No partial termination of plan.

The Sixth Circuit has held that when an administrator of a stock bonus/profit-sharing plan was granted broad discretion to interpret and construe the plan, its determination that a partial termination had not occurred should be reviewed under a relatively undemanding "arbitrary and capricious" standard (Sea Ray Employees' Stock Ownership and Profit-Sharing Plan v. Robinson, 164 F3d 981 (1999)). The court rejected the position of several former employees that the issue of partial termination was a question of law and therefore subject to de novo review by the court.

Drop-Off in Sales Led to Layoffs

Sea Ray a manufacturer of pleasure boats, maintained a qualified stock bonus/profit-sharing plan with a seven-year graded vesting schedule for employer contributions. Generally, if a participant left Sea Ray before completing seven years of service, the nonvested portion of his account balance was reallocated among the remaining participants. In accordance with Sec. 411(d)(3) requirements, if a plan experienced a partial termination, the terminated employees became fully vested in their account balances (regardless of length of service).

Spurred by unprecedented growth in sales, participation in the plan grew from 1,501 employees in July i985 to 3,832 in July 1989. In March 1989, however, small-boat sales began falling in response to an economic downturn, resulting in a series of layoffs. By June 1990, the number of plan participants had fallen to 3,060 employees. Conditions deteriorated further in 1991, when large-boat sales fell as a result of a new Federal luxury tax. By June 1991, plan participation had shrunk to 1,968 employees.

In June 1992, Sea Ray's plan administrator discussed the possibility that the plan had undergone a partial termination between 1989-1991. Looking at each year in that period separately, the administrator concluded that, in the absence of improper motive or bias on Sea Ray's part, the percentage of terminations during those years did not constitute a partial termination. The administrator then sought a court ruling that a partial termination did not occur. Opposing the administrator was a group of former Sea Ray employees who were not fully vested at the time they were laid off.

The district court granted Sea Ray summary judgment, holding that (1) as a result of the plan's broad grant of discretion to the administrator to interpret and construe the plan, its determination that partial termination had not occurred was subject to an "arbitrary and capricious" review standard, (2) the layoffs were not at a level generally considered to constitute a partial termination and (3) the administrator's determination was not arbitrary or capricious.

On appeal, the former employees argued that the administrator lacked discretion to determine whether a partial termination had occurred. Absent a definition of "partial termination" in the plan, the determination of whether it had occurred was a matter of law and should be made by the court.

Review Standard

The appeals court first confirmed the district court's finding that the plan granted discretion to the administrator. The court then rejected the former employees' contention that, because the plan did not define "partial termination," the administrator's discretion did not extend to partial terminations. According to the court, limiting an administrator's discretion to only those terms explicitly defined would undermine the administrator's discretionary powers or force companies to write very long plans.

The court also rejected the former employees' argument that eligibility determinations are questions of law subject to de novo review. Admitting that other circuits have adopted this view, the Sixth Circuit declined to join those courts; see Weil v. Retirement Plan Admin. Comm. of Terson Co., Inc., 913 F2d 1045 (2d Cir. 1990); Gauer v. Connors, 953 F2d 97 (4th Cir. 1991); and Pratt v. Petroleum Production Management, Inc. Employee Sav. Plan and Trust, 920 F2d 651 (10th Cir. 1990). Thus, the court reviewed the administrator's determinations regarding partial termination under the "arbitrary and capricious" standard.

Percentages

Before reviewing the administrator's determination, the Sixth Circuit had to ascertain the percentage of participants involuntarily excluded from the plan between 1989 and 1991. The court first examined the district court's findings that (1) the layoffs at Sea Ray were caused by two separate events that occurred in two different plan years (the downturn in the small-boat market in 1989-1990, and the decline in the large-boat business caused by the Federal luxury tax in 1990-1991), (2) because the causes of the layoffs were independent, the percentage decline should be considered separately for each of those years and (3) employees who terminated their employment voluntarily as a result of the company's economic downturn should be excluded from the partial termination calculation, along with employees whose employment terminated as a result of death, disability, retirement or for cause.

On that basis, the district court found that the percentage decline was 15.9% for 1989-1990 and 27.9% for 1990-1991. (In contrast, the former employees argued that the layoffs for the two periods should be analyzed together, and that employees who left Sea Ray in anticipation of an involuntary layoff should be counted as constructive discharges, in which case the percentage decline would have totaled 32.9%.) The Sixth Circuit found no clear error by the district court in arriving at these percentages, and neither of the percentages was so high that, taken alone, would require a finding that a partial termination had occurred.

Administrator Was Neither Arbitrary nor Capricious

The appeals court noted that, while the percentage of terminated employees is the most persuasive factor in determining whether a partial termination has occurred, all the facts and circumstances must be considered. Two additional factors the court considered were the effects on the plan of the exclusion of employees from participation, and the employer's motives. The court quickly dismissed both factors. First, none of the parties alleged the plan was financially impaired, and, second, the former employees did not allege that Sea Ray had improper profit motives in terminating the employees.

The court found that the administrator had made its decision only after "carefully deliberating both the governing legal standards of partial terminations and Sea Ray's actions in light of those standards." Given that finding, along with the court's findings on the percentage of terminations, the absence of damage to the plan and the lack of an improper motive, the court found that the administrator was reasonable in concluding that the plan had not been partially terminated.

FROM GARY Q. CVACH, LL.M., CPA, AND DENIS L. YURKOVIC, J.D., WASHINGTON, DC