Pension Benefit Guaranty Corporation v. Kentucky Bancshares, Inc.

Filing 27

OPINION & ORDER: (1) DENYING Kentucky Bancshares' 22 CROSS MOTION for Summary Judgment; (2) GRANTING pla's 19 MOTION for Summary Judgment; (3) Kentucky Bancshares must comply w/Pension Benefit Guaranty Corp's Final Determination as well as the provisions of Title IV of the Employee Retirement Income Security Act of 1974 & applicable regulations; (4) PBGC shall FILE a brief in support of its claim for atty fees & costs by 4/7/14; (5) matter is DISMISSED & STRICKEN from the docket. Signed by Judge Karen K. Caldwell on 3/17/14.(KJR)cc: COR Modified text on 3/17/2014 (KJR).

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON

CIVIL ACTION NO. 13-cv-143-KSF
PENSION BENEFIT GUARANTY
CORPORATION

PLAINTIFF

v.

OPINION & ORDER

KENTUCKY BANCSHARES, INC.

DEFENDANT
***********

The plaintiff, Pension Benefit Guaranty Corporation (“PBGC”), has filed this action pursuant
the Employment Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 (“ERISA”), to
enforce the provisions of Title IV of ERISA and to enforce a final agency determination that
violations of Title IV have occurred in connection with the defendant’s termination of a singleemployer, defined-benefit pension plan. Currently before the Court are the parties’ cross-motions
for summary judgment [DE ##19, 22]. This matter is fully briefed and is ripe for review.
I.

STATUTORY AND REGULATORY BACKGROUND
A.

THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

Congress enacted ERISA in 1974 “to ensure that employees and their beneficiaries would
not be deprived of anticipated retirement benefits by termination of pension plans before sufficient
funds [had] been accumulated in the plans.” Pension Benefit Guaranty Corporation v. R.A. Gray
& Co., 467 U.S. 717, 720 (1984)(citing Nachman Corp. v. Pension Benefit Guaranty Corporation,
446 U.S. 359, 361-62 (1980)).

See also 29 U.S.C. § 1001(a)(including among ERISA’s
1

congressional findings “that owing to the termination of plans before requisite funds have been
accumulated, employees and their beneficiaries have been deprived of anticipated benefits”). ERISA
is divided into three principal subchapters. Subchapter 1 addresses the protection of employee
pension benefit rights by establishing “rules for reporting and disclosure, participation and vesting,
funding of pension trust, fiduciary responsibility, and administration and enforcement.” A-T-O, Inc.
v. Pension Benefit Guaranty Corporation, 634 F.2d 1013, 1014 (6th Cir. 1980); see 29 U.S.C. §§
1001-1191. Subchapter 2 establishes the enforcement jurisdiction of various federal departments
and agencies over the statute’s provisions, as well as creates the joint pension task force. See 29
U.S.C. §§ 1201-1242. Finally, Subchapter 3 provides insurance coverage for pension benefit plans.
See 29 U.S.C. §§ 1301-1461.
Subchapter 3 is the “key to the congressional plan,” Page v. Pension Benefit Guaranty Corp.,
968 F.2d 1310, 1311 (D.C. Cir. 1992), designed to guarantee that “if a worker has been promised
a defined pension benefit upon retirement - and if he has fulfilled whatever conditions are required
to obtain a vested benefit - he actually will receive it.” R.A. Gray & Co., 467 U.S. at 720. In order
to ensure this guarantee, Congress created the Pension Benefit Guaranty Corporation (“PBGC”), “a
wholly-owned United States government corporation within the Department of Labor, modeled after
the Federal Deposit Insurance Company.” Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S.
633, 636-67 (1990). PBGC is vested with the authority to enforce and administer a mandatory
Government insurance program that currently protects the pension benefits of millions of privatesector American workers who participate in defined benefit pension plans. See generally 29 U.S.C.
§ 1302.

2

B.

STANDARD TERMINATIONS

One of PBGC’s principal operations is to monitor, and under limited circumstances, initiate
the termination of defined benefit plans where the plans have insufficient assets to satisfy their
obligations to participants. In the case of an underfunded pension plan termination, PBGC “becomes
the trustee of the plan, taking over the plan’s assets and liabilities.” LTV Corp., 496 U.S. at 637.
Once trustee, PBGC then merges the remaining assets of the terminated plan with its own funds to
“ensure payment of most of the remaining ‘non-forfeitable benefits.’” 29 U.S.C. § 1301(a)(8),
1322(a) & (b); LTV Corp., 496 U.S. at 638.

PBGC then pays the benefits according to

congressionally prescribed limits. 29 U.S.C. § 1322(b)(3)(B).
This case, however, does not involve an involuntary termination. Rather, the defendant,
Kentucky Bancshares, Inc. (“Kentucky Bancshares”), performed a voluntary “standard termination”
under 29 U.S.C. § 1341(b). A standard termination is appropriate when the pension plan has
sufficient assets to pay all of a pension plan’s benefit liabilities. Standard termination procedures
“are exhaustive, setting detailed rules” for all phases of the process. See Beck v. PACE Int’l Union,
551 U.S. 96, 102-03 (2007); Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 446 (1999). In a
standard termination, the Plan administrator is required to provide notice to plan participants of the
intent to terminate the plan (the “NOIT”). 29 U.S.C. § 4041(a)(2), and (b)(1)(A); 29 C.F.R. §
4041.23. The NOIT serves as written notice to plan participants of the intended plan termination and
includes a proposed date of termination as well as notice of plan benefits, explaining the benefits
owed to each affected party. See 29 U.S.C.§ 1341(a)(2), (b)(2)(B); 29 C.F.R. §§ 4041.23, 4041.24.
The termination date may be changed by the Plan administrator under certain circumstances not
applicable here. 29 U.S.C. § 1348(a)(1).
3

Before distribution of any assets, a Standard Termination Notice-PBGC Form 500 (“Form
500") must be filed with PBGC, stating the intent to terminate the plan, as well as the proposed date
of plan termination, and providing, inter alia, detailed information regarding plan assets and benefit
liabilities. See 29 U.S.C. § 1341(b)(2)(A); 29 C.F.R. 4041.25. Form 500 provides detailed
instructions for completing the standard termination process.
Upon receipt of the Form 500, PBGC has 60 days to make the statutorily required
determination that “there is no reason to believe” that the plan is not sufficient for benefit liabilities
based upon its review of the required documentation from the plan administrator, the plan’s actuary
or other affected parties, including an attestation that the plan is sufficient for benefit liabilities (the
“60 Day Review Period”). 29 U.S.C. § 1341(b)(2)(C); 29 C.F.R. § 4041.25. In the absence of a
finding from PBGC that the plan is not sufficient for all benefit liabilities, the plan administrator
must distribute plan assets in accordance with Title IV of ERISA within a specified time period. 29
U.S.C. § 1341(b)(2)(D) and (B)(3); 29 C.F.R. § 4041.28. When distributing assets in a standard
termination, the plan’s administrator must either (1) purchase “irrevocable commitments” (i.e.,
annuities) from a private insurer to satisfy all benefit liabilities, 29 U.S.C. § 1341(b)(3)(A)(i), or (2)
provide an alternative form of distribution (e.g., lump sum payment) “in accordance with the
provisions of the plan and any applicable regulations. . . .” 29 U.S.C. § 1341(b)(3)(A)(ii). To
determine the value of a lump sum distribution, the regulations set out a two-step process. First, the
amount of the monthly pension benefit must be calculated in accordance with plan provisions. Then,
the projected stream of future benefit payments must be discounted to present value, as of the date
of distribution, 29 C.F.R. § 4041.28(c)(2), using assumptions for mortality and interest specified in
the plan. See 26 U.S.C. § 401(a)(25). The interest rate used to discount to present value are
4

inversely related to the amount of the lump sum (i.e., the greater the interest rate, the lower the lump
sum).
Thirty days after the last distribution of plan assets, a Post-Distribution Certification for
Standard Termination-PBGC Form 501 (“Form 501") must be filed with PBGC, attesting that all
benefits under the plan have been paid in accordance with Title IV. See 29 U.S.C. § 1341(b)(3)(B);
29 C.F.R. 4041.29. Following the filing of Form 501, PBGC continues to have authority regarding
matters relating to the plan. 29 U.S.C. § 1341(b)(4). Additionally, PBGC is required by 29 U.S.C.§
1303(a) to audit a statistically significant number of standard terminations to determine, inter alia,
if affected parties have received their benefits. 29 U.S.C. § 1303(a). These determinations are
subject to PBGC’s administrative review procedures. 29 C.F.R. § 4003.1(b)(3)(iii).
C.

OTHER RELEVANT STATUTORY AND REGULATORY PROVISIONS
In addition to ERISA, other statutory and regulatory provisions are relevant to the standard

termination at issue in this case. The first is § 401(a) of the Internal Revenue Code (“I.R.C.”), 26
U.S.C . § 401(a). Under this statute, a pension plan must comply with the requirements of I.R.C. §
411 to qualify for favorable tax treatment. To obtain advanced assurance that a pension plan satisfies
the I.R.C. qualification requirements under 26 U.S.C. § 401, a taxpayer may request a determination
letter that the plan provisions meet qualification requirements. See 26 C.F.R. § 601.201(a)(3), (c)(5),
and (o); IRS Publication 794. While the determination letter may speak to the issue of tax
qualification, it does not make any “determination regarding the effect of other federal or local
statutes. 26 C.F.R. 601.201(c)(5).
To be tax qualified under the I.R.C., except as provided by I.R.C. § 417, a plan must provide
vested participants who do not die before their “annuity starting date” their accrued benefits in the
5

form of a qualified joint and survivor annuity (“QJSA”). 26 U.S.C. § 401(a)(11). Under I.R.C. §
417, they must also allow a participant to waive the QJSA in lieu of another form of benefit if the
plan provides for other optional forms of benefits. 26 C.F.R. §1.401(a)-11(a)(1)(II); 26 U.S.C. §
417(a)(1)(A)(i). A participant may elect to waive a QJSA in lieu of another form of benefit only
during the 180-day period ending on the participant’s “annuity starting date,” 26 U.S.C. § 417(a)(1)
and (6). If the participant elects a lump sum in lieu of an annuity, the annuity start date is the date
on which all events have occurred that entitle the participant to a lump sum. The annuity starting
date for an annuity is the first date of the first period that a benefit is payable as an annuity. See 26
U.S.C. § 417(f)(2). The date is determined not by the purchase of the annuity, but by payments
under the annuity contract. Id.

As the regulations explain,

. . . benefits under 401(a)(11) and 417 may not be eliminated or reduced because the
plan uses annuity contracts to provide benefits merely because . . . such contracts are
distributed upon plan termination. Thus, the requirement of sections 401(a)(11) and
417 [requiring the option to waive the QJSA] apply to payments under the annuity
contracts, not to the distribution of the contracts.
26 C.F.R. § 1.401(a)-20, Q&A-2. Thus, any election to waive a QJSA benefit must be made within
180 days of being able to commence payment under the annuity contract, not within 180 days of
purchasing the annuity contract.
Section 411(a) establishes a floor for lump sum valuations, and provides that the present
value of lump sum benefits shall not be less than the present value calculated using the specified
“applicable mortality table” and the “applicable interest rate” assumptions.” See 26 U.S.C. §§
411(a)(11)(B); 417(e)(3). Over time, these specific assumptions have changed. Most recently, for
the plan years beginning after December 31, 2007, the Pension Protection Act of 2006 (the “PPA”),
Pub.L.No. 109-280, 120 Stat. 780 (2006), amended the I.R.C. to change the “applicable interest rate”
6

from the annual rate of interest on 30-year Treasury securities (prescribed by GATT, Retirement
Protection Act of 1994 within the Uruguay Round Agreements Act, Pub.L 103-465,§ 767, 109 Stat.
4809, 5039-40 (1994)), to the adjusted first, second, and third segment rates derived from a corporate
bond yield curve. PPA § 302(b); 26 U.S.C. § 417(e)(3); see also, 29 U.S.C. § 205(g). The PPA also
replaced the 1994 GAR Mortality Table as the “applicable mortality table” used for lump sum
calculations, to a mortality table under I.R.C. § 430(h)(3)(A). 26 U.S.C. § 417(e)(3)(B). Under the
PPA, the “applicable mortality table” for distributions in 2009 was the PPA 2009 Mortality Table.
See generally, IRS Notice 2008-85, 2008-42 I.R.B. 905 (Oct. 20, 2008).
Recognizing that required PPA amendments might reduce accrued benefits under some plans,
the PPA provided that plans would not violate I.R.C. § 411(d)(6) and ERISA section 204(g) when
making amendments to comply with PPA’s changes, if those amendments were made before the last
day of the first year beginning after January 1, 2009, and conformed to plan operations. PPA §
1107(a). However, the PPA did not provide for relief for violations of Title IV of ERISA.
Also relevant to this action is Section 411(d)(6) of the I.R.C. which prohibits plan
amendments that reduce accrued benefits. It also prohibits the elimination of optional forms of
benefits, such as lump sums. Such prohibited reductions include the elimination of optional benefit
forms, at plan termination, through the purchase of deferred annuities that do not include optional
benefit forms available under the plan. 26 CF.R. 1.411(d)-(4) Q&A2(a)(3)(ii)(A) and (B), Example
2. This prohibition, however, does not extend to the purchase of immediate annuities where a plan
participant has elected to immediately receive a payment of his benefit in such form in lieu of a lump
sum; thus extinguishing the obligation to protect optional forms. A valid election can only be made

7

180 days prior to the date payments will start under the purchased annuity. 26 U.S.C. § 417(a)(1)
and (6).
II.

FACTUAL AND PROCEDURAL BACKGROUND
The facts in this matter are largely undisputed. Kentucky Bancshares is a bank holding

company for Kentucky Bank. Kentucky Bancshares is the contributing sponsor of Kentucky
Bancshares, Inc. Retirement Plan and Trust (the “Plan”) within the meaning of 29 U.S.C. §
1301(a)(13). Kentucky Bancshares is also the Plan Administrator within the meaning of 29 U.S.C.
§ 1301(a)(13). The Plan is a single-employer, defined benefit pension plan covered under Title IV
of ERISA. 29 U.S.C. § 1321.
The Plan, previously known as the Bourbon Agricultural Deposit Bank Retirement Plan and
later as the Bourbon Bancshares, Inc. Retirement Plan and Trust, was adopted by Kentucky
Bancshares as of January 1, 1972. On October 15, 2008, the Plan administrator issued a NOIT to
participants and beneficiaries in accordance with 29 U.S.C. § 1341(a)(2), with a proposed
termination date of December 31, 2008. Administrative Record, hereinafter “AR,” 328-29, DE #
6. On April 14, 2009, PBGC received Form 500-Standard Termination Notice for the Plan,
indicating a proposed termination date of December 31, 2008. AR 1-5. On July 10, 2009, Kentucky
Bancshares purchased a nonparticipating single premium group annuity contract from United of
Omaha Life Insurance Company (“Annuity Contract”), which did not include the option to pay future
benefits in the form of a lump sum. AR 330-43. The Annuity Contract required payment of benefits
on the Annuity Start Date. AR 333. For Plan participants not yet in pay status that did not elect
lump sums, that date would occur upon their reaching the normal retirement age of 65 under the
Plan. AR 368, 824, 826, 830, 832, 834.
8

Pursuant to the terms of the Plan, participants could elect a benefit in the form of a lump sum
payment that was the “Actuarial Equivalent” of the normal benefit payable under the Plan. As of
December 31, 2008, for purposes of calculating optional forms of benefit - including lump sums the Plan defined Actuarial Equivalent of a benefit form as the benefit resulting in a higher value
when calculated using either (1) the annual interest rate based on 30-year U.S. Treasury securities
for the second month before the Plan Year in which the annuity start date occurs and the 94 GAR
mortality table, or (2) the interest rate specified in the Plan (7%) and the 1984 Unisex Pension
mortality table. AR 263.
On February 24, 2009, the Plan was amended to change the assumptions used for calculating
lump sums in accordance with the PPA (the “PPA Amendment”). Specifically, §§ 10.2 and 10.3 of
the Plan were amended to provide that:
10.2 For purposes of the Plan’s provisions relating to the calculation of the present
value of a benefit payment that is subject to [Internal Revenue] Code Section 417(e),
any provision prescribing the use of the annual rate of interest on 30-year U.S.
Treasury securities shall be implemented by instead using the rate of interest
determined by applicable interest rate described by [Internal Revenue] Code Section
417(e) after its amendment by PPA [the Pension Protection Act of 2006, (“PPA”),
P.L. 109-280, § 302, 120 Stat. 780 (2006)(“PPA”)]. Specifically, the applicable
interest rate shall be the adjusted first, second, and third segment rates applied under
the rules similar to the rules of [Internal Revenue] Code Section 430(h)(2)(C) for the
month before the date of the distribution or such other time as the Secretary of the
Treasury may by regulations prescribe. . . .
10.3 For purposes of the Plan’s provision relating to the calculation of the present
value of a benefit payment that is subject to [Internal Revenue] Code Section 417(e),
any provision directly or indirectly prescribing the use of the mortality table
described in Revenue Ruling 2001-62 shall be amended to prescribe the use of the
mortality table described in Revenue Ruling 2007-67.
AR 679.

9

On July 10, 2009, Kentucky Bancshares purchased a nonparticipating single premium group
annuity contract from United of Omaha Life Insurance Company, which did not include the option
to pay future benefits in the form of a lump sum. AR 330-43. The Annuity Contract required
payment of benefits on the Annuity Start Date. AR 333. For Plan participants not yet in pay status
that did not elect lump sums, the Annuity Start Date would occur upon their reaching the normal
retirement age of 64 under the Plan. AR 368, 824, 826, 828, 830, 832, 834.
On November 13, 2009, the Plan administrator filed Form 501 - Post Distribution
Certifications with PBGC that certified, inter alia, that all benefits payable under the Plan were
calculated correctly in accordance with ERISA’s provisions and regulations, and that all benefit
liabilities under the Plan were satisfied. AR 7, 8. By a letter dated January 21, 2010, PBGC notified
Kentucky Bancshares that the Plan’s termination had been selected for audit. AR 9. A revised Form
501 was submitted to PBGC on February 26, 2010 amending the value of benefits distributed. AR
33.
On April 8, 2011, PBGC issued an initial determination letter (“Initial Determination”) with
respect to its audit. AR 772-74. As set out in the Initial Determination, PBGC found that: (1) the
PPA Amendment adopting the PPA specified interest rates and mortality table (together the “PPA
Assumptions”) after the date of Plan termination decreased benefits in violation of 29 C.F.R. §
4041.8, as the amendment was not necessary to meet qualifications under I.R.C. § 401; and (2) the
Annuity Contract did not offer a lump sum payment option for future benefit payments, thereby
violating I.R.C. § 411(d)(6). AR 772-74. As a result, PBGC determined that Kentucky Bancshares
was required to recalculate the lump sum distributions made from the Plan, and pay the highest
benefit value (plus interest from the date of the initial payment) calculating using: (a) the 30-year
10

Treasury rate in effect for November 2008 (4%) and the 94 GAR mortality table; (b) UP 1984 (7%)
and the pre- and post-mortality table (1984 Unisex Pension mortality table); and (c) the November
2008 PPA segment rates in effect for the 2009 Plan year and the 2009 applicable mortality table.
AR 772-74, AR 263. The Initial Determination also required that Kentucky Bancshares amend the
Annuity Contract to provide participants the option to elect a lump sum distribution at retirement.
AR 772-74.
Kentucky Bancshares requested reconsideration of the Initial Determination. AR 779-837.
In support of its request, Kentucky Bancshares contested PBGC’s determination that the Plan’s posttermination interest rate and mortality table amendments violated Title IV of ERISA and the Plan
provisions in effect on the Plan’s termination date. Id. Kentucky Bancshares argued that its actions
and written documents support a de facto amendment to the Plan prior to the termination date.
Kentucky Bancshares also argued that the PPA amendment was necessary for I.R.C. qualifications,
and therefore exempted it from 29 C.F.R. § 4041.8's prohibition on post-termination amendments.
Kentucky Bancshares argued that compliance with PPA provided relief from Title IV of ERISA.
Finally, Kentucky Bancshares contested PBGC’s determination that the Annuity Contract was
required to include the option of future benefit payments in lump sum form. AR 785.
PBGC issued its final determination (“Final Determination”) on May 9, 2012. AR 838-41.
The Final Determination concluded that Kentucky Bancshares’ arguments on reconsideration
provided no defense to PBGC’s Initial Determination because: (1) the Plan was not amended to
adopt the PPA assumptions until the PPA Amendment (February 24, 2009); (2) the PPA Amendment
was adopted after the date of the Plan termination (December 31, 2008), decreased benefits for
participants and beneficiaries who elected lump sums, and was unnecessary to meet I.R.C.’s tax
11

qualification requirements, thereby violating 29 C.F.R. § 4041.8; (3) PPA provided no relief under
Title IV of ERISA; and (4) failure to provide for a lump sum form of benefit payment in the Annuity
Contract violated I.R.C. § 411(d)(6), resulting in a failure to pay all benefit liabilities under the Plan
in accordance with 29 U.S.C. § 1341. AR 838-41. Thereafter, on May 23, 2013, PBGC filed this
Complaint seeking, inter alia, judgment in its favor and against Kentucky Bancshares, enforcing
PBGC’s Final Determination and requiring Kentucky Bancshares to comply with the provisions of
the Plan and Title IV of ERISA [DE #1]. This court has jurisdiction over this matter under 29 U.S.C.
§ 1303(e)(3)
III.

STANDARD OF REVIEW
In the Joint Report of Parties [DE #12] filed on September 13, 2013, the parties agreed that

the standard of review in this action is set forth by the Administrative Procedure Act in 5 U.S.C. §
706(2)(A), which provides:
The reviewing court shall . . . hold unlawful and set aside agency action, findings,
and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law. . . In making the foregoing determinations, the
court shall review the whole record or those parts of it cited by a party, and due
account shall be taken of the rule of prejudicial error.
The court’s review under the arbitrary and capricious standard is narrow. See Sierra Club v. Slater,
120 F.3d 623, 633 (6th Cir. 1997). Under this standard, the court is limited to consideration of the
agency’s administrative record, and may not substitute its judgment for that of the agency. Florida
Power & Light Co. v. Lorion, 470 U.S. 729, 743-44 (1985); Motor Vehicle Mfrs. Ass’n v. State Farm
Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983); Citizens to Preserve Overton Park, Inc. v. Volpe, 401
U.S. 402, 420 (1971); Northeast Ohio Reg’l Sewer Dist v. United States E.P.A., 411 F.3d 726, 732

12

(6th Cir. 2005); Simms v. Nat’l Highway Traffic Safety Administration, 45 F.3d 999, 1003 (6th Cir.
1995).
The parties further agree that to the extent that PBGC’s interpretation of a statutory provision
under Title IV of ERISA is at issue, Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984), and its
progeny supplies the legal framework for determining the extent to which the interpretation is subject
to deference. Under Chevron, if Congress has not spoken directly to the issue, then the agency’s
interpretation of the statute it administers is entitled to deference. Chevron, 467 U.S. at 837. The
“court need not conclude that the agency construction was the only one it permissibly could have
adopted to uphold the construction, or even the reading [the court] would have reached if the
question initially had arisen in a judicial proceeding.” Jewish Hospital, Inc. v. Secretary of Health
& Human Servs., 19 F.3d 270, 273-74 (6th Cir. 1994). The Court must afford the agency’s
construction deference unless “arbitrary, capricious, or manifestly, contrary to the statute.” Battle
Creek Health Sys. v. Leavitt, 498 F.3d 401, 408-09 (6th Cir. 2007). An agency’s interpretation of
its own regulations is entitled to even more deference. Id. The agency’s interpretation of its own
regulations “must be given controlling weight unless it is ‘plainly erroneous or inconsistent with the
regulation.’” Id. (quoting Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)).
IV.

ANALYSIS
(A)

WHETHER PBGC WAS ARBITRARY AND CAPRICIOUS IN ITS
DECISION THAT THE PPA AMENDMENT VIOLATED APPLICABLE
LAW

The following facts are not disputed. The Plan terminated on December 31, 2008. The PPA
Amendment was not adopted until February 24, 2009, well after the Plan termination date. The PPA
Amendment provided lower lump sums than those calculated using the previously applicable
13

mortality table and interest rate assumptions. Reducing accrued benefits post-termination is in
violation of PBGC’s regulation at 29 C.F.R. § 4041.8. Nevertheless, Kentucky Bancshares argues
that PBGC’s Final Determination with respect to the PPA Amendment was arbitrary and capricious,
and not in accordance with law for the following reasons:
(1)

Kentucky Bancshares de facto amended the Plan to comply with the PPA prior to
Plan termination;

(2)

The PPA Amendment fell within 29 C.F.R. § 4041.8's exception allowing posttermination amendments that reduce accrued benefits if they are necessary for tax
qualification. Kentucky Bancshares argues that this is so because the Plan paid two
participants their lump sums calculated using PPA Assumptions before the Plan
termination date, thereby establishing an operating plan practice to which the PPA
Amendment had to conform; and

(3)

PPA § 1107 expressly demonstrated Congress’ intent to authorize post termination
plan amendments that reduce accrued benefits.

The Court turns first to Kentucky Bancshares’ argument that the Plan had effected a de facto
amendment prior to its termination. According to Kentucky Bancshares, the de facto amendment
was the result of the following actions: (1) Kentucky Bancshares receipt of a list of PPA changes
from The Standard (the Plan’s record keeper and actuary) that it would use an ongoing Plan
administration, including a notation that the actuarial assumptions used to “determine minimum
lump-sum distributions” had changed; (2) e-mails between Kentucky Bancshares’ Director of Special
Projects and The Standard; (3) a presentation made to Kentucky Bancshares’ management by The
Standard explaining PPA’s changes (including those made to minimum lump-sum calculations); and
(4) the subsequent payment of lump sums calculated using PPA Assumptions to two Plan
participants in 2008. AR 789, 780-81, 787-90.

14

None of these actions, however, satisfies ERISA’s requirement that all employee benefit
plans be established and maintained pursuant to a written instrument, executed by a party who is
authorized to effect such an amendment. 29 U.S.C. § 1102(a)(1); Bellino v. Schlumberger
Technologies, Inc., 944 F.2d 26, 33 n. 8 (1st Cir. 1991)(concluding that letter purporting to explain
a change to a plan was not a valid plan amendment); Pizlo v. Bethlehem Steel Corp., 884 F.2d 116,
120 (4th Cir. 1989)(affirming the district court’s determination that modification of a pension plan
by informal and unauthorized amendment was impermissible pursuant to 29 U.S.C. § 1102(a)(1)).
The purpose of this requirement is to ensure that “every employee may, on examining the plan
document, determine exactly what his rights and obligations are under the plan.” Curtiss-Wright
Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995). While plan sponsors are generally free under
ERISA to adopt, modify, or terminate pension plans, a written document is clearly required. The
Sixth Circuit has consistently refused “ . . . to sanction informal ‘plans’ or plan ‘amendments’ whether oral or written - [as doing so] would leave the law of employee benefits in a state of
uncertainty and would create disincentives for employers to offer benefits in the first place.”
Sprague v. General Motors Corp., 133 F.3d 388, 403 (6th Cir. 1998).
Kentucky Bancshares has failed to cite any binding precedent in support of its position that
a de facto amendment occurred. ERISA is clear - a written amendment is required. Accordingly,
the Court finds that PBGC’s Final Determination that there was no de facto amendment to the Plan
was not arbitrary and capricious, and was in accord with the law.
Next, the Court turns to Kentucky Bancshares’ argument that the Plan Amendment of
February 24, 2009 was required for plan tax qualification. Kentucky Bancshares does not dispute
that I.R.C. § 417(e) only sets a floor for valuing lump sum or that the I.R.C. does not prohibit a plan
15

from paying a larger lump sum if required by another statutory provision or a provision of the plan.
26 U.S.C. § 417(e). As PBGC argues, the I.R.S. clearly allows plan sponsors that had implemented
PPA Assumptions to return to the previous mortality table and interest rate assumptions without
risking disqualification. See I.R.S. Notice 2008-30 (allowing amendments providing the greater of
lump sums calculating using GATT or PPA Assumptions, with no restriction for any prior payments
calculated using PPA Assumptions). The fact that Kentucky Bancshares may have calculated and
paid certain benefits before the Plan’s termination date using PPA Assumptions is irrelevant. The
Plan could have specified that the Plan must pay the greater of the PPA interest rates and the 30-year
Treasury rates (GATT rates), and made supplemental payments as necessary to any affected
participants, thereby insuring that the pre-termination lump sum payments complied with the
amendment. Thus, PBGC’s finding that the PPA Amendment, which eliminated the use of 30-year
Treasury rates for calculating benefits, was not necessary for tax qualification, was not arbitrary or
capricious, and was in accord with relevant law.
Nor was the PPA Amendment sanctioned by PPA § 1107 as Kentucky Bancshares argues.
PPA § 1107 amended the I.R.C., but says nothing about Title IV’s prohibition against benefit
reducing, post-termination amendments. Title IV clearly requires the payment of all benefit
liabilities as determined on the date of plan termination. 29 U.S.C. § 1341(b)(1)(D). Moreover,
PBGC’s regulation, 29 C.F.R. § 4041.8, prohibits post-termination reductions in benefits. Both
prohibitions are clear, and PBGC was not arbitrary or capricious in determining that PPA § 1107 did
not authorize the post-termination reduction in benefits. For all these reasons, the Court finds that
PBGC’s determination that Kentucky Bancshares did not adopt the PPA Amendment until after the
date of termination in violation of Title IV and 29 U.S.C. § 4041.8 was not arbitrary and capricious.
16

Consequently, Kentucky Bancshares must comply with PBGC’s determination that it must
recalculate the participants’ lump sum distributions using the GATT assumptions (i.e., the 30-year
Treasury rate and the 94 GAR mortality table), including a reasonable rate of interest from the date
of the initial determination to the date the additional benefits will be paid.
(B)

WHETHER THE OPTIONAL LUMP SUM FORM OF BENEFITS MUST BE
PROVIDED IN THE ANNUITY CONTRACTS PURCHASED FOR FUTURE
BENEFIT PAYMENTS

In its Final Determination, PBGC also concluded that Kentucky Bancshares’ failure to
provide optional forms of benefits in the Annuity Contract purchased for future benefit payments
violated I.R.C. § 411(d)(6). This section prohibits plan amendments that reduce accrued benefits,
including the elimination of optional forms of benefit. 26 U.S.C. § 411(d)(6)(B)(ii). Kentucky
Bancshares argues that the Annuity Contract purchased in this case does not need to include lump
sum options for Plan participants not currently in pay status. According to Kentucky Bancshares,
the six participants who had not reached retirement age on the Plan termination date elected payment
in the form of an annuity. It contends that the purchase of the Annuity Contracts itself “constituted
payment of a benefit” to Plan participants in a form elected by the participant, and thus no lump sum
benefit option was required. For the reasons below, PBGC was correct in rejecting Kentucky
Bancshares’ reasoning.
Under the relevant regulations, an optional form of benefit must be preserved until a plan
participant becomes eligible to receive plan benefits and elect any available optional forms of
benefit. See 26 C.F.R. § 1.411(d)-(4) Q & A 2(a)(2)(ii) & (iv). Thus, on plan termination, optional
forms of benefit may not be eliminated through the purchase of deferred annuity contracts for
participants who are not yet eligible to receive retirement benefits. 26 C.F.R. § 1.411(d)-(4) Q & A
17

2(a)(3)(ii)(A) & (B), Example 2. Additionally, such participants are unable to make a valid election
to receive an optional form of benefit until not more than 180 days before an annuity start date, the
first day a participant is eligible to begin receiving pension benefits. 26 U.S.C. § 417(a)(6) & (f)(2);
29 U.S.C. § 1055(c)(1) & (7). Under these statutes and rules, the purchase of an annuity contract
to be held for future payment to a participant that has not reached retirement age does not constitute
“payment of a benefit” at the time of purchase, and, as PBGC found, may not serve to eliminate
future election of a lump sum optional form of benefit.
As a result, the six Plan participants for whom Kentucky Bancshares purchased a deferred
annuity have not yet made a valid benefit distribution election. By failing to preserve the lump sum
payment as an optional form for those participants that had not yet reached retirement age, Kentucky
Bancshares has violated I.R.C. § 411(d)(6). Accordingly, PBGC’s determination that the Annuity
Contract violated I.R.C. § 411(d)(6), resulting in a failure to pay all benefit liabilities under the Plan
in accordance with 29 U.S.C. § 1341, was neither arbitrary nor capricious. Consequently, Kentucky
Bancshares must comply with PBGC’s determination that it must amend the Annuity Contract to
provide the lump sum option for Plan participants not currently in pay status.
V.

CONCLUSION
For the reasons set forth above, the Court, being fully and sufficiently advised, hereby

ORDERS as follows:
(1)

Kentucky Bancshares’ motion for summary judgment [DE #22] is DENIED;

(2)

Pension Benefit Guaranty Corporation’s motion for summary judgment [DE #19] is
GRANTED; and summary judgment will be entered in favor of Pension Benefit
Guaranty Corporation;

18

(3)

Kentucky Bancshares must comply with Pension Benefit Guaranty Corporation’s
Final Determination as well as the provisions of Title IV of the Employee Retirement
Income Security Act of 1974 and all applicable regulations;

(4)

Counsel for PBGC shall FILE a brief in support of its claim for attorneys’ fees and
costs NO LATER THAN APRIL 7, 2014. A response and reply may be filed in
accordance with the Local Rules; and

(?)

This matter is DISMISSED and STRICKEN from the active docket.

This March 17, 2014.

for Karl S. Forester, Senior Judge

19