Section of Taxation Publications
  VOL. 54
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Giving Teeth to the Prohibitions of ERISA: Forbidden Actuarial Calculations in Cash Balance Plans as per Esden v. Bank of Boston

Gregory M. McLaughlin


In Esden v. Bank of Boston, the Second Circuit held that the defendant bank violated the provisions of the Employee Retirement Income Security Act (ERISA) when it, for the purpose of making a lump-sum distribution out of a cash balance plan, actuarialized the present equivalent value of the participant’s account using an interest credit percentage less than the minimum guaranteed by the plan’s terms. By using a 4% interest credit, rather than the minimum 5.5% guaranteed by the plan, the defendant bank made the value of the retirement plan conditional upon the form of benefit payment Esden selected, and thereby violated the statutory prohibition against forfeiture of benefits subsequent to vesting. The court based its decision on ERISA, the Code, and corresponding Treasury Regulations. The court, while noting that the precise issue before them was one of first impression, took guidance from the Eleventh Circuit’s decision in Lyons v. Georgia-Pacific Corp. Salaried Employees Retirement Plan, currently the only other case on similar facts considered above the district court level.

Part I of this note presents a general history and description of cash balance plans, the applicable statutory framework governing such plans, and the factual background underlying Esden (2d Cir.) and Lyons (11th Cir.). Part II explores the pair of district court rulings that lead to the Esden (2d Cir.) decision. Part III considers the holding of and the analysis employed in Esden (2d Cir.). Part IV analyses Esden (2d Cir.) and Lyons (11th Cir.) for their larger implications for tax lawyers, retirement plan managers and cash balance plans in general. Part V concludes that cash balance plans, being defined benefit plans within the framework of ERISA, the Code, and corresponding Regulations, are subject to the anti-forfeiture and valuation requirements, and the lasting effect of Esden (2d Cir.) will be to normalize the interest credit percentage at the applicable statutory discount rate.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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