Employees and Retirees in Chicago that are participants in a pension plan should be concerned about a cost of living adjustment ("COLA") in their pension plans. A COLA is an annual adjustment to a pension benefit based upon a cost of living index. The question arises, however, when a participant takes a lump sum distribution, whether that lump sum will reflect future COLAs or not. A class action case on this topic recently settled, and some parties challenged the settlement. Williams v. Rohm & Haas Pension Plan, No. 10-1978 (7th Cir. Sept. 2, 2011).
The case began when Cory Williams left Rohm & Haas, and elected to take a lump sum distribution of his pension benefit under the terms of the plan. He later came to believe his lump sum distribution should have included the present value of the future COLAs that he would have received if he elected an annuity. The district court granted summary judgment in his, and the class's, favor. It, and the appellate court, held that a COLA is an accrued benefit within the meaning of § 2(23)(A) of the Employee Retirement Income Security Act ("ERISA"), and thus ERISA § 504(c)(3), which provides any lump sum distribution must be the actuarial equivalent of any benefit payable as an annuity. In fact, tax regulations provide that when a plan an early retirement annuity is to be the actuarial equivalent of an early retirement annuity, the lump sum must include a COLA. Treas. Reg. § 1.411(a)-11(a)(2).
The parties contested the damages amounts, and the Plan argued the tax regulation was not applicable because under other precedent, other similar tax regulations have been held to be merely a requirement for preferential tax treatment, but not a requirement to comply with ERISA. See McCarter v. Ret. Plan for the Dist. Managers of Am. Family Ins. Grp., 540 F.3d 649, 651 (7th Cir. 2008). Before the district court could address this argument on damages, the parties settled the claims.
If you have questions regarding the cost of living adjustment in your pension plan, speak to a pension lawyer versed in ERISA today.