Case Studies

Mr. R. Campell Jones
1111 Street Address
Anywhere, SC, 00000

Dear Mr. Jones:

Your final appeal to the X Corporation’s Pension Committee (the “PC”) has been fully reviewed by Claim Appeal Fiduciary Services, Inc. (“CAFS”) to which the PC has delegated such responsibility and authority.  CAFS is an independent fiduciary that handles final claim appeals.

You claim that your pension benefits under the X Corporation Pension Plan for Salaried Employees (the “Plan”) should be recalculated You contend that the “stay pay” and compensation representing accrued (but unused) vacation that you received during the last six (6) months of your employment should be included in the “final average pay” upon which your pension benefit amount is based. After careful and full consideration, CAFS has determined that your claim must be denied. For the reasons set forth below, these earnings are not eligible for inclusion in final average pay. Therefore, your final accrued benefit amount is not calculated based upon consideration of these categories of pay.

Specific Reasons for Determination and Reference to Plan Provisions

Factual Background and Claim History - According to the administrative record in this matter, you were employed by X Corporation (“X”) for over twenty-nine (29) years.  The X division for which you worked was shut down, and your last pay period ended September 30, 2004.  As part of the shutdown, you and a number of other employees were offered stay-pay incentives.  In exchange for staying on for a few months, you were offered a special compensation arrangement.  Under this arrangement, you received a fifty percent (50%) increase in base salary for two (2) months and a seventy-five percent (75%) increase in base salary for four (4) additional months.  Although the individuals receiving this stay-pay arrangement were not permitted to take vacation after March 31, 2004, all vested/accrued, but unused, vacation was included as part of the severance payment.

By your letter dated November 23, 2004, you sought recalculation of your pension benefits.  You expressed your belief that the stay-pay and pay representing accrued (but unused) vacation that you received in the last six (6) months of your employment should be included in your Average Final Annual Compensation under the Plan.  Your belief was based upon a “SPEC PAY” designation that was attributed to those payments on your Earnings Statements (your payroll statements that accompanied your paychecks).  You also stated that you did not see any provision in the Plan’s SPD which indicated that such amounts would “not be included” in Average Final Annual Compensation.

By letter dated January 22, 2005, the PC set forth a chart showing base pay, overtime, and vested vacation for each of the last five (5) years of your employment.  The PC referred you to Appendix A, referred to in the SPD, for the formula to calculate Average Final Annual Compensation.  In your case, by applying the Plan terms set forth in Appendix A, your “final average pay” or Average Final Annual Compensation, was determined to be $52,067 which resulted in a lump sum pension benefit of $218,156.

In addition, the PC further based its information on an assessment of various type of pay received by employees of X.  In its initial determination, PC advised you that the payroll department uses hundreds of designations for pay categories, and that the SPD cannot possibly list each one.  As a result, an administrative policy was developed by X, which has been consistently applied for over five (5) years.  You were provided a copy of the policy called the “X Corporation Pension Plan for Salaried Employees Pay Categories Policy” which specifically states that the term “special pay” has been interpreted by the PC to exclude such earnings as stay-pay and separation pay.  The letter further explained that the “SPEC PAY” designation on your Earnings Statements is merely a convenience for the payroll department, and has no significance with respect to the Plan.  The January 2005 letter concluded with a reminder regarding appeal procedures.

You made a final appeal of the denial of your claim by letter dated January 30, 2005, without additional arguments or documentation.  Your claim file was then forwarded by the PC to CAFS, the independent fiduciary for final claim appeals for the Plan.  CAFS is an independent entity, and is not subordinate to PC, or to X and is, therefore, free to determine the merits of your claim appeal.

Plan Provisions Supporting the Denial

The following provisions are relevant to the your claim:

Section 9.1 names X as Plan Administrator, except to the extent that:  “ (a)  Authority to construe, administer, and interpret the Plan has been delegated to the Pension Committee in accordance with this Article 9 . . .”  (Plan, p. 29.)

Section 9.3 states in pertinent part:

Subject to the provisions of Articles 9 and 10 hereof, the Pension Committee or its designee is be responsible for the administration, operation and interpretation of the Plan. The Pension Committee or its designee has the exclusive right to interpret the Plan provisions and to exercise discretion where necessary or appropriate in the interpretation and administration of the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan.  Such decisions, actions and records of the Pension Committee shall be conclusive and binding upon the Company, the Employer and all persons having or claiming to have any right or interest in or under the Plan.  (Plan, p. 30.)

Section 9.5 states in pertinent part:

The Pension Committee may designate any person or persons to carry out its Fiduciary responsibilities under the Plan.  Such Fiduciaries shall have only those specific powers, duties, responsibilities and obligations under this Plan as are specifically given them in writing.  This includes the designation of third parties to assume fiduciary responsibility for claims and/or claim appeals.  (Plan, p. 31.)

CAFS has been designated by given the specific responsibility of making a decision on any final claim appeal under the Plan.

In addition to the Plan provisions stated above, CAFS also referred to the following Plan provisions in determining the calculation of your pension benefits under the Plan.

Section 1.5 states “ ‘Average Final Annual Compensation’ means Average Final Annual Compensation as defined in the appropriate Appendix.

Appendix A, Section A1-1.5 states:

“Average Final Annual Compensation” means the average obtained by dividing (i) the Compensation of the Employee for service during the five consecutive calendar years in the last ten calendar years of his employment by the Company, including the year in which his employments cases but not including any prior year in which he was not employed for the full year, for which such Compensation is greatest, by (ii) the number of years, and a fraction, if any equal to five years minus any portion of such five consecutive calendar years occurring prior to the date of his cessation of employment during which he was not in receipt of Compensation.

Appendix A, Section A1-1.11 states in pertinent part:

“Compensation” means the total compensation of an Employee, prior to any reduction in such compensation for contributions to any qualified defined contribution plan in accordance with Section 401(k) of the Code, and inclusive of contingent compensation, incentive compensation, bonuses, special, and overtime pay.  Such total compensation shall be calculated as follows:

a) For such service during which the Employee was an Eligible Employee, annual compensation shall be the amount of total compensation paid in each calendar year, except that with respect to any contingent compensation or incentive compensation, other that sales commissions, the amount to be included in total compensation shall be the amount accrued for such calendar year and paid during such calendar year or during any subsequent calendar year; and

Consistent with the Plan provisions, the SPD provides, in pertinent part, that in determining Average Final Annual Compensation: “Determine your total compensation, including any incentive compensation, bonuses, overtime, and special pay . . .”  (SPD, p. 3.)

The X Corporation Pension Plan for Salaried Employees Pay Categories Policy states in pertinent part:

Pension related compensation does not include educational reimbursements, separation or related pay, accrued vacation pay and vacation bonus, moving expense reimbursements, safety equipment expense reimbursements and long-term disability benefits paid by the claims administrator or the insurance company . . .  (Policy p. 2.)

Reasons for Denial and Application of Plan Provisions

CAFS conducted a thorough review of the claim file, the applicable Plan documents, and conducted interviews with PC members and other internal staff at X, regarding the interpretation of the Plan terms relevant to your claim.

As provided in the Plan, and explained above, it is the responsibility of CAFS as the designee of the PC to interpret the Plan provisions and to exercise discretion where necessary or appropriate in the interpretation and administration of the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan.  This includes the the categories of pay that are included in Average Final Annual Compensation.

CAFS undertook an additional investigation and verified the terms of the Plan and the Policy.  CAFS also interviewed staff of X involved in the Plan and its administration, and staff in the payroll department.  CAFS determined there is a consistent methodology and policy that has been applied with respect to the categories of remuneration that fall within the Plan’s definition of Compensation for this purpose.  Specifically, the intent of the Plan, as demonstrated by the interpretation given by the Policy, is to include earned income that approximates pay as an active employee.  Indeed, this is the main purpose of the Plan – which is to provide for retirement benefits to employees. 

In interpreting the Plan’s terms, CAFS looks to the Plan, the SPD, the Policy, past administrative practice and other similar factors.  The term “special pay” has been interpreted for at least the last five (5) years to exclude stay-pay and accrued (but unused) vacation pay.

Terms used in documents such as payroll records are for the convenience of the payroll department, and are not persuasive evidence of a term’s meaning for purposes of the Plan.  No Plan document references designations by the payroll department in any way for the interpretation of Plan terms and do not bind the Plan.  The mere reference to “spec pay” on the payroll form is actually a reference on payroll forms for multiple categories of pay, so that each payroll form does not need to include reference to the 50 or so categories of pay of X.  Moreover, you have not referred to any document or situation in either of your appeals in which the term “SPEC PAY” as provided on Earnings Statements was represented to you, or given to you in writing, to be part of your pensionable remuneration. 

Therefore, earnings such as stay pay and accrued (but unused) vacation pay, which would result in a windfall in the last year of employment, are not included in the determination of Average Final Annual Compensation.  To do so, is inconsistent with the Plan, Plan operation, and the purposes of the Plan.

Accordingly, for the reasons stated in this letter, CAFS has independently determined to deny your appeal for additional benefits under the Plan.

Additional Information

This review has been an independent “fresh” look, without deference to any prior denial decision.  In addition, the final review was conducted by CAFS, which was not involved in the prior denial decision.  CAFS is not a subordinate of the prior decision maker.

This is the last and final review of your claim that your pension benefits must be recalculated to include stay pay and accrued (but untaken) vacation pay earnings.  This decision is conclusive and binding, unless pursue a civil action under Section 502 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), 29 U.S.C. §1132.  Such civil action must, under the Plan be brought within one hundred eighty (180) days after the mailing or delivery to you of this letter.

The review of this claim applied the Plan terms, under the discretionary authority granted to Claim Appeal Fiduciary Services, Inc. as an independent fiduciary for the Plan.  This ruling has utilized and interpreted Plan document, Summary Plan Description, the Policy, and facts in the administrative record of this claim.  Other than the documents referred to in this letter, no other internal rule, guideline, protocol or other similar criterion was relied upon in making this determination.

Sincerely,

Claim Appeal Fiduciary Services, Inc.

By___________________________

cc: X Corporation