6th Circuit: Kentucky Bancshares Violated ERISA in Plan Termination

By John Iekel • January 26, 2015 • 0 Comments
The Pension Benefit Guaranty Corporation (PBGC) was not arbitrary and capricious when it concluded that Kentucky Bancshares was obliged to comply with the Section 1107 of the Pension Protection Act (PPA) as well as ERISA’s standard termination requirements when it terminated its retirement plan and trust, the U.S. 6th Circuit Court of Appeals ruled in PBGC v. Kentucky Bancshares (No. 14-5773, Jan. 15, 2015).

In 2008, Kentucky Bancshares undertook two major efforts required under the PPA. It incorporated new interest rate and mortality assumptions for computing the minimum lump sum benefits payable to participants under the plan, which generally allowed payment of lower lump sum benefits. It also began preparing to terminate the plan by the end of 2008. Though Kentucky Bancshares began implementing the changes in 2008, it did not actually amend the plan terms until February 2009, almost two months after the plan had been terminated on Dec. 31, 2008.

The PBGC argued that Kentucky Bancshares violated ERISA as well as a PBGC regulation and did not make all the payments it was obliged to under the terms of the plan at the termination. Kentucky Bancshares argued that the post-termination amendment of the plan altered those obligations.

The PBGC said the post-termination amendment could not be retroactive, because “plan benefits are determined under the plan’s provisions in effect on the plan’s termination date.” The PBGC recognized that a post-termination amendment may be taken into account to the extent that it does not decrease the value of benefits, but concluded the exception did not apply in this case.

Kentucky Bancshares insisted that it had to make the amendment so the plan would operate in compliance with the PPA. The PBGC, however, determined that although the PPA authorized the plan amendment changes, nothing prohibited Kentucky Bancshares from increasing benefits under the plan, and that a decrease in the value of benefits was not necessary to make sure the plan did not become disqualified.

The U.S. District Court for the Eastern District of Kentucky granted summary judgment to the PBGC and upheld the PBGC’s determination. Kentucky Bancshares appealed to the 6th Circuit, arguing that the PBGC erroneously interpreted the law.

The 6th Circuit affirmed the district court’s ruling. It held that there was “nothing irrational or implausible” about the PBGC’s rationale in arriving at its determination, and that it was reasonable for the PBGC to conclude that Kentucky Bancshares’ efforts to comply with the PPA did not obviate its obligation to comply with ERISA’s standard plan termination rules. It added that the two sets of rules are not contradictory, and that Kentucky Bancshares did not explain “why it did not, could not or should not” be required to comply with both.