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Court Rules That COLAs Must Be Included in Lump Sum Distributions

In Pikas v. Williams Company, a federal court agreed with AARP by awarding monetary relief to pension plan participants who had not received cost of living adjustments in lump sum distributions.

Background

The participants in the pension plan at Williams Company alleged that it was a violation of the federal Employee Retirement Income Security Act (ERISA) for Williams Company to pay cost of living adjustments (COLAs) to participants who chose to receive benefits in the form of an annuity while denying COLAs to participants opting for lump-sum distributions.  The court said the dispositive issue in the case was whether the COLA was an “accrued benefit” under ERISA. Under ERISA, an accrued benefit in a defined benefit plan is “the individual's accrued benefit determined under the plan and … expressed in the form of an annual benefit commencing at normal retirement age.”

The court held that “[o]nce a retiree's pension vests, he has accrued the promised COLA. Williams may not require him to forgo that COLA to take an optional form of payment.”  Thus, retirees cannot lose their right to a COLA if they chose to take their pension benefit as a lump sum distribution. The court held that the COLA was not an ancillary or supplemental benefit because it provided additional retirement income necessary to maintain the real value of retirement benefits and is not based on contingent circumstances that may or may not occur before normal retirement age. The court determined that the defendants are liable for their failure to include COLAs in the lump sums distributed to plaintiffs. The court then asked for additional briefing on the issue of the appropriate remedy.

AARP, in its friend-of-the-court brief, suggested that the defendants should pay the difference between the lump sum amount actually paid to the plaintiffs and the amount that should have been paid to the plaintiffs if the defendants had included the COLA, along with prejudgment interest on the differential amount. AARP argued that a violation of a statutory provision of ERISA, here the accrued benefit rule, is sufficient to prove actual harm because as the Supreme Court has stated, actual harm is shown from the loss of a right protected by ERISA or the legal tradition governing trust law on which ERISA is based.

The district court agreed with AARP that participants should receive the difference in the amount of a lump sum calculated with the COLA compared with the amount received. But the court ruled that COLAs are to be awarded to those participants who received a lump sum distribution based on each participant’s distribution date — a less generous recovery than the plaintiffs sought.

What’s at Stake

The outcome of this case is important because it ensures that regardless of participants’ choice of pension distribution options they will receive all of the benefits they have earned.

Case Status

Pikas v. Williams Company was decided in the United States District Court for the Northern District of Oklahoma.