One of the important changes made by the Pension Protection Act was the change to whipsaw calculations for cash balance plans. Last Friday, April 20th, the Sixth Circuit Court of Appeals issued one of the first opinions to mention this change, devoting two separate sections of the opinion to PPA.
In an opinion which concludes that each plaintiff is entitled to have his or her lump-sum distribution reevaluated using the whipsaw calculation as determined by the district court, plus interest, the Sixth Circuit clearly and concisely ruled in favor of the participants, who had taken lump sum distributions from AK Steel cash balance plan before age 65. The affected participants joined in the class action against AK Steel, contending that AK Steel did not calculate the lump sum distributions using a whipsaw calculation, which the plaintiffs contended they were entitled to and that failure to use the whipsaw calculation violated ERISA because it caused a forfeiture of benefits.
In the opinion, the Court explains the whipsaw calculation, and provides an example of how it provides a greater lump sum distribution for one hypothetical participant. The court found it significant that AK Steel received a determination letter from the IRS in 1996 for the cash balance plan, stating in the determination letter application “that an employee electing a lump-sum distribution of benefits would receive a payment equal to his or her account balance.”
In one of the sections of the opinion devoted to the Pension Protection Act, the Court states that before PPA, a cash balance plan would have been required to use the whipsaw calculation in order to comply with ERISA. The Court states that:
“PPA created special rules for cash balance plans, among them the provision that defined benefit plans shall not be treated as failing to meet the requirements of ERISA solely because the present value of an accrued benefit is deemed equal to the amount expressed as the balance in a participant’s hypothetical account. PPA § 701(a)(2). These rules apply to distributions made after August 17, 2006. PPA § 701(e)(2). In effect, the PPA establishes on a prospective basis that the whipsaw calculation is not required.”
This is probably the conclusion of the class action suit involving AK Steel as the U.S. Supreme Court is not likely to grant cert. on this case. [tags]Pension Protection Act, cash balance, whipsaw, retirement, pension, ppa[/tags]
