No Adverse Effect Means No Longevity Risk Shift: Eleventh Circuit bars lump-sum terminations of top hat defined-benefit plans that reduce any participant’s lifetime annuity (Hoak v. NCR)

No Adverse Effect Means No Longevity Risk Shift: Eleventh Circuit bars lump-sum terminations of top hat defined-benefit plans that reduce any participant’s lifetime annuity (Hoak v. NCR)

Introduction

This published Eleventh Circuit decision in Hoak v. NCR addresses how employers may terminate unfunded “top hat” defined-benefit plans for select executives. NCR Corporation terminated five top hat plans, replacing each participant’s promised lifetime annuity with a single lump-sum payment that NCR said was actuarially equivalent, using mortality tables and a 5% discount rate. The plans, however, allowed termination only if “no such action shall adversely affect any participant’s accrued benefits.” Participants brought a class action under ERISA § 502(a)(1)(B), arguing that the lump sums impermissibly reduced their accrued benefits—lifetime annuities—by shifting longevity risk from the employer to them.

The central issue was whether, under unambiguous plan language barring any adverse effect on accrued benefits, NCR could satisfy its lifetime annuity obligations with lump-sum payments calculated on an expected-value basis. The Eleventh Circuit affirmed summary judgment for the class, holding that the lump-sum conversion breached the plans because—even if “actuarially equivalent” in the aggregate—it guaranteed that some participants would receive less than the lifetime annuities they were promised, thereby “adversely affecting” their accrued benefits. The court also affirmed a remedy measuring the additional amounts due by the cost of purchasing replacement lifetime annuities (using PBGC assumptions) plus prejudgment interest.

Summary of the Judgment

  • The plans promised lifetime annuities and allowed termination only if “no such action shall adversely affect any participant’s accrued benefits.”
  • NCR unilaterally converted lifetime annuities to lump sums using mortality tables, actuarial calculations, and a 5% discount rate.
  • The Eleventh Circuit held the plan language unambiguous: if the lump-sum conversion reduces the value of the lifetime annuity for even one participant, it “adversely affects” the accrued benefit of “any” participant and breaches the plans.
  • Evidence established that approximately half of participants, ex ante, would outlive their expected life and thus exhaust the lump-sum if they drew the annuity-equivalent monthly amount—thereby receiving less than the promised lifetime annuity.
  • The court distinguished Holloman v. Mail-Well, where the plan expressly authorized accelerated payments and plaintiffs failed to prove a shortfall; here, the plans did not authorize lump sums upon termination and contained a no-adverse-effect clause.
  • The court did not decide whether Firestone deference applies to top hat plans because unambiguous plan terms control regardless of any discretionary clause.
  • Remedy: Affirmed order requiring NCR to pay the difference between paid lump sums and the 2013 cost of replacement annuities (PBGC assumptions), plus prejudgment interest at 8.9% and postjudgment interest.
  • The panel did not reach the district court’s alternative holding that a 5% discount rate for employer default risk breached the plans.

Analysis

Precedents Cited and Their Influence

  • Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) and MetLife v. Glenn, 554 U.S. 105 (2008):
    • Firestone established deferential review when a plan grants discretion. Glenn refined how conflicts are weighed. Here, the Eleventh Circuit avoided deciding whether such deference applies to top hat plans, because unambiguous plan terms control.
  • Egelhoff v. Egelhoff, 532 U.S. 141 (2001) and Alday v. Container Corp. of America, 906 F.2d 660 (11th Cir. 1990):
    • Emphasize ERISA’s plan-document rule: benefits must be paid according to plan terms. This anchored the court’s fidelity to plain language (“no adverse effect” for “any” participant).
  • Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999):
    • Clarified the nature of defined-benefit plans—fixed periodic payments from a general asset pool. This framed accrued benefits here as lifetime annuities, not accounts.
  • Holloman v. Mail-Well Corp., 443 F.3d 832 (11th Cir. 2006):
    • Distinguished. Holloman upheld accelerated payments where (i) the plan expressly authorized acceleration with specified actuarial assumptions (including an 8% discount rate), and (ii) plaintiffs provided no reliable evidence of a shortfall. In Hoak, the plans lacked authorization for lump sums upon termination and contained a strict no-adverse-effect clause; participants proved that some would be worse off.
  • Meadows v. Cagle’s Inc., 954 F.2d 686 (11th Cir. 1992); McCutcheon v. Colgate-Palmolive Co., 62 F.4th 674 (2d Cir. 2023); Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, 651 F.3d 600 (7th Cir. 2011); Scribner v. Worldcom, Inc., 249 F.3d 902 (9th Cir. 2001):
    • Collectively support the principle that when plan terms are unambiguous, they must be enforced as written; discretionary clauses cannot override clear text. The NCR plans also expressly limited the administrator’s interpretive power.
  • Goldstein v. Johnson & Johnson, 251 F.3d 433 (3d Cir. 2001) and Comrie v. IPSCO, Inc., 636 F.3d 839 (7th Cir. 2011):
    • Show a split on whether Firestone deference applies to top hat plans (often treated as non-fiduciary). The Eleventh Circuit sidestepped the broader question because the plan language here was dispositive.
  • Romano v. John Hancock Life Ins. Co. (USA), 120 F.4th 729 (11th Cir. 2024):
    • Reaffirms applying federal common law of contracts to interpret ERISA plans, starting with plain meaning. The court leaned on ordinary dictionary definitions of “adversely affect” and “any.”
  • Nachman Corp. v. PBGC, 446 U.S. 359 (1980); 29 U.S.C. § 1341(b)(3)(A)(i)-(ii):
    • On plan termination, an administrator must purchase irrevocable annuities or otherwise fully provide all benefit liabilities, ensuring promised pension benefits are actually paid. This supports the court’s insistence on lifetime annuity value, not expected-value substitutes that can run out.
  • Peabody v. Davis, 636 F.3d 368 (7th Cir. 2011):
    • Supports that the remedy for a successful § 502(a)(1)(B) claim is payment of accrued benefits. Here, accrued benefits equated to lifetime annuities; thus, replacement-annuity cost was the correct measure.
  • Byars v. Coca-Cola Co., 517 F.3d 1256 (11th Cir. 2008); Blau v. Lehman, 368 U.S. 403 (1962); Woods v. Barnett Bank, 765 F.2d 1004 (11th Cir. 1985):
    • Authorize prejudgment interest in ERISA cases as a matter of fairness to fully compensate beneficiaries for wrongfully withheld benefits. Affirmed here.

Legal Reasoning

  • Unambiguous Plan Terms Control:
    • The plans allowed termination only if it did not “adversely affect” the “accrued benefits” of “any” participant.
    • The court applied ordinary dictionary meanings:
      • “Adversely affect” means negatively influence or harm.
      • “Any” means one, some, every, or all without limitation.
    • Therefore, if even a single participant’s lifetime annuity is reduced, the action breaches the plans.
  • Lifetime Annuity vs. Lump Sum and Longevity Risk:
    • Accrued benefits were lifetime annuities—fixed monthly payments for life.
    • Lump-sum calculations relied on mortality tables and a 5% discount rate. NCR acknowledged that, ex ante, roughly half of participants would outlive the expected life used in the tables. Those participants would exhaust their lump sums before they died if they drew the annuity-equivalent amounts, receiving less than their promised lifetime annuity.
    • Result: The lump-sum conversion shifted longevity risk from NCR to participants. That shift “adversely affected” at least “any” (that is, one or more) participants, violating the plans.
  • Plan-Document Primacy and Deference:
    • The court did not decide whether Firestone deference applies to top hat plan administrators. Regardless, deference is irrelevant where plan terms are unambiguous. The plans also expressly barred the administrator from modifying plan terms or benefits.
  • Distinguishing Holloman:
    • Holloman involved a plan that expressly allowed accelerated payments with specified actuarial assumptions; plaintiffs offered no evidence of a shortfall. Here, the plans did not authorize lump sums upon termination and contained a strong no-adverse-effect clause. Participants proved adverse effects.
  • Remedy:
    • Because accrued benefits were lifetime annuities, the district court properly measured make-whole relief as the cost (as of termination) to purchase equivalent replacement annuities in the private market, using PBGC assumptions. That ensures participants receive what was promised.
    • NCR’s proposed “reinstatement” of annuities was rejected. It was not obviously superior, and the court noted possible complications under tax rules that require plan terminations to be “irrevocable” (29 C.F.R. § 1.409A-3(j)(4)(ix)(C)). Even framed as “damages,” NCR’s approach did not make the district court’s remedy an abuse of discretion.
  • Prejudgment Interest:
    • Affirmed to fully compensate participants for the time value of money they should have had since 2013. The award rested on equitable fairness standards applicable when benefits are wrongfully withheld.

Impact and Practical Implications

  • Top hat plan terminations that promise no “adverse effect” cannot use expected-value lump sums that shift longevity risk to participants:
    • Even if an aggregate “actuarial equivalence” is achieved, the clause protecting “any” participant requires that no individual be worse off.
    • Thus, to satisfy lifetime annuity obligations, either:
      • Purchase irrevocable annuities from an insurer for each participant, or
      • Pay enough cash for each participant to purchase a replacement lifetime annuity in the private market at termination.
  • Plan drafting consequences:
    • Employers wishing to retain a lump-sum option must state it expressly and specify permissible actuarial assumptions. Absent clear text, courts will not infer the power to replace lifetime annuities with lump sums that can run out.
    • Clauses promising no adverse effect to “any” participant will be read literally and strictly.
  • Risk allocation:
    • The decision rejects shifting longevity risk to participants via lump-sum conversions unless the conversion leaves no participant worse off. Employers cannot rely on “on-average” fairness.
    • Discounting to reflect employer default risk is suspect; while not decided on appeal, the district court viewed it as a breach. Conservative practice is to avoid such discounts absent explicit plan authorization.
  • Litigation posture:
    • Plaintiffs need not price each individual annuity to show breach where plan language protects “any” participant; establishing that some participants will predictably be harmed suffices.
    • PBGC assumptions are an accepted benchmark for valuing replacement annuities at termination and for calculating make-whole damages.
    • Prejudgment interest remains available to fully compensate beneficiaries for delayed benefits.
  • Geographic and doctrinal reach:
    • This is binding in the Eleventh Circuit and persuasive elsewhere. It adds to a body of law emphasizing plan-document primacy and strict enforcement of unambiguous terms, especially in top hat contexts where fiduciary duties are limited but plan promises still govern.

Complex Concepts Simplified

  • Top Hat Plan:
    • An unfunded deferred compensation plan for a “select group of management or highly compensated employees.” It is subject to some ERISA rules but exempt from many funding, participation, and fiduciary requirements.
  • Defined-Benefit Plan:
    • A plan promising a set benefit—typically a monthly pension for life—funded from a general pool of assets. The employer bears longevity and investment risk unless the benefit is properly discharged.
  • Accrued Benefit:
    • In a defined-benefit plan, the participant’s earned pension—here, a fixed monthly annuity for life based on plan formulas.
  • Actuarial Equivalence, Mortality Tables, Discount Rate:
    • Actuaries translate streams of future payments into a present sum by using mortality tables (probability of survival at each age) and a discount rate (time value of money, sometimes plus risk premiums). Expected-value calculations, however, do not guarantee that any one person will be made whole for life.
  • Longevity Risk:
    • The risk that a person lives longer than expected, causing a lump sum to be insufficient to fund lifetime payments. In a lifetime annuity, the issuer bears this risk; in a lump-sum conversion, the participant bears it unless the lump sum is sufficient to purchase a replacement annuity.
  • PBGC Assumptions:
    • Standardized actuarial assumptions used to price annuities and value pension liabilities, often used by courts to estimate the cost of purchasing replacement annuities at a given time.
  • Firestone Deference:
    • Judicial deference to a plan administrator’s discretionary interpretations. It typically does not override clear plan language. Whether and how it applies to top hat plans remains debated; the Eleventh Circuit did not decide that issue because the terms here were unambiguous.
  • Prejudgment Interest:
    • Additional sums awarded to compensate for the time value of money when benefits were wrongfully delayed, ensuring full compensation.

Practical Guidance

  • For plan sponsors and administrators:
    • Audit termination clauses. If the plan promises not to “adversely affect” accrued benefits, you must ensure no individual is worse off.
    • Consider purchasing insured annuities or funding lump sums sufficient to purchase equivalent private annuities at termination.
    • If a lump-sum option is desired, draft explicit authorization and specify actuarial assumptions (mortality tables, discount rates) consistent with market pricing and participant protections.
    • Beware of embedding employer default risk in discount rates absent clear plan authorization; courts may view that as reducing promised benefits.
    • Coordinate ERISA and tax (e.g., 409A) implications—terminations may need to be irrevocable, complicating “reinstatement” remedies and favoring cash-and-annuity-purchase solutions.
  • For participants and counsel:
    • Focus on plan text. “Any participant” and “no adverse effect” language is powerful. Evidence that some participants are predictably harmed (e.g., longevity distribution) can establish breach.
    • Remedial baseline: cost of replacement annuities at termination (PBGC assumptions are a recognized proxy), plus prejudgment interest to restore time value.

Conclusion

Hoak v. NCR sets a clear rule in the Eleventh Circuit: where a top hat defined-benefit plan’s termination clause promises that no action will “adversely affect” “any” participant’s accrued benefits, an employer cannot discharge lifetime annuity obligations with lump sums that transfer longevity risk to participants. The plan language is enforced as written. Even if aggregate actuarial equivalence exists, the clause protects each individual; if even one participant would end up with less than the promised lifetime annuity, the conversion breaches the plan.

The decision reinforces ERISA’s plan-document primacy, limits the practical force of discretionary clauses in the face of unambiguous text, and endorses a make-whole remedy pegged to the cost of replacement annuities (using PBGC assumptions), with prejudgment interest to ensure full compensation. For employers, the case underscores the need for careful drafting and termination planning; for participants, it offers a robust template for challenging lump-sum conversions that reduce lifetime annuity value. In the broader legal landscape, Hoak reaffirms that “no adverse effect” means what it says—and that longevity risk belongs with the promisor unless the plan unmistakably provides otherwise and no participant is harmed.

Case Details

Year: 2025
Court: Court of Appeals for the Eleventh Circuit

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