Week Forty-Five

Week of November 6, 2017 through November 10, 2017

Jeffrey Plotnick v. Computer Sciences (Duncan 11/8/2017): The Fourth Circuit held that a recent amendment to defendant’s compensation plan under which the company’s board of executives changed the applicable crediting rate used to determine a participant’s buyout, was a valid and reasonable exercise of the board’s authority and did not render the contractual promises in the Plan illusory. Accordingly, the court affirmed the district court’s denial of class certification and grant of summary judgment in favor of defendant. Full Opinion


Highlight Case

Jeffrey Plotnick v. Computer Sciences Corporation, No. 16-1606

Decided: November 8, 2017

The Fourth Circuit held that a recent amendment to Computer Sciences Corporation’s (“CSC”) unfunded, deferred compensation plan (the “Plan”), under which the company’s board of executives changed the applicable crediting rate used to determine a participant’s buyout, was a valid and reasonable exercise of the board’s authority and did not render the contractual promises in the Plan illusory.

The plaintiffs were former executives of CSC and participants in the Plan, which is a type of plan commonly referred to as a “top-hat plan” wherein key executives can elect to forgo compensation during their employment in exchange for payments in retirement. Under the Plan, participants’ deferrals accrue in a notational account, and the company makes payments to participants after their retirements from CSC’s general assets. Because the Plan is unfunded, CSC applies a crediting rate to calculate each participant’s payout; after retirement, Plan participants receive their deferred income plus credits earned according to this crediting rate. Importantly, the Plan explicitly states that the crediting rate is subject to amendment by the Board. This power of the board is cabined by additional terms in the Plan that prohibit amendments to the crediting rate which either (1) decrease the amount of any participant’s account at the time of the amendment or (2) apply the crediting rate in a non-uniform or inconsistent manner with respect to all participants similarly situated.

Prior to the 2012 amendment to the crediting rate at issue, CSC used a crediting rate that tracked the 120-month rolling average yield to maturity of only a single fund. Application of this crediting rate generally gave Plan participants above-market yields on their deferred income and extremely low volatility. Moreover, due to the predictability of the crediting rate tracked to only a single, low-risk fund, the annual installments a participant received were not only “approximately equal” as required by the Plan, they were actually equal until the final payment that closed out the participant’s account. The 2012 amendment modified the crediting rate and introduced a more flexible rate linked to a participant’s selection of one (or more) of four valuation funds. The amendment’s expansion of choices for participants naturally introduced the potential for volatility and risk, including the possibility of losing value in a participant’s notational account. Moreover, the lack of predictability in the crediting rates from year to year means that annual installment payments could no longer be made strictly equal, as they had been.

The plaintiffs opposed this change in the crediting rate and brought claims under § 1132(a) of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et. seq., as amended, alleging denial of benefits under the Plan. They sought class certification on behalf of all retired plan participants affected by the amendment, and CSC quickly moved for summary judgment. The district court denied class certification and granted CSC’s motion for summary judgment, holding that the 2012 Amendment was valid and that the plaintiffs were not entitled to relief on their denial-of-benefits claim. On appeal, the plaintiffs challenged the following three features of the 2012 amendment: (1) the change to the crediting rate; (2) the introduction of potential for risk and volatility into the Plan; and (3) variations in annual distributions, which the plaintiffs argued were no longer “approximately equal.”

Before reaching the merits of the plaintiffs’ claims, the Fourth Circuit first discussed the applicable standard for district courts to apply to a top-hat plan administrator’s benefits decision. The court first noted the United States Supreme Court decision Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), which set forth the standard of review for denial of benefits under ordinary ERISA plans. Under the Firestone standard, a district court reviews challenges brought under ERISA § 1132(a) for denial of benefits “under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” The Fourth Circuit noted that circuit courts have been split on whether the Firestone standard applies to a district court’s review of “top-hat plans.” While some circuits have concluded as much, other circuits have concluded that top-hat plans should be treated as “unilateral contracts” and thus reviewed de novo, according to the federal common law of contract and without regard to whether administrative discretion is explicitly written into the top-hat plan. The Fourth Circuit rejected both of these paths and instead endorsed the reasoning of the district court in the case: under either an abuse-of-discretion standard or a contract- based standard, a “reasonable” exercise of discretion would stand, meaning that choosing between one of the two standards essentially creates a distinction without a difference.

Ultimately, the court concluded that regardless of whether it proceeded under a “reasonableness” inquiry, an abuse-of-discretion standard, or even de novo review, the 2012 amendment and CSC’s denial of benefits were valid. First, in regards to CSC’s change of the crediting rate, the court held that the plain language of the Plan permitted CSC’s board to do so as long as the change was applied uniformly amongst the participants and did not decrease the value of the participant at the time of the amendment. Here, the court found no valid reason to apply differing rates to Plan participants based on whether they were retired and active. Second, the court held that any limitations on the board’s ability to change the crediting rate did not extend to limit the introduction of risk and volatility into the Plan, meaning that the amendment’s allowance of participants to choose from four different valuation funds was proper. Lastly, the court held that the Plan’s direction that payments be “approximately equal” was not a mandate requiring that the board select low volatility crediting rates that assure actually equal payments over time. Although payments to Plan participants prior to the 2012 amendment were actually equal, this was merely “a derivative effect of the application of a crediting rate that tracked earnings in participants’ notational accounts to a crediting rate associated with a valuation fund featuring very low volatility.” The court reasoned that the plan itself did not promise such precision, and that under the 2012 amendment CSC makes “approximately equal” annual payments to eligible participants based on the market performance of the valuation funds chosen by those participants.

Accordingly, the court affirmed the district court’s denial of class certification and grant of summary judgment in favor of CSC based on its finding that CSC’s amendment to the Plan was valid.

Full Opinion

Raymond J. Prince

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