise of discretion was done in good faith, the touchstone of which is reasonableness.” Plotnick, 182 F. Supp. 3d at 597. Furthermore, the district court noted that courts in this circuit applying Firestone’s abuse-of-discretion standard will not disturb discretionary decisions if they are “reasonable.” See id. at 598 (quoting Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342 (4th Cir. 2000)). Thus, under either an abuse-of-discretion or a contract-based standard, a “reasonable” exercise of discretion would stand, essentially closing any rhetorical distance between the two competing standards of review.

    The district court thus proceeded in its analysis without determining whether Firestone or contract-based principles would apply, asking instead simply: “Was the administrator’s determination to deny plaintiffs’ claims for benefits on the ground that the 2012 Amendment is valid a reasonable interpretation of the Plan?” Id. From here, the district court analyzed the reasonableness of the Plan administrator’s interpretation under this circuit’s eight Booth factors. Id. (citing Helton v. AT&T, 709 F.3d 343, 353 (4th Cir. 2013)). The district court held that under any standard of review, “CSC correctly interpreted the Plan as permitting the 2012 Amendment, and CSC’s denial of plaintiffs’ claims for benefits was therefore appropriate.” Id. at 600.

    Because, on the facts presented here, we agree that the competing standards of review present a distinction without a difference, we decline to decide which standard of review applies. Instead, we proceed as the district court did and reach the same conclusions. Whether we proceed under a “reasonableness” inquiry, an abuse-of-discretion standard, or even de novo review, we agree that the 2012 Amendment and CSC’s denial of benefits were valid. Accordingly, we are compelled to affirm the district court’s grant of summary judgment to CSC.
    Next, the plaintiffs challenge the 2012 plan amendment and the court addresses those challenges in turn. The court first determines that the plan had a right to change the crediting rate.

    First, regarding amendment of the crediting rate, a plain reading of the Plan permits the Board to change the crediting rate so long as the change does not decrease the value of a participant’s notational account at the time of amendment. The Plan also generally requires that administration be uniform and consistent. The 2012 Amendment changed the crediting rate but did not decrease the value of any notational account at the time the amendment took effect and applied uniformly to all participants.

    Under any standard of review, the Board amended the Plan in accordance with the Plan’s plain text. Plotnick and Kennedy seek to characterize the 2012 Amendment as rendering the promises of the Plan illusory, but the Plan made no promise that the crediting rate would remain the same forever. Rather, the opposite was true; by its clear and unambiguous terms, the crediting rate was always “subject to amendment by the Board.” J.A. 411, 432.
    The court next determines that the plan did not violate any promise to not introduce risk or volatility.

    Next, with regard to the introduction of risk and volatility into the Plan, Plotnick and Kennedy seek to read into the Plan another guarantee that simply does not exist. As noted above, the Plan’s textual requirements--that there be uniform administration of participants’ accounts and that amendments not reduce the value of these accounts at the time of amendment--limited the Board’s discretion in meaningful ways. For example, CSC could not apply a negative crediting rate, because this would reduce the value of accounts at the time the amendment took effect. Furthermore, the Plan administrator could not exclude Appellants’ accounts from the 2012 Amendment because this might violate the requirement of uniform administration.

    But as noted above, the text of the Plan simply does not limit the Board’s selection of a crediting rate in the way in which Plotnick and Kennedy argue. The relative level of risk or volatility in a crediting rate merely follows from the crediting rate that the Board selects, and the Plan places no limit on a crediting rate’s exposure to market-based risk. Since the 2012 Amendment, one participant may choose to allocate funds in a way that maximizes potential account growth, while another participant can choose a crediting rate based on a single, low-volatility valuation fund. The effects of volatility are more evenly spread over the payment term because payments are calculated annually instead of in advance, but this simply means that the volatility that was once accounted for in the “true-up” period is now spread more equally across annual installments.
    Lastly, the court determines that the plaintiffs are not entitled to their preferred crediting rate in perpetuity.

    Third, with regard to the variation in annual distributions that the 2012 Amendment created, this court cannot offer the relief that Plotnick and Kennedy seek. Plotnick and Kennedy are correct that if a participant elected to receive annual payments, the Plan directs that CSC make payments in “approximately equal annual installments.” See J.A. 412, 434. Before the 2012 Amendment, these “approximately equal” installments happened to be actually equal--at least until the last “true-up” payment, which accounted for volatility in the crediting rate over the account’s payment term and thus was different in amount from the other annual payments. However, this predictable payment schedule was merely a derivative effect of the application of a crediting rate that pegged earnings in participants’ notational accounts to a crediting rate associated with a valuation fund featuring very low volatility. By tracking a single, low-volatility valuation fund, the pre-2012 crediting rate smoothed out market fluctuations and accordingly allowed CSC to predict with greater accuracy what future payments would be due to participants.

    Nevertheless, as explained above, Plotnick and Kennedy are not entitled to their preferred crediting rate in perpetuity. Before the 2012 Amendment, most participants’ annual payments happened to be equal, but the Plan does not promise such precision. In fact, participants’ last “true-up” payment had never been equal to the other payments over the payment term.
    The opinion is attached below.
    Attached Files
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