ERISA Residual Annuity Calculation Standard: Prohibition of Pre-Retirement Mortality Discounts and Uniform Projection Rate Requirement

Introduction

McCutcheon v. Colgate-Palmolive Co., 24-1419 (2d Cir. Apr. 4, 2025) arises under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. Plaintiffs‐appellees Rebecca McCutcheon and Paul Caufield—each a former Colgate-Palmolive employee who accrued benefits under a “grandfathered” annuity (pre-1989 formula) and a cash-balance style Personal Retirement Account (“PRA”)—sued to recover alleged underpayments of their lump-sum distributions and residual annuities. On remand from McCutcheon II, 62 F.4th 674 (2d Cir. 2023), the district court (Schofield, J.) entered an amended final judgment ordering Colgate and its Plan fiduciaries to apply (1) no pre-retirement mortality discount (“PRMD”) when converting an age-65 Residual Annuity to an earlier payment age and (2) a single “20+1%” interest rate for projecting both employer- and employee-funded portions of the PRA account into a lifetime annuity. Defendants appealed; the Second Circuit affirms.

Summary of the Judgment

By summary order, the Second Circuit affirms the district court’s amended final judgment in full. Two principal points:

1. No Pre-Retirement Mortality Discount: Where a Plan amendment entitles participants who elected a lump sum to a “Residual Annuity” designed to make them whole, a PRMD (an actuarial reduction reflecting the chance of pre-retirement death) may not be applied to that Residual Annuity when adjusting from age 65 to an earlier commencement age. That practice would undercut the “make-whole” purpose and result in impermissible forfeitures under ERISA.
2. Uniform Projection Rate: In converting the hypothetical PRA cash balance (including both employer contributions and elective employee contributions under Appendix C, § 2(b)(ii)) into a single‐life annuity commencing at age 65, Plan administrators must use the same 20+1% rate throughout. They cannot apply a lower rate to the employee contributions component.

Analysis

1. Precedents Cited

• McCutcheon v. Colgate-Palmolive Co. (McCutcheon I), 481 F. Supp. 3d 252 (S.D.N.Y. 2020): District court granted summary judgment to plaintiffs on “Error 3,” holding that any use of a PRMD on a benefit that remains payable if a participant dies violates ERISA’s anti-forfeiture rule.
• McCutcheon v. Colgate-Palmolive Co. (McCutcheon II), 62 F.4th 674 (2d Cir. 2023): Federal appellate panel affirmed Error 3 ruling and clarified that Appendix C, § 1.3 of the Plan requires a 20+1% rate to convert PRA account values into an age-65 annuity.
• Havlish v. 650 Fifth Ave. Co., 934 F.3d 174 (2d Cir. 2019): Law-of-the-case and mandate-rule principles prohibit relitigation of issues decided on a prior appeal.
• Callahan v. County of Suffolk, 96 F.4th 362 (2d Cir. 2024): Trial courts must implement and not deviate from appellate mandates.

2. Legal Reasoning

a) Law of the Case & Mandate Rule: Defendants argued on remand that the district court should permit a PRMD and a separate, lower projection rate for employee contributions. The Second Circuit rejected this, invoking Havlish and Callahan: once this Court decided those issues in McCutcheon I and McCutcheon II, the district court—and this Court on further review—must “scrupulously” follow those decisions. Because ERISA liability for “Error 3” encompassed any use of a PRMD (not just in the lump-sum equivalence calculation) and because the Plan’s § 1.3 mandated the 20+1% rate for converting any portion of the PRA into an annuity, the issues were ripe, argued, and resolved in the earlier appeals.

b) ERISA’s Anti-Forfeiture Principle: Under 29 U.S.C. § 1054(g) and related provisions, a plan may not impose forfeitures inconsistent with ERISA’s “make-whole” objectives. Applying a PRMD to a Residual Annuity that remains payable even if the retiree dies would reduce the benefit below its actuarial equivalent and thus breach ERISA’s anti-forfeiture mandate.

c) Plan Interpretation: Appendix C § 1.3 expressly sets a uniform interest assumption—“20+1%”—for converting a participant’s hypothetical PRA balance into a life annuity starting at age 65. That language admits no bifurcation between employer credits and employee elective contributions; both must be projected at the same rate.

3. Potential Impact

This decision reinforces strict compliance by plan administrators with:

• The law-of-the-case rule: once fully briefed, issues cannot be relitigated on remand.
• ERISA’s anti-forfeiture protections: residual benefits designed to restore forfeited value must be paid in full, without actuarial discounts that undercut the restoration.
• Clear plan language conventions: courts will enforce unambiguous provisions (e.g., a specified projection rate) even where administrators might favor another actuarial assumption.

Future ERISA fiduciaries will carefully review plan amendments for unintended forfeitures, exercise caution before applying mortality or discount factors to residual or corrective benefits, and adhere rigidly to mandated interest-rate assumptions in plan texts.

Complex Concepts Simplified

• Personal Retirement Account (PRA): A hypothetical cash-balance account funded by employer contributions (and optionally by employee contributions) that grows actuarially and can be converted into an annuity or lump sum at retirement.
• Grandfathered Annuity: The traditional final-average-earnings formula in place before a Plan amendment, preserved for those who accrued benefits under the old formula.
• Residual Annuity: A corrective benefit added post-amendment to restore value lost when the lump sum paid was less than the actuarial equivalent of the original annuity.
• Pre-Retirement Mortality Discount (PRMD): An actuarial reduction that anticipates the possibility a retiree might die before benefits commence—impermissible here because it would shrink a promised corrective payment.
• 20+1% Rate: A specified interest assumption—20-year Treasury yield plus one percentage point—used by the Plan for projecting hypothetical account balances into lifetime annuities.

Conclusion

McCutcheon v. Colgate-Palmolive Co. crystallizes two key ERISA principles: administrators may not apply pre-retirement mortality discounts to corrective residual annuities, and they must adhere to explicit plan terms (here, a uniform 20+1% projection rate) when converting account balances into annuities. Coupled with the Court’s firm enforcement of mandate-rule and law-of-the-case doctrines, this ruling underscores that ERISA fiduciaries must both respect plan language and avoid legal maneuvers that undermine participants’ statutorily protected benefits.