Prohibition of Pre-Retirement Mortality Discounts and Uniform Projection Rates in ERISA Residual Annuity Calculations

Introduction

This commentary examines the Second Circuit’s decision in McCutcheon v. Colgate-Palmolive Co., 62 F.4th 674 (2d Cir. 2025), which clarifies critical ERISA principles governing lump-sum conversions and residual annuity calculations under an employee retirement plan. The case arises from plaintiffs-appellees Rebecca McCutcheon and Paul Caufield’s lawsuit against their former employer, Colgate-Palmolive Co. and related plan administrators, alleging that the Plan incorrectly calculated “Residual Annuity” benefits under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. Key issues include (1) whether a pre-retirement mortality discount (PRMD) may be applied when reducing a residual annuity from normal retirement age; and (2) whether employee contributions embedded in a hypothetical cash-balance account should be projected at a different interest rate than employer contributions when converting that account to an annuity.

Summary of the Judgment

On April 4, 2025, a three-judge panel of the Second Circuit unanimously affirmed the district court’s judgment granting summary judgment in favor of the plaintiffs. The court held that:

The law-of-the-case and mandate rules precluded relitigation of the PRMD issue, and in any event such a discount is impermissible when calculating a make-whole residual annuity.
The projection rate for converting a participant’s hypothetical cash-balance “Personal Retirement Account” (PRA) into an age-65 annuity must be the uniform “20+1%” rate (20-year Treasury plus 1%) prescribed by the Plan, covering both employer contributions and any elective employee contributions.

Analysis

Precedents Cited

Law-of-the-Case and Mandate Rules: The court relied on Havlish v. 650 Fifth Ave. Co., 934 F.3d 174 (2d Cir. 2019), and Callahan v. County of Suffolk, 96 F.4th 362 (2d Cir. 2024), to reaffirm that issues decided or ripe for decision in prior appeals cannot be reopened on remand.
McCutcheon I & II: The panel adhered strictly to its prior summary judgment in McCutcheon v. Colgate-Palmolive Co., 481 F. Supp. 3d 252 (S.D.N.Y. 2020) (“McCutcheon I”), and its subsequent mandate in 62 F.4th 674 (2d Cir. 2023) (“McCutcheon II”), particularly on the question of using a PRMD in benefit calculations and on the prescribed projection rate for PRA balances.

Legal Reasoning

The court first addressed the PRMD issue. The plaintiffs’ complaint had defined “Error 3” to cover two applications of a mortality discount: (1) determining the actuarial equivalent of the lump-sum originally paid; and (2) applying an early-retirement factor to the residual annuity payable before age 65. The district court granted summary judgment on “Error 3” in its entirety because defendants had not opposed plaintiffs’ motion, and on the merits held that applying a PRMD would reduce a member’s residual annuity below the actuarial equivalent of the annuity it replaced—constituting an unlawful forfeiture under ERISA. On appeal, defendants did not sufficiently distinguish between the two alleged “Error 3” calculations, and this Court affirmed both the law-of-the-case bar and the merits holding that a PRMD is impermissible.

Next, the court considered whether different interest rates could apply to employee versus employer contributions in converting a PRA balance into a lifetime annuity (the “§ 2(b)(ii) benefit”). The Plan’s Appendix C and § 1.3 explicitly required the use of the “20+1%” rate for converting any member’s account to an age-65 annuity. Although defendants later argued that employee-funded contributions should use a lower rate, the Second Circuit held that this contention was ripe during the first appeal and thus precluded by the mandate rule. Moreover, the Plan language unambiguously imposed a uniform rate.

Impact

This decision reinforces strict adherence to ERISA anti-forfeiture principles in benefit calculations and underscores the binding nature of prior appellate rulings under the law-of-the-case doctrine. Retirement plan administrators should take away two principal lessons:

Mortality discounts may not be used when doing so would reduce a residual annuity below the actuarial equivalent of the benefit forfeited.
If a plan document prescribes a single conversion rate for hypothetical cash balances, that rate applies uniformly to all components of those balances, whether funded by employer or employee contributions.

Future ERISA disputes concerning annuity conversions and “make-whole” supplements will likely invoke McCutcheon as controlling authority on these points.

Complex Concepts Simplified

Pre-Retirement Mortality Discount (PRMD): An actuarial adjustment that lowers the value of a future stream of payments to account for the chance the retiree dies before payments begin. Under ERISA, such a discount cannot be used to reduce a “make-whole” supplement (residual annuity) below the value of the benefit it replaces.
Residual Annuity: A corrective benefit designed to make whole participants whose lump-sum distributions fell below the actuarial equivalent of the annuities they were entitled to under an earlier plan design.
Hypothetical Cash-Balance Account (PRA): An internal bookkeeping account combining employer contributions (and, for some members, elective employee contributions) that can be paid out as a lump sum or converted to an annuity.
20+1% Rate: A formula referencing the yield on a 20-year Treasury security plus one percent, which the Plan designated as the rate for converting hypothetical account balances into an annuity payable at normal retirement age.
Law-of-the-Case Doctrine: A principle that courts must follow legal determinations already made in earlier stages of the same case, preventing parties from relitigating settled issues.

Conclusion

The Second Circuit’s McCutcheon decision cements two vital ERISA annuity-calculation rules: first, plans may not employ pre-retirement mortality discounts in a way that reduces residual annuities below their make-whole value; second, where a plan stipulates a single conversion rate for all components of a hypothetical cash balance, that rate applies uniformly. By invoking the law-of-the-case and mandate doctrines, the Court also illustrates the binding effect of appellate determinations on remand. This ruling will guide plan administrators and litigants in ensuring ERISA benefit calculations comply with anti-forfeiture mandates and plan terms.