No Violation Due to Additional Tax Liability Incurred by Participant Upon Termination of Non-Qualified Plan and Distribution in a Lump Sum

A recent federal court case considered an issue that arises from time to time when employers want to terminate their non-qualified plans: Can the employer terminate the plan and pay out all benefits in a lump sum despite participants’ elections of other forms of benefit? (Taylor v. NCR Corp. (N.D. Ga. 2015).

Mr. Taylor had retired from NCR in 2006. He elected a joint and 100% survivor annuity benefit under the Retirement Plan for Officers of NCR so that he and his wife would receive an annual benefit of $29,062.80. In 2013, NCR informed Mr. Taylor that it had terminated the Plan and that he would receive a lump sum payment equal to the actuarial present value of his accrued benefit under the plan in April 2014. Mr. Taylor’s lump sum payment value before taxes $440,975.88. After federal and state income taxes were withheld, the remaining value of the lump sum was $254,063.00.

After the Plan Administration Committee denied his benefits claim and appeals, Mr. Taylor sued NCR, the Retirement Plan, and the Committee, claiming that the version of the Plan under which he retired did not permit mandatory lump sum distributions and the lump sum payment adversely affected his accrued benefit because federal and state income tax consequences resulted reduction in his payout under the Plan by 52.5%. Mr. Taylor did not dispute that NCR had the right to terminate or amend the Plan. Instead, he argued that NCR’s right was “circumscribed by the limitation that any such amendment cannot ‘adversely affect any Participant’s . . . accrued benefits prior to such action.’”

NCR responded that tax consequences are not part of an accrued benefit under ERISA. The Court agreed, observing, “Courts uniformly have concluded that tax losses do not fall within the relief available to redress a violation of ERISA.”

Most, but not all, courts have reached the same conclusion. Readers may recall the Henkel case, discussed in January in Melbinger’s Executive Compensation Blog (Unfortunate Court Decision Holding Employer Liable for Legal, But Not Optimal, Tax Withholding), which seemingly reached the opposite conclusion. We will continue to follow these cases and report them to you.