Myers-Garrison v. Johnson & Johnson

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-40520

BRENDA MYERS-GARRISON,
Plaintiff-Appellant,

versus

JOHNSON & JOHNSON, JOHNSON &
JOHNSON HOSPITAL SERVICES
INCORPORATED; THE CONSOLIDATED
RETIREMENT PLAN OF JOHNSON & JOHNSON
AND AFFILIATED COMPANIES; ROBERT
DARRETTA; EFREM B. DLUGACZ; ROGER S. FINE;
ROGER S. HEISEN,
Defendants-Appellees.

Appeal from the United States District Court
For the Eastern District of Texas

April 18, 2000

Before HIGGINBOTHAM and PARKER, Circuit Judges, and JACK,* District
Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Brenda Myers-Garrison brought this nationwide class action on

behalf of Johnson & Johnson employees, alleging that their pension

benefits were reduced in violation of the Employee Retirement

Income Security Act (“ERISA”). Myers-Garrison appeals the district

court’s granting of summary judgment for Johnson & Johnson based on

its conclusion that the retirement plan was exempted from ERISA’s

protections against reductions by the Retirement Protection Act.

We agree with Myers-Garrison that the Retirement Protection Act

*
District Judge of the Southern District of Texas, sitting by
designation.
does not exempt the plan changes allegedly made here. Finding that

only some of the class members may have experienced reduced

benefits, however, we vacate and remand for further proceedings.

I

This class action arises out of changes Johnson & Johnson made

to its defined benefits pension plan. Initially, section 6.01(c)

of the plan provided for a mandatory lump sum distribution to

vested employees whose total benefits were equal to or less than

$3,500 and whose annual payment would be less than $80. The

discount rate was calculated using the Pension Benefit Guaranty

Corporation (“PBGC”) rate in effect in the month the benefits were

distributed. Employees with benefits greater than those limits

received benefits under an annual benefit plan.

In 1994, Congress passed the Retirement Protection Act, which

incorporated provisions of the General Agreement on Tariffs and

Trade (“GATT”) treaty. The RPA amended provisions of ERISA and the

Internal Revenue Code that specify that an employer must calculate

a lump sum payment using an applicable mortality table and a

discount rate. The RPA changed what interest rate employers could

use as the discount rate from the PBGC rate to the rate of interest

on 30-year Treasury securities (the “GATT rates”). This change

offered a financial benefit to employer pension plans by allowing

them to discount at higher rates.

In 1995, Johnson & Johnson took advantage of the change by

amending its plan. On a one-time basis, Johnson & Johnson offered

lump sum distribution to vested employees who had terminated their

2
employment before January 1, 1995, were under 55 upon termination,

and whose total benefits would be equal to or less than $50,000.

Those employees whose benefits totaled between $3,500 and $50,000

could choose between a lump sum and the normal annual benefits (the

“optional class members”); those whose benefits were under $3,500

were subject to a mandatory lump sum benefit (the “mandatory class

members”). Because the amendment did not include the under-$80

requirement of the old section 6.01(c), the mandatory class

potentially included both members who would have received lump sum

distributions under 6.01(c) and others who formerly would have

received an annual benefit.

In December 1995, 3,730 employees received distributions

through the program: 1,736 under the mandatory provision, and 1,994

on an optional basis. Rather than using the discount rate

effective during the month of distribution, Johnson & Johnson

applied the GATT rate in effect in November 1994, two months prior

to the beginning of the plan year. This rate, 8.08 percent, was

significantly higher than the GATT rates in subsequent months.

Myers-Garrison and other employees later brought suit under

§ 1132(a)(3) of ERISA, arguing that their benefits had been reduced

in violation of ERISA’s provisions that protect employees from

reductions to accrued benefits. The court certified the former

employees as a national class under Fed. R. Civ. P. 23(b)(1) and

(b)(3). On cross-motions for summary judgment, the district court

granted summary judgment to Johnson & Johnson. The court held that

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the changes in the discount rate were statutorily exempted under

the Retirement Protection Act. Myers-Garrison appealed.

II

We first consider whether the Retirement Protection Act

exempts Johnson & Johnson from the reaches of ERISA. ERISA’s

prohibition on benefit reductions, called the “anti-cutback rule,”

provides:

(6) Accrued benefit not to be decreased by amendment.--
(A) In general.--A plan shall be treated as not
satisfying the requirements of this section if the
accrued benefit of a participant is decreased by an
amendment of the plan, other than an amendment described
in section 412(c)(8), or section 4281 of the Employee
Retirement Income Security Act of 1974.

(B) Treatment of certain plan amendments.--For
purposes of subparagraph (A), a plan amendment which has
the effect of –
(i) eliminating or reducing an early retirement
benefit or a retirement-type subsidy (as defined in the
regulations), or
(ii) eliminating an optional form of benefit,

. . . shall be treated as reducing accrued benefits. . .
.2

A plan’s change to a higher discount rate would decrease benefits,

which would normally trigger the rule. Section 767(d)(2) of the

RPA, however, allows an employer to switch from the PBGC to the

GATT rates without running afoul of the anti-cutback rule:

A participant’s accrued benefit shall not be considered
to be reduced in violation of section 411(d)(6) of the
[IRC] . . . merely because the benefit is determined
[according to the new interest rates].3

2
I.R.C. § 411(d)(6) (1999).
3
Retirement Protection Act of 1994, § 767(d)(2), Pub. L. No.
103-465, 108 Stat. 5012 (“RPA”).

4
Myers-Garrison argues that the RPA’s permission to change to GATT

rates did not address changes in what month’s interest rate was

applied. Johnson & Johnson not only switched to GATT rates but

changed the month used to determine which interest rate would

apply.

Treasury regulations addressed the transitional problem of

which month’s GATT rate employers could use in switching from PBGC

rates. As these regulations went into effect as temporary

regulations on April 5, 1995, they were operative upon Johnson &

Johnson’s amendment.4 The regulations give the employer several

options about which month may be used.5 The employer may

permanently adopt the applicable interest rate for the first full

month preceding the annuity starting date,6 the interest rate for

the month the old rate was determined,7 or one or two months

immediately preceding that date.8 Here, the month preceding the

annuity was November 1995; the old rate would have been determined

using the December 1995 rate; and the two months preceding that

date were October and November 1995. The effective rates in

October, November and December 1995 were 6.37%, 6.26%, and 6.06%,

respectively.

4
See 60 Fed. Reg. 17219 (1995).
5
See Treas. Reg. § 1.417(e)-1(d)(10) (1999).
6
See § 1.417(e)-1(d)(10)(iii)(B).
7
See § 1.417(e)-1(d)(10)(iv)(B).
8
See id.

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 Alternatively, the employer may apply special rules for the

first year in which the amendment is in effect. The employer may

give the transition-period employees the larger distribution of:

(1) either the interest rate on the date one or two months before

the date used prior to the amendment, or the date provided under

the terms of the amended plan;9 or (2) the larger distribution

based either on the interest rate on the date the old interest rate

would have been calculated, or the date provided under the terms of

the amended plan.10 Under these rules, Johnson & Johnson would have

offered the more favorable rate between October or November 1995

and November 1994 or the better rate between December 1995 and

November 1994. Thus, these rules also would have limited Johnson

& Johnson to choosing the rate effective in October, November or

December of 1995, not the higher November 1994 rate.11

Johnson & Johnson urges us to disregard the Treasury

regulation as contrary to the plain language of the RPA. The

regulation, however, is promulgated pursuant to the IRS’s

implementing authority and thus is subject to Chevron deference.

Under that standard, it is not contrary to the plain meaning of the

RPA, which does not address whether an employer may change the

month for when the interest rate is calculated. The regulation was

9
See § 1.417(e)-1(d)(10)(vi)(C).
10
See § 1.417(e)-1(d)(10)(ii).
11
Johnson & Johnson cites no authority for its argument that
the regulations are not mandatory.

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valid and mandatory for plans which changed the discount rates from

the PBGC to the GATT rates.

III

The transition regulations only apply, however, if the plan

amendment at issue reduces benefits in violation of the anti-

cutback rule. We thus come to the central question of the case:

whether Johnson & Johnson reduced any employees’ benefits in

violation of IRC § 411(d)(6). We first examine whether the

benefits of the mandatory class members were protected by the rule.

Johnson & Johnson argues that the mandatory group did not have an

“accrued benefit” because only annual benefits, not lump sum

distributions, fall within the meaning of accrued benefits.

The rule protects “accrued benefits,” “early retirement

benefits,” and “optional forms of benefit.” The IRC defines

“accrued benefits” as those “determined under the plan and, except

as provided in subsection (c)(3), expressed in the form of an

annual benefit commencing at normal retirement age.”12 Section

411(c)(3) in turn states that if an accrued benefit is not

determined as an annual benefit commencing at normal retirement

age, the accrued benefit shall be the actuarial equivalent

thereof.13 This definition suggests that the “annual benefit”

12
I.R.C. § 411(a)(7)(A).
13
See § 411(c)(3) (1999); see also Constantino v. TRW, Inc.,
773 F. Supp. 34, 41 (N.D. Ohio 1991) (construing parallel ERISA
provision under 29 U.S.C. § 1054(c)(3)), aff’d in part, modified on
other grounds, 13 F.3d 969 (6th Cir. 1994).

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language is a yardstick for measuring the benefit, not an

independent requirement for anti-cutback protection.

Johnson & Johnson relies on Steiner Corporation Retirement

Plan, in which the Tenth Circuit held that a lump sum distribution

was not an accrued benefit.14 In Steiner, however, the lump sum was

an alternative to the plan’s annual benefits. The court was thus

choosing not between exempting lump sums from the anti-cutback rule

but rather between two protected categories of benefit: an accrued

benefit or an optional form of benefit.15 We are not persuaded that

employees subject to mandatory lump sum plans enjoy no statutory

protection from cut-backs in their benefits.

The mandatory class members entitled to benefits under section

6.01(c) of the original plan were protected by the anti-cutback

rule. Because the original plan and the amendment had different

requirements, however, not all of the mandatory class members would

have received a lump sum benefit under section 6.01(c). It is

unclear from the record whether the higher rate was applied to

employees who could have received 6.01(c) benefits. One Johnson &

Johnson employee, Garry Goldberg, testified in deposition that if

the employees met the under-$80 requirement, they would be paid

using whichever interest rate was more favorable to the employee.

An office memorandum also suggested that this rule was intended.

14
See Steiner Corp. Retirement Plan v. Johnson & Higgins, 31
F.3d 935, 939 (10th Cir. 1994).
15
See Steiner, 31 F.3d at 936, 940.

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Because we lack any evidence as to whether this rule was carried

out, we remand for further findings on this issue.

The mandatory class members who would not have been eligible

for the lump sum distribution under 6.01(c) did not receive a

reduction in benefits for purposes of IRC § 411(d)(6). A

regulation then in effect provided that an employer could change

the threshold for an involuntary lump sum distribution without

violating the anti-cutback rule.16 For those class members who were

switched from an annual benefit to a lump sum amount, Johnson &

Johnson need only have complied with the general interest rate

regulation,17 not the transition rule applicable to cutbacks.

We turn to the optional class members. The parties dispute

into what category of benefit those employees’ annual benefit fell

for purposes of the anti-cutback rule. Even accepting Myers-

Garrison’s claim that the benefits were protected under the rule,

the amendment did not reduce them. The optional members could have

chosen to take their old annual benefit with an identical

distribution. Instead, they opted for a new benefit. The anti-

cutback rule does not regulate new benefits; as a commonsense

matter, offering employees a new alternative does not amount to a

decrease in their accrued benefits.

Myers-Garrison attempts to have all of the class members

benefit from the interest rates required for the members entitled

to a lump sum benefit under the original plan by relying upon a

16
See Treas. Reg. § 1.411(d)-4, Q & A 2(b)(2)(v).
17
See Treas. Reg. § 1.417(e)-1(d)(4)(i).

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consistency rule in the Treasury regulations. That rule requires

that the time for determining the general interest rate must be

determined in a consistent manner for all participants in the

plan.18 We do not interpret this rule to require that all plan

members must benefit from transition interest rates carved out for

members who would otherwise suffer a reduction in benefits. The

transition rules make no reference to their applicability beyond

the distributions protected by the anti-cutback rule. Those class

members who suffered no cutback under § 411(d)(6) cannot ride the

coattails of the class members who did.

Johnson & Johnson’s duty to follow the transition rules for

changes to discount rates from the PBGC to GATT rates only extended

to those members whose benefits would otherwise have been reduced

in violation of IRC § 411(d)(6). No such reduction occurred as to

the optional class members or to the mandatory class members who

would not have been eligible for a mandatory lump sum distribution

under the original plan. It is unclear from the record whether

Johnson & Johnson complied with the transition rules regarding the

remaining group: any class members who would otherwise have

received a lump sum distribution. We thus VACATE and REMAND for

further proceedings regarding that issue.

VACATED AND REMANDED.

18
See Treas. Reg. § 1.417(e)-1(d)(4)(i).

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