JOHN R. BROWN, Circuit Judge:
This action arises from the denial of certain pension benefits under The Richards Group, Inc. Employees' Profit-Sharing Plan (Plan). On cross motions for summary judgment, the District Court granted summary judgment in favor of the Plan but denied the Plan's counterclaim for attorney's fees. The court, after reviewing both parties' interpretation of the Plan, determined that the interpretation of the Plan's Administrative Retirement Committee (Committee) was not arbitrary and capricious and thus, under the standard of review applied, upheld its interpretation. To reach this conclusion the court focused on the fact that the Plan had been uniformly construed in other cases of similarly situated employees and the Committee interpretation could be "fairly implied" and was
I. The Facts
Robert Dennard worked for The Richards Group from February 1966 until September 1977, except for a three month break during 1972. As an employee of The Richards Group, Dennard was a participant in the Company's profit-sharing plan. The Plan, first adopted in April of 1967, was restated in 1976 to comply with the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., the federal legislation regulating private employee benefit plans.
II. ERISA and the Plan
ERISA, enacted in 1974 to protect and regulate private employee benefit plans,
The Richards Group Plan is a profit-sharing plan, whereby the employer contributes a specified percentage of profits annually to a trust fund maintained for the benefit of Participants. An employee is generally eligible to become a Participant upon completion of 1,000 "hours of service", or "one year of service", within a consecutive 12-month period commencing on the date of employment. Once eligible, an employee becomes a Participant on the May 1 or November 1 which coincides with or next follows the date of completion of the 1,000 hours of service. This accords with ERISA standards which establish maximum periods for eligibility and entry into a plan. As a Participant, an employee is eligible to receive an allocation, that is a portion, of the employer's contribution made each Plan Year. The Plan Year, in this case, May 1 through April 30, is the basic computation period, used when participation has commenced, to measure service for purposes of receiving a portion of the employer's contribution and to determine vesting, as described below.
B. How Much
Each Plan Year the Company contributes to a trust fund. The contribution is then allocated to different Participants on the basis of their relative compensation for that Plan Year. ERISA requires that separate accounts for purposes of record-keeping be maintained for each Participant. Under the Richards Plan, each participant receives one unit for each $100 of compensation received during the Plan Year. The total contribution by the Company is then allocated on the basis that a Participant's units for such year bears to the total units of all Participants for the year. For example, with a Company contribution of $10,000 and a total payroll for Participants of $100,000 (or 1,000 units), a Participant earning $20,000 (or 200 units) would receive 1/5 (20,000/100,000) or $2000. A Participant earning $40,000 (400 units) would receive $4000 or 2/5 of the total contribution. This amount would then be credited to the Participant's account.
A Participant is not necessarily entitled to the full amount in his account immediately upon the allocation. Each Plan Year that a Participant works 1,000 or more hours of service with the Company he receives credit for One Year of Service. His vested interest, that is the portion of his account which is nonforfeitable, increases as he receives credit for Years of Service. Vesting, or nonforfeitability, begins with two Years of Service, at which point a Participant is entitled to 20% of his employer account balance. The vested percentage increases 10% per year of service after that point until 10 years are completed at which point the Participant is 100% or fully vested in his account balance and any further contributions made by the employer. A Participant who leaves the employment of the Company prior to full vesting (100%) forfeits the unvested portion of his account once he has incurred a one year Break in Service, that is a Plan Year during which an employee completes less than 501 hours of Service. The forfeitures are then reallocated to the remaining Participants at the end of the Plan Year in which the Break in Service is incurred in the same manner that the employer contribution is allocated. Thus, a Participant who resigns after three years of service and 30% vesting will, once a Break has occurred, forfeit 70% of his account.
Although a participant has a vested interest in the Plan, he is not entitled to receive any benefits until a later date. Receipt of benefits may be deferred generally until retirement age, unless the Committee administering the plan consents to an earlier
D. Gains and Losses
Besides employer contributions and forfeitures, there is a third factor involved in determining the amount in a Participant's account — the investment gains or losses of the entire trust fund.
III. The Dispute
At the time that Dennard voluntarily resigned from The Richards Group on September 16, 1977 he was 100% vested in the balance of his employer account and did not incur a one year Break in Service (a Plan Year with less than 501 hours) during the Plan Year May 1, 1977-April 30, 1978. Dennard received an allocation of employer contributions, forfeitures, and investment gains or losses to the trust fund for the Plan Year May 1, 1977-April 30, 1978, at which time his account balance was $57,200.01. No distribution of benefits was made until May 30, 1979, one month following the close of the Plan Year May 1, 1978-April 30, 1979, the Plan Year in which he incurred a one year Break in Service. No allocation of employer contributions, forfeitures or investment gains or losses was made to Dennard's account for the Plan Year May 1, 1978-April 30, 1979. Dennard agrees that he was not entitled to a share of the Company's contribution and forfeitures for that Plan Year — the only amount in dispute is $7,936.19, Dennard's share of the investment gains from the May 1, 1978-April 30, 1979 Plan Year. Allocation of investment earnings is basically the equivalent to receiving interest on a bank account, but since the trust fund, or bank account so to speak, consists of accounts for several persons, the interest is divided among them on the basis of account balance ratio.
In accordance with the Plan, Dennard made written demand for this additional amount, $7,936.19, which the Plan's Committee denied in a letter dated October 2, 1979. Dennard appealed the Committee's denial to the Board of Directors of The Richards Group which, after a hearing, affirmed the denial of the claim. After having exhausted these administrative remedies, Dennard filed suit under Section 502(a)(1)(B) of ERISA against The Richards Group, its profit-sharing plan, and Stanford H. Richards in his capacity as Trustee for the Plan and member of the Committee. Section 502(e)(1) of ERISA, 29 U.S.C. § 1132(e)(1), provides jurisdiction in both state and federal courts.
At issue in this claim is the interpretation of certain specific Plan provisions and the interrelation of participation, vesting, and
As written, the Plan appears to distinguish a Participant from a Former Participant by the entitlement of the Participant to a share of the Company's contribution, since a former employee can be by definition either a Participant or Former Participant. For purposes of allocating the employer's contribution, the Plan provides a portion to each person who has worked and not incurred a One Year Break in Service.
Dennard's contention can be stated simply. Section 9.02 of the Plan provides that his vested interest is the amount in his employer account as of the last day of the preceding Plan Year in which he did not incur a Break in Service, here the Plan Year May 1, 1977-April 30, 1978, subject to Section 5.03 hereof, multiplied by his vested percentage, here 100%. Section 5.03 (see note 7 supra) provides for the allocation of net earnings and adjustments to Former Participants, the category which Dennard would fit into for the Plan Year May 1, 1978-April 30, 1979, since he had a vested interest but had not been paid in full. He was not a Participant for that year since the Company was not obligated to make a contribution, as distinct from an allocation of earnings, to the Plan.
The Richards Group's position turns on its determination that "termination", not defined in the Plan, is synonymous with a "One Year Break in Service" (§ 2.23, see note 10 supra) for purposes of allocation and vesting and in the definition of Former Participant (§ 2.16, see note 5 supra). Under this view, a Former Participant includes only a former employee who has already incurred a One Year Break in Service. An employee who resigns or is fired during a Plan Year, but who does not incur a One Year Break in Service during that Plan Year, remains a Participant for the Plan Year and receives for that year allocations of employer contributions and forfeitures, as well as earnings. At the end of the next Plan Year, if the employee has not returned to work, he incurs a One Year Break in Service and is "terminated" within the meaning of the Plan. His vested interest is then fixed on the basis of his account balance on the last day of the previous Plan Year, a result reached by a reading of § 9.02, (see note 8 supra), which provision governs the determination of the percentage of an account balance to which a Participant is entitled.
Under this interpretation, Dennard was a Participant for the Plan Year May 1, 1977-April 30, 1978 who incurred a One Year Break in Service at the end of the Plan Year May 1, 1978-April 30, 1979. His Vested Interest became fixed at the amount of the account as of the last day of the preceding Plan Year in which he did not incur a break, April 30, 1978. The parenthetical phrase in section 9.02, "(subject to Section 5.03 hereof)", is not explicated by the Company.
IV. Standard of Review
The District Court in the first instance, and this Court on appeal, in reviewing the actions of administrators of an employee benefit plan, utilize an "arbitrary and capricious" standard of review. Paris v. Profit Sharing Plan for Employees of Howard B. Wolf, Inc., 637 F.2d 357, 362 (5th Cir.), cert. denied, 454 U.S. 836, 102 S.Ct. 140, 70 L.Ed.2d 117 (1981); Bayles v. Central States, Southeast and Southwest Areas Pension Fund, 602 F.2d 97, 99 & 100 n.3 (5th Cir. 1979). "According to the clear weight of federal authority, the actions of the trustees in the administration of the pension plan must be sustained as a matter of law unless plaintiff can prove such activities have been arbitrary or capricious." Bayles, supra. This standard, traditionally used for review of trusts, has been applied by several other circuits.
In Bayles, we indicated certain factors to be considered in applying the arbitrary and capricious standard: (1) uniformity of construction; (2) "fair reading" and reasonableness of that reading; and (3) unanticipated costs.
The District Court's opinion in this case failed to determine what the "legally" correct interpretation of the Plan provisions should be. While we would not necessarily remand on the basis of this omission, we are not convinced that the District Court considered all factors possibly indicating arbitrary and capricious action by the Committee. Given the posture of this case, decided on summary judgment, we cannot say that when viewed in the light most favorable to the party opposed to the motion, here Dennard, there was not an issue of fact. That issue would depend on the actions of the Committee in light of the determination of the legal issue of the correct interpretation of the Plan. The District Court, rather than reach that legal issue, stated that "[t]he Court cannot say that Dennard's interpretation of the Plan is wholly implausible", a statement it felt sufficient under the arbitrary and capricious standard. The District Court specifically indicated that
Certainly action contrary to IRS rulings could be indicative of arbitrary and capricious action. The District Court's opinion here failed to discuss the revenue rulings mentioned below. Nor did the District Court consider all aspects of consistency of the Plan, as discussed below, but rather it focused on only those portions necessary to the Committee's thesis. The District Court appears to have put emphasis on the issue of uniformity in application, a factor probably not as important in a case claiming that the administrator or trustees interpreted the plan contrary to its plain meaning as in a case of ambiguous interpretation or operational problems outside the plan's language. While it is true that differentiated treatment could be indicative of arbitrary and capricious action, the opposite proposition, that uniformity establishes the absence of arbitrary and capricious conduct, is not necessarily true. See Morgan v. Mullins, 643 F.2d at 1324 n.4; Snyder v. Titus, 513 F.Supp. 926, 934 (E.D.Va.1981).
The District Court also found that the Committee's interpretation was not unreasonable, irrational, or arbitrary because of the need for a suspense period. It is this statement that leads us to question the District Court's appreciation of the Plan's operation and its relation to IRS regulations. The District Court for support cites two ERISA provisions concerning vesting standards. Yet there is no dispute that Dennard is 100% vested. What is at issue is whether he is entitled to interest on his account. The vesting provisions governing forfeitability affect the time of distribution and the percentage, not the actual amount of the distribution. While a plan need not wait until a break in service has occurred before distributing funds, many plans prefer to wait for a break to avoid any problems that might subsequently arise if a participant returns before a break and the plan has already forfeited the nonvested portion of the participant's account and reallocated it to remaining participants. The problem of forfeitures is also often handled by a "suspense" account, where any forfeited amounts are held separately until the end of the plan year in which a participant incurs a break, at which point the forfeitures are reallocated. The suspense account method is used primarily when distributions occur on a regular basis prior to a break in service. In Dennard's case, there is no question that the Plan should have maintained Dennard's account until the date that distribution was made. But there is no benefit to the operation of this Plan whatsoever, even aside from the specific Plan language, in not allocating a share of investment gains to accounts of terminated employees. The only possible difference is to whom the investment gains are allocated — and that is specified in the Plan: to "each Participant whose Service was not terminated under Article IX during such Plan Year and to the account of each Former Participant whose Account had not, as of the first day of such Plan Year, been segregated under Section 10.03(b) ..."
Dennard finds support for his construction of the Plan from certain IRS rulings. The statutory interpretation of the IRS, as the agency charged to enforce and administer portions of ERISA, is entitled to some deference. See Columbia Gas Development Corp. v. Federal Energy Regulatory Commission, 651 F.2d 1146 (5th Cir. 1981); Kaneb Services, Inc. v. Federal Savings and Loan Insurance Corp., 650 F.2d 78 (5th Cir. 1981). Dennard relies on two IRS Rulings, Revenue Ruling 70-125, 1970-1 C.B. 87 (now superseded by Revenue Ruling 80-155, 1980-1 C.B. 84) and Revenue Ruling 73-103, 1973-1 C.B. 191. Both of these Revenue Rulings, as well as the superseding ruling, interpret Reg. § 1.401-1, which requires profit-sharing plans to provide definite predetermined formulas for allocating contributions and distributing funds. In Revenue Ruling 73-103, the IRS found that a plan which did not provide for adjustment to the accounts of plan participants who had ceased employment prior to retirement age did not meet the requirements of Section 401(a) of the Internal Revenue Code of
Although the District Court made no mention of Revenue Ruling 73-103, the fact that the Committee's interpretation of the Plan is contrary to IRS interpretations lends support to a finding of arbitrary construction and lack of good-faith. The Committee attempts to argue that a one-year "suspense" period can be implied from the language of the Plan. The District Court determined that the suspense period was rationally related to the purposes of the Plan, stating "[t]hus, it is necessary to wait until a resigned or discharged former employee has sustained a one-year break before the nonforfeitable percentage of his account can be ascertained." While the use of suspense accounts has been sanctioned by the IRS, this use occurs only in the context of forfeitures. A plan which pays out benefits prior to the occurrence of a one year break may maintain any nonvested amounts, forfeitures, in a suspense account until the end of the plan year, at which time such forfeitures would be redistributed to remaining participants. In contrast a suspense period on earnings has absolutely no purpose when distributions are not made until a one year break in service has occurred. The Committee's citation to 26 C.F.R. § 1.411(a)-7(d)(4)(ii) is irrelevant to the issue in this case. Section 411 and the regulations promulgated thereunder deal with vesting requirements and when service may be disregarded. Within that context, certain distributions are deemed to have been made upon termination if made not later than the close of the second plan year following the plan year in which termination occurs. This, however, has no bearing on the requirements of § 401 which concerns the amount of benefits, as opposed to the percentage that is nonforfeitable.
The Committee also relies on the fact that the IRS, in reviewing the Plan in 1976 and 1979, found it to be qualified under ERISA. While the Committee admits that the issuance of a favorable determination letter by the IRS is not binding on this Court, the Committee minimizes the fact that favorable determination letters are based on a plan's language, not its operation. Since a plan's language can possibly be interpreted in more than one way, as evidenced by the dispute in this case, we cannot say that the IRS was interpreting the Plan according to the Committee's position, rather than that of Dennard. In fact, given the IRS Revenue Rulings discussed above, we may assume that the IRS, in passing on the Plan's qualification, interpreted § 5.03 of the Plan as providing for the allocation of profits or losses to all those with account balances.
The Plan Speaks
The specific language of a plan is a major consideration in determining whether a plan's administrator or trustees have acted arbitrarily and capriciously or not in good-faith when the claim is made as here that the plan's language is clear. Consistency of the administrator's or trustee's interpretation of a provision with the remainder of a plan is one indication of good-faith. Here the Committee's interpretation that a Former Participant is only one who has incurred a Break in Service appears contrary to the clear language of the Plan. If "terminate" is not to be given its normally understood meaning, then it should have been defined as equaling a One Year Break in Service. See note 10 supra. Also when the definition of Service (see note 8 supra) is read within the definition of Former Participant (see note 5 supra), it is clear that "terminate" does not mean incur a Break in Service. If it did, there would be no need for using the defined term "Service." Nor does the use of "terminate" within other sections of the Plan seem to bear out the
Second, the Committee's interpretation appears clearly to ignore the parenthetical phrase "(subject to Section 5.03 hereof)" of § 9.02, thereby rendering it meaningless. This parenthetical, rather, seems meant to refer to the Plan provision governing the allocation of investment earnings. Section 9.02 refers to the percentage of the account balance in which a participant has a vested right. For purposes of vesting, one may use the account balance as of the Plan Year prior to incurring a Break in Service. Section 5.03(c) contemplates that investment gains will be made to all employer accounts except any which might have been distributed during the Plan Year due to termination but prior to a Break in Service and any that have been segregated for periodic payment. It is to the advantage of all Participants, both those who are receiving a distribution and those who remain in the Plan, that valuations be made annually and that all those with accounts share in such valuation since the fund theoretically could lose money rather than gain. Any such loss should be shared by all those with account balances.
The fact that the Plan has conferred upon the Committee the power to construe and interpret all terms, provisions and conditions of the Plan and to determine all questions of coverage and eligibility, in § 11.06,
Two other factors, mentioned in Bayles, supra, uniformity in construction and additional costs, provide little succor to the Committee's argument. While the Committee points to the uniform construction of the Plan provisions and the fact that Dennard was not treated differently from any of at least five other employees who resigned or were discharged during the same time — an argument that the District Court found persuasive — we agree with the Eighth Circuit that even though consistently applied, "if the interpretation is unreasonable from the beginning, such an interpretation may still be arbitrary and capricious." Morgan, 643 F.2d at 1324 n.4. See also Snyder v. Titus, 513 F.Supp. at 934 ("being consistently wrong can hardly be sanctioned as right"). The Committee also relies on Bayles, supra and Paris, supra to support its argument that its interpretation of the Plan which favors those participants who remain in the Company's employ, as opposed to those who have resigned or been fired, is an interpretation allowed to the Committee. Bayles is not relevant since it was concerned with "anticipated costs" for a pension, as opposed to a profit-sharing, plan. See note 12 supra. Paris, while involving a profit-sharing plan, involved the interpretation of eligibility and the effect of a retroactive effective date. Neither Bayles nor Paris is directly applicable since each was concerned with unanticipated costs limiting resources to "the proper beneficiaries". Here, no additional benefits are being created since the interest earned on Dennard's account is not an expense to the Plan or the Company. Nor are the other participants entitled to the additional income.
Given the Committee's interpretation of the Plan which appears initially to be contrary to its plain meaning and its possible lack of consistency with several other provisions, as well as being at odds with IRS rulings, we hold that the District Court should not have granted summary judgment. The District Court, upon remand, should engage in a two-step process whereby it first determines the correct interpretation of the Plan provision and then proceeds to determine whether the Committee acted arbitrarily and capriciously. In making the second finding, the District Court should consider the factors we have discussed and also, after any additional discovery which the District Court might grant, any other factual matters bearing on the Committee's action.
Because of our disposition of this case, we treat only summarily the Committee's cross-appeal of the District Court's judgment denying its counterclaim for attorney's fees pursuant to § 502(g) of ERISA, 29 U.S.C. § 1132(g). Our opinion in Iron Workers Local No. 272 v. Bowen, 624 F.2d 1255 (5th Cir. 1980), elaborates our standards for awarding attorney's fees pursuant to ERISA. The District Court, after listing the determinative factors, stated that "none of the reasons discussed in these cases ... justify an award of attorney's fees to the Defendants." We believe that this statement is sufficient and does not
REVERSED AND REMANDED.
Percent of Vested Years of Service Interest ---------------- ---------- Less than 2 Years of Service 0% 2 Years of Service but less than 3 20% 3 Years of Service but less than 4 30% 4 Years of Service but less than 5 40% 5 Years of Service but less than 6 50% 6 Years of Service but less than 7 60% 7 Years of Service but less than 8 70% 8 Years of Service but less than 9 80% 9 Years of Service but less than 10 90% 10 Years of Service or more 100%