Free Brief (Non Appeal) - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8

SUSAN MARTIN (AZ#014226) DANIEL L. BONNETT (AZ#014127) JENNIFER KROLL (AZ#019859) MARTIN & BONNETT, P.L.L.C. 3300 N. Central Avenue, Suite 1720 Phoenix, Arizona 85012-2517 Telephone: (602) 240-6900 [email protected] [email protected] [email protected] Attorneys for Plaintiffs IN THE UNITED STATES DISTRICT COURT

9

FOR THE DISTRICT OF ARIZONA
10 11 12 13

Barbara Allen, Richard Dippold, Melvin Jones, Donald McCarty, Richard Scates and Walter G. West, individually and on behalf of all others similarly situated, Plaintiffs,

14

vs.
15 16 17 18

Honeywell Retirement Earnings Plan, Honeywell Secured Benefit Plan, Plan Administrator of Honeywell Retirement Earnings Plan and Plan Administrator of Honeywell Secured Benefit Plan, Defendants.

19 20 21 22 23 24 25 26 27 28

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

No. CV04-0424 PHX ROS

Plaintiffs' Response to Defendants' Supplemental Brief Addressing Impact of New Treasury Regulations

Plaintiffs submit this response to Defendants' supplemental brief, (doc. 95), addressing the impact of new Treasury regulations, 26 C.F.R. §§ 1.411(d)-3, (d)-4 (2005). The new regulations are not retroactive, would not alter the Court's summary judgment ruling even if they did apply and provide no grounds for reconsideration or an interlocutory appeal. The agency has specifically directed that plan amendments adopted before August 12, 2005 are to be evaluated under the "applicable authorities." Here, the Court has already determined the applicable authorities are Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001) and Shaw v. Int'l Ass'n of Machinists & Aerospace Workers Pension Plan, 750 F.2d 1458 (9th Cir. 1995). Even if the agency's explicit determination to apply the

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 1 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

regulations prospectively should be overruled, the regulations would not alter summary judgment in favor of Plaintiffs because: · The regulations endorse the holding in Shaw, the facts of which this Court found indistinguishable from the decreases by plan amendment of the three promised features of the benefit plan here; · The regulations direct that the determination of whether an amendment reduces benefits must be made by comparing benefits immediately before and immediately after the applicable amendment date and hold an amendment is unlawful if the benefit of "any participant" is reduced; · Defendants' repeated attempts to draw comparisons between benefits existing on the date the merger amendment was adopted with the benefits paid to Plaintiffs upon their retirement utilizes the wrong measuring points. A generalized increase in benefits at retirement or as the result of amendments on different dates or between different plans does not legitimize the amendment decreasing benefits adopted on February 4, 1984; · Given that Defendants never even proffered any argument that the plan amendments adopted on February 4, 1984 somehow offset the decreases in benefits made on that date by simultaneous increases; the new "net effect" rule, even if applied, would not alter the Court's decision, and · The regulations make clear that Signal Retirement Plan Section 4.10(c)(ii), the so-called "savings clause" does not meet the requirements of the regulations, neither as to the date accrued benefits are protected nor as to the scope of the plan's definition of the benefits that provision allegedly protects.1 In short, if the identical amendments were adopted tomorrow, they would still violate ERISA § 204(g) and the new Treasury regulations. I. THE REGULATIONS SHOULD NOT BE APPLIED RETROACTIVELY A. The Determination that the Regulations Are Prospective Is Dispositive Despite the urging of certain groups representing plan sponsors to apply the regulations retroactively,2 the Treasury deliberately determined that the regulations should

1

Defendants also failed to introduce any evidence that the calculations called for by Section 4.10 ( c ) (ii) of the Signal Retirement Plan were ever performed.

See, e.g., June 22, 2004 comment by the ERISA Industry Committee ("ERIC"), urging Treasury to revise the rules to make clear that the regulations' "net effect" rule (which it referred to as the simultaneous amendment rule) "applies to amendments adopted before publication of the final regulations as well as to amendments adopted thereafter." See 2004
2

2

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 2 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

be applied prospectively only and that earlier plan amendments should be analyzed under existing authority. In this case, the applicable authorities are the Ninth Circuit precedents already followed by this Court. Short of an actual reference to the name of this case, the regulations could not be more clear: Effective dates --(1) General effective date. Except as otherwise provided in this paragraph (j), the rules of this section apply to amendments adopted on or after August 12, 2005. 26 C.F.R. § 1.411(d)-3(j) (2005). See 70 Fed. Reg. 47109, 47115 (2005). That the agency made a conscious decision not to give retroactive effect to any portion of the regulations is also demonstrated by the preamble which states: "Plan amendments adopted before August 12, 2005 are to be evaluated in light of the applicable authorities without regard to these regulations." 70 Fed. Reg. at 47115. Given that the IRS noted that it viewed the new rules to be in conflict with the holding in Michael,3 yet specifically directed that amendments predating the regulations are to be governed by the applicable authorities, there can be no dispute that the agency did not intend for the regulations to displace controlling judicial precedent and to govern this matter. Applying the August 2005 regulations to this case would violate the agency's conscious decision to make the regulations prospective only. As the court noted in Pauley v. U.S.D.A., 348 F.3d 1143, 1152 (9th Cir. 2003), in reversing a district court decision that Tax Notes Today 134-21. While it is not clear what role, if any, Honeywell representatives played in submission of the ERIC comments, ERIC has previously been represented at hearings by Honeywell's then vice president and deputy general counsel who also served on ERIC's Board of Directors. See, e.g. Testimony of Jane Greenman on behalf of the ERISA Industry Committee, hearings before the Committee on Education and the Workforce (March 13, 2002); Testimony of Jane Greenman on behalf of ERIC, hearings before the Subcommittee on Health, Committee on Energy and Commerce (March 15, 2001)(available on Lexis Federal Document Clearing House). Despite ERIC's urging, Treasury did not apply any portion of the regulations retroactively.
3

The Treasury in citation in the preamble to Michael, never explained the source or extent of its disagreement with that decision, but instead cryptically stated "This is contrary to the analysis in Michael." It is not clear what part of Michael the Treasury disagrees with.
3

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 3 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

applied a regulation retroactively despite the agency's decision to apply it prospectively, "it would be impossible for the agency to promulgate a rule that was not retroactive unless it expressly contradicted a prior rule." Assuming, as Defendants have argued, that deference to the regulation is appropriate under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), then deference should be accorded to the agency's express decision as to when its regulation should become effective. Because the regulations do not apply to this case, the regulations provide no change in the law that warrants either reconsideration or an interlocutory appeal. B. The Supreme Court Decision in Brand X Does Not Apply. This case is governed by Pauly, supra, and by Bowen v. Georgetown University Hospital, 488 U.S. 204, 208 (1988) not by Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 125 S.Ct. 2688, 2717 (2005). In Bowen, the Supreme Court held that "administrative rules will not be construed to have retroactive effect unless their language requires this result." 499 U.S. at 208. Similarly, in Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994), the Court made clear that "when a case implicates a federal statute enacted after the events in suit, the court's first task is to determine whether Congress has expressly prescribed the statute's proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules."4 Here, after issuance of the Supreme Court's Brand X decision, the IRS expressly determined that its regulation should not be given retroactive effect. It would be directly contrary to Brand X to ignore the agency's judgment and apply the regulations where the agency, recognizing the existence of what it viewed as contrary authority, determined to apply its rules prospectively only. The Supreme Court was not

4

27 28

Principles of statutory construction apply equally to regulations. Black & Decker Corp. v. Commissioner, 986 F.2d 60, 65 (4th Cir. 1993).
4

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 4 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

dealing in Brand X with an agency regulation that was intended to have only prospective effect.5 Even if the Treasury's express directive not to apply the regulation retroactively should be disregarded, principles of administrative law acknowledged by Defendants, (Defs' brief, p.9), that prohibit retroactive application of new legal rules would also prohibit retroactive application to the new "net effect" rule. That the rule is indeed new cannot seriously be disputed and is best demonstrated by Defendants' litigation of this case. Despite Defendants' contention that the "net effect" rule merely restates prior law, at no time in either the motion to dismiss or in opposition to Plaintiffs' motion for summary judgment did Defendants ever argue that this case was governed by the old regulations, 26 C.F.R. § 1.411(d)-3 (1977). Nor did Defendants even cite or refer to the predecessor IRS regulations they now claim constituted prior law. The new regulations replace former §1.411(d)-3 in its entirety. Even without examining the new regulations, to suggest that old regulations dictated the same results as the new regulations in the absence of even a single reference to the old regulations in any of the four briefs filed by Defendants defies credulity. Principles of estoppel and preclusion and the standards for reconsideration also bar Defendants from making this claim for the first time on a motion for reconsideration. Even if Defendants were not barred from asserting that the old rules were the same, the regulations in fact create myriad new legal rules. Among other things, the regulations add a "net effect" test to determine whether two or more amendments having the same

The case cited in Defendants' supplemental citation of authority, AARP v. Equal Employment Opportunity Commission, 05-cv-509 (E.D. Pa. 2005), if anything, supports the inapplicability of the Treasury regulations here. The regulations at issue in AARP expressly applied retroactively: "It is intended that the exemption shall apply to existing, as well as newly created, employer-provided retiree health benefit plans." 68 FR 41542, 41547.

5

5

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 5 of 15

1 2 3 4 5 6 7 8 9 10 11 12

applicable amendment date have the net effect of reducing accrued benefits6 and they provide that certain particularized plan provisions guaranteeing that benefits may not fall below preamendment levels determined on the applicable amendment date can shield otherwise improper amendments from violations of the anti-cutback rule. The old regulations issued in 1977 did not provide for any of these rules. The old regulations, 26 C.F.R. § 1.411(d)3(b) (1977), were not inconsistent with Michael. While they directed that all features of a benefit plan be examined and treated as one amendment, the old regulations did not say that an amendment of one pension plan provision decreasing promised accrued benefits could by offset by an amendment of another plan provision increasing benefits. The IRS also confirmed that the regulations now apply to § 411(b)(6)(B), ERISA §204(g)(2), benefits for the first time.7 The 2004 § 411(d)(6) proposed regulations stated

6

13 14 15 16 17 18 19 20 21 22 23 24 25 26

Defendants misrepresent the "net effect" test by suggesting that a series of amendments can rehabilitate an otherwise unlawful amendment or shield an otherwise unlawful amendment through a prior amendment increasing benefits. (Defs. Br. p.6.) To use the "net effect" rule, the two amendments must have the same "applicable amendment date." 26 C.F.R. §1.411(d)-3(a)(2)(ii). The "net effect" rule is limited to the circumstances described in 26 C.F.R. § 1.411(d)-3(a)(2)(ii) and should not be confused, as Defendants endeavor to do, with the separate "multiple amendment" rule. 26 C.F.R. § 1.411(d)-3(a)(2)(iii). Defendants' claim that the "net effect" rule applies to the "multiple amendment" rule is contrary to the regulations. The multiple amendment rule, 26 C.F.R. §1.411(d)-3(a)(2)(iii), provides that "A plan amendment violates the requirements of section 411(d)(6) if it is one of a series of plan amendments that, when taken together, have the effect of reducing or eliminating a section 411(d)(6) protected benefit in a manner that would be prohibited by section 411(d)(6) if accomplished through a single amendment." The multiple amendment rule does not allow a plan amendment decreasing benefits to be offset by an amendment increasing benefits adopted on a different earlier or later date. It provides rather that an amendment otherwise lawful may be made unlawful if it is part of "a series of plan amendments made at different times that, when taken together have the effect of reducing or eliminating a Section 411(d)(6) protected benefit in a manner that would be prohibited under Section 411(d)(6) if accomplished with a single amendment." 70 Fed.Reg. at 47112. In contrast, the "net effect" rule is limited by its terms to amendments that have the "same applicable amendment date." Despite Defendants' multiple assertions to the contrary, this case implicates early retirement benefits and retirement-type subsidies as well as normal retirement benefits. The IRS has
6

7

27 28

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 6 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

that the new regulations "provide that these rules apply to § 411(d)(6)(B) protected benefits as well." 69 Fed. Reg. 13769, 13770 (2004). Prior to the new regulations, the IRS had not issued regulations defining accrued benefits for purposes of applying the anticutback rule. See 53 Fed. Reg. 26050 (1988) ("Many commentators requested guidance with respect to which benefits, rights and features are protected under § 411(d)(6)...With one exception, the regulations do not provide specific guidance with respect to the benefits described in § 411(d)(6)(a), early retirement benefits or retirement-type subsidies."). Even if the IRS' own decision not to apply its regulation retroactively should be disregarded, the regulations create new legal rules and under administrative law principles should be treated as prospective only.

long recognized that plan amendments can reduce participants' benefits in several ways, including reducing, the accrued normal retirement benefit and a participants' early retirement benefits or retirement type subsidies. See 53 Fed.Reg. 26050 (1988) ("Also, the regulations clarify that some benefits may be covered by more than one category of section 411(d)(6) protected benefits. Thus, the same benefit may be a benefit described in section 411(d)(6)(A) and an early retirement benefit or retirement-type subsidy described in section 411(d)(6)(B)(i))."). The Plan amendments at issue here, as Plaintiffs repeatedly argued, reduced both early retirement benefits and retirement-type subsidies as well as participants' normal retirement benefits. For example, Plaintiff Richard Scates, who retired at age 56, nine years before the normal retirement age of 65, (Affidavit of Richard Scates dated June 16, 2004, ¶ 2-3), had his early retirement benefits and retirement-type subsidies reduced by offsetting benefits attributable to his service before 1984 by the Social Security Offset and by increasing from 3½ to 7½ % the projected interest rate used to determine the SBA offset following his termination of employment at age 56 until he would have been 65 years old. The Court understood that Plaintiffs were complaining about early retirement benefits and retirement type subsidies as well as normal retirement benefits: The absence of a Social Security offset in the Garrett Retirement Plan is functionally no different than the no-offset rule in Michael. Under Michael's logic, each of these so-called unconditional promises -- in reality separate components of one overall benefit formula -- are accrued early retirement benefits forever protected from downward adjustment or elimination. (Order, doc. 77, pp. 20-21 (emphasis added).) (See also Plaintiffs' Response to Defendants' Motion for Reconsideration and Clarification And Alternative Motion to Allow Interlocutory Appeal, doc. 102, p.3 & n.3.)
7

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 7 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

II. EVEN IF THE REGULATIONS APPLIED TO THESE PLAN AMENDMENTS, THEY WOULD NOT ALTER THE RESULT IN THIS CASE. Even if the regulations applied retroactively, they would not alter the result in this case. The regulations endorse the holding in Shaw by disapproving of the result in Board of Trustees of Sheet Metal Workers National Pension Fund v. Commissioner, 318 F.3d 599 (4th Cir. 2003). Sheet Metal Workers held that a cost of living increase adopted after retirement was not an accrued benefit protected from elimination by subsequent amendment.8 Given that this Court ruled that Shaw "cannot be persuasively distinguished from the facts of this case," (Order p.25), the regulations, if effective, would not alter the Court's ruling. Defendants have pointed to no feature of the February 4, 1984 plan amendments that provided a simultaneous upward adjustment of benefits that offset the benefit reductions. In other words, Defendants offered no evidence that the "net effect" rule, if applied to the February 4, 1984 amendments, would shield the amendments from violation of §204(g). Other than relying on a distorted claim that Plaintiffs had somehow conceded that the amendments increased benefits, a concession much broader than the Court's view that Plaintiffs had acknowledged they were better off "on the whole," (Order p.13), Defendants made no effort to come forward with admissible evidence satisfying the particularized inquiry required under the regulations that despite the February 4, 1984 reductions in benefits, some other simultaneously adopted pension plan amendments caused benefits to increase. The only attempt Defendants made to show that there was an increase immediately after the Plans were amended was through two declarations stricken by the Court that
8

In Sheet Metal Workers, the court distinguished the IRS' reliance on Shaw and Hickey v. Chicago Truck Drivers, 980 F.2d 465 (7th Cir. 1992) noting that unlike those cases, the amendment granting additional benefits in Sheet Metal Workers occurred post-retirement. The regulations also endorse the holding of Bellas v. CBS, Inc., 221 F.3d 517 (3d Cir. 2000), that contingent early retirement benefits cannot be eliminated by plan amendment even if the amendment precedes the contingent event such as a plant shut down. 70 Fed. Reg. at 47115 n.7, 47111. See, e.g., Richardson v. Pension Plan of Bethlehem Steel Corp., 112 F.3d 982 (9th Cir. 1997) (shutdown benefit is protected under anti-cutback rule).
8

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 8 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

referenced distribution of the surplus assets of the separate Severance Plan and the fortuity of a favorable rate provided by an insurance company insuring the secured benefit accounts (but never promised by any plan amendment). Under no circumstances does the "net effect" rule allow a pension plan to evaluate the "net effect" of a plan amendment by factoring in plan amendments adopted in an entirely different plan or by including amendments adopted and effective on different dates. 26 C.F.R. § 1.411(d)-3 (a)(2)(ii). Defendants also tried to compare benefits not immediately before and after the February 4, 1984 amendments but rather tried to compare benefits at the date the merger amendment was adopted (December 31, 1983) with benefits paid at retirement. Despite the existence of the proposed regulations at the time of briefing on the summary judgment motion, Defendants made no effort to demonstrate that benefits were increased by amendments made on February 4, 1984 the applicable comparison date under both the proposed and final regulations. Like the final regulation, the "net effect" test of the proposed regulation is measured immediately after the amendment. See 69 Fed. Reg. 13769, 13776-77 (2004). An amendment "will violate Section 411(d)(6) if, for any participant, the net effect" is to decrease a participant's accrued benefit as of that applicable amendment date." See 69 Fed. Reg. at 13776-77; 26 C.F.R. § 1.411(d)-3(a)(2)(ii) (2005).9 Accordingly, the "net effect" rule, even if applicable here, would not save the February 4, 1984 plan amendments from violating Section 204(g).

Section 4.10( c )(ii) of the Signal Retirement Plan Does Not Comply with the Regulations' Narrow Exception to an Anti-cutback Violation The Signal Retirement Plan's so-called savings provision does not meet the requirements of the new regulations. Even if the regulations applied, they would not save the The regulations define "applicable amendment date"as follows: "the later of the effective date of the amendment or the date the amendment is adopted." 70 FR 47109, 47122. 26 C.F.R. § 1.411(d) - 3(g)(4) (emphasis added).
9
9

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 9 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

challenged amendments from violations of the anti-cutback rule. Defendants again misrepresent the facts and the terms of the regulations when they assert that "even if Plaintiffs were correct in suggesting that the December 31, 1983 amendment of the benefit formula theoretically could have reduced their accrued benefits, the Retirement Plan's savings clause in §4.10 ( c) would have prevented the amendment from actually cutting back their accrued benefits." (Defs. Supp. Br., doc. 95, p.6.) The challenged amendments here were not adopted until, at the earliest, February 4, 1984: On February 4, 1984, the Signal Retirement Plan was amended and restated , effective January 1, 1984, to admit former participants in the Garret Retirement Plan who continued in active employment as new participants in the Signal Retirement Plan and to grant them past service credit for their years of participation in the Garret Retirement Plan. (Order, doc. 77, p. 7.)10 Section 4.10(c)(ii) of the Signal Retirement Plan does not meet the requirements for the type of plan provision permitted to save an otherwise unlawful plan amendment from violating the anti-cutback rule under the regulations. On its face, the plan provision fails to protect accrued benefits as of February 4, 1984. Moreover, Section 4.10(c)(ii) by its terms protects only normal retirement benefits. Section 4.10(c)(ii) offers no protection from reduction by plan amendment to early retirement benefits, optional retirement benefits and disability retirement benefits. The plan provision Defendants rely on purports to protect "accrued benefits;" however, the Plan narrowly defines accrued benefits as "(b) An Employee's `Accrued Benefit' as of his separation from the Service shall be equal to his Normal Retirement Benefit computed under Section 4.2..." (Decl. Of Amy Promislo, dated May 4, 2004, Exhibit E, at HW0000351.) The definition, and hence the savings clause, do not include early retirement benefits set forth under Signal Plan Sections 4.3 and 4.4,

Defendants' persistence in endeavoring to utilize an erroneous amendment date is improper in light of the facts and this Court's decision. In the absence of any evidence in this record of any simultaneous net benefit increase measured as of the date of the adoption of the February 4, 1984 amendment, the effort to somehow bootstrap the changes made to the Garrett Severance Plan, an entirely separate plan, is overreaching.
10

10

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 10 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Disability Retirement Benefits under Section 4.5 or Optional Retirement Benefits under Section 4.6. (Id., at HW0000340-42; 344-45.) The regulations do not state that any type of plan provision purporting to protect against reducing the dollar amount of benefits below a certain level can suffice; the Treasury elected to require that such plan provision had to protect all accrued benefits as of the later of the time of adoption or effective date. Section 4.10(c)(ii) of the Signal Retirement Plan fails the test. It does not save the February 4, 1984 amendments from violation of the anti-cutback rule. III. THE REGULATIONS ARE NOT ENTITLED TO CHEVRON DEFERENCE The new Treasury regulations are not entitled to Chevron deference as they conflict with unambiguous statutory provisions and also would not survive step two of the Chevron analysis. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Supreme Court has stated that "[t]he judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear congressional intent. If a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect." Chevron, 467 U.S. at 843 n.9. The Ninth Circuit recently reiterated this point in finding a regulation in conflict with a statute: Under step one of the Chevron test, we must first ask whether Congress has spoken to the precise question at issue. Id. at 842; Akhtar v. Burzynski, 384 F.3d 1193, 1198 (9th Cir. 2004). "If Congress has done so, the inquiry is at an end; [we] must give effect to the unambiguously expressed intent of Congress." Morales-Izquierdo v. Ashcroft, 388 F.3d 1299, 1303 (9th Cir. 2004) Ramos Bona v. Gonzalez, 2005 U.S.App.Lexis 21207, at *12 (9th Cir. September 30, 2005). A court "should not defer to an agency's interpretation of a statute if Congress' intent can be clearly ascertained through analysis of the language, purpose and structure of the statute." NRDC v. Nat'l Marine Fisheries Serv., 421 F.3d 872 (9th Cir. 2005). See also Reynolds v. Hartford Fin. Servs. Group, Inc., 416 F.3d 1097, 1108 (9th Cir. 2005) ("Because we find FCRA unambiguous, however, we reach our decision independently of, and do not defer to, the agency's interpretation."). In this case, Congress explicitly provided that:
11

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 11 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
11

(g) Decrease of accrued benefits through amendment of plan (1) The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan, other than an amendment described in section 1082(c)(8) or 1441 of this title. (2) For purposes of paragraph (1), a plan amendment which has the effect of­ (A) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or (B) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy . ... 29 U.S.C. § 1054(g). By grouping multiple amendments together and permitting one amendment to offset the violation effected through another amendment, the regulation conflicts with the unambiguous language of the statute stating that benefits may not be decreased by "an amendment of the plan." Moreover, to the degree that the regulations protect nothing more than the nominal dollar value of a benefit at a given snapshot in time and legitimize the "wear-away" of benefits promised under pre-amendment features of the plan, the regulations are in conflict with the statutory definitions of accrued benefits and the distinction between defined contribution plans11 and defined benefit plans.12 In Heinz, the Supreme Court rejected the idea advanced by the Plan and the IRS that accrued benefits had not been reduced because the amendment did not reduce the net dollar amount of the benefits: "to give the anticutback rule a reading that constricted would take textual force majeure, and certainly something closer to irresistible than the provision quoted in the Plan's observation that accrued benefits are ordinarily `expressed in the form of an annual benefit commencing at normal retirement age...'" Central Laborers' Pension Fund v. Heinz, 541 U.S. 739, 745

ERISA Section 3(34), 29 U.S.C. §1002(34). ERISA Section 3(35); 29 U.S.C. §1002(35).
12

12

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 12 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

(2004). By focusing on the net effect of the nominal dollar value of more than one plan amendment without regard to whether promised features of the plan's benefit formulas could be changed retroactively, the regulations destroy the essential distinctions between defined benefit and defined contribution plans. The accrued benefit under a defined benefit plan is the benefit "determined under the plan." 29 U.S.C. §1002(23)(A). In a defined benefit plan, no specific dollar value is guaranteed, rather, the accrued benefit is the benefit under the promised formula.13 By suggesting that the benefit is the numerical product alone and not the right to the benefit under the formula up to the date of the amendment, the regulations destroy the distinction between defined benefit and defined contribution plans. See, e.g., Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 758 (7th Cir. 2003), in which Judge Posner struck down the plan's efforts to treat its cash balance plan as if it were merely a defined contribution plan protecting only the specific dollar value in the account on termination of employment: In a defined contribution plan, the employee's pension entitlement is to the value of his retirement account to which contributions (whether from the employer, the employee, or both) have been made, while in a defined benefit plan, as our numerical example illustrated, the entitlement is to the pension benefit that the plan promises. If an employee has worked for his employer for at least five years, his defined benefit pension benefits will have vested by operation of law. That is, they will have become an entitlement, specifically an entitlement to the "normal retirement benefit," 29 U.S.C. §§ 1053(a), defined, so far as applicable to this case, as "the benefit under the plan commencing at normal retirement age," id. §§ 1002(22), which is 65. If the employee leaves the company before he reaches the normal retirement age, his "normal retirement benefit," which is to say his pension entitlement, is the benefit that he has "accrued" to the date of his leaving. Id. §§ 1002(23)(A). In the case of a defined contribution plan (the benefits of which, incidentally, vest immediately), that benefit is simply the amount in his retirement account when he leaves the company's employment. Id. §§ 1002(23)(B). In the case of a standard defined benefit That the benefit is more than just the numerical product is illustrated by a simple variation of participant N's accrued benefits under Example 1 of the regulations, 26 C.F.R. § 1.411(d)3(a)(ii)(4). If participant N's career average pay actually declines below $50,000, the regulation's "net effect" rule ceases to make any sense because it would protect a dollar value higher than the participant's benefit under the old formula utilized by the plan. Surely Defendants are not suggesting that in such a case, they are required to pay a dollar value higher than and completely divorced from any formula under the plan.
13
13

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 13 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

plan, the kind that entitles the retiree to a pension equal to a percentage of his salary based on his years of service, the entitlement is to a pension beginning at age 65, the amount depending on his years of service and his salary. See also Stepnowski v. Comm'r, 2005 U.S. Tax Ct. LEXIS 12 (T.C. 2005) ("More generally, an accrued benefit represents the progressively increasing interest in a retirement benefit that an employee earns each year, under a formula that is provided in the plan.") (citing Bd. of Trs. of the Sheet Metal Workers' Natl. Pension Fund v. Commissioner, 117 T.C. 220, 228 (2001), affd. 318 F.3d 599 (4th Cir. 2003)). Consequently, to the extent that the regulations purport to limit the protection of Section 204(g) solely to the reduction or elimination of the nominal dollar amount of the benefit and to sanction wear-away or permit a decrease of a promised benefits to be offset by another amendment increasing benefits, they are inconsistent with the court's decision in Heinz, the text of Section 204(g) and definitions of accrued benefits and defined benefit plans under ERISA. The definition of Section 411(d)(6)(B) protected benefits also fails to conform to the unambiguous terms of ERISA §204(g)(2). The regulations omit critical language from the statute which provides that "benefits attributable to service before the amendments shall be treated as reducing accrued benefits." The regulations omit the crucial reference to "benefits attributable to service" before the applicable amendment date. For these reasons, among others, no deference to the regulations is appropriate. CONCLUSION For the foregoing reasons, Defendants' motion should be denied.

14

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 14 of 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Respectfully submitted this 3rd of October, 2005. MARTIN & BONNETT, P.L.L.C. By: s/Susan Martin Susan Martin Daniel L. Bonnett Jennifer L. Kroll 3300 North Central Avenue, Suite 1720 Phoenix, AZ 85012-2517 (602) 240-6900 Attorneys for Plaintiffs CERTIFICATE OF SERVICE I hereby certify that on October 3, 2005 I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: David B. Rosenbaum Dawn L. Dauphine Osborn Maledon, P.A. and: Michael Banks William Delaney John G. Ferreira. Azeez Hayne. Amy Promliso Covert Morgan Lewis & Bockius LLP Attorneys for the Defendants S/Dorothy E. Hull Legal Assistant for Martin & Bonnett, PLLC

G:\WORK\Allied\Court\Pleadings\Response to Defs Supp Brief re Treasury Reg.wpd

15

Case 2:04-cv-00424-ROS

Document 109

Filed 10/03/2005

Page 15 of 15