the return of assets attributable to employee contributions.
Firestone contends that neither the statute nor the regulations require that employees receive the benefit of a better-than-expected rate of return on contributions. Resolution of that question, in Firestone's view, is left to the terms of the pension plan. In this case, Firestone argues, the Plan provided that upon termination employees would receive only those contributions (plus the fixed rate of return specified in the Plan) that were not expended to provide benefits under the Plan. By Firestone's calculation, none of the residual assets are attributable to employee contributions because all employee contributions were exhausted funding Plan benefits before any Firestone contributions were spent. In short, all employee contributions were spent on liabilities before any Firestone contributions were spent. Under this view, excess assets would be attributable to employee contributions only if the employee contributions over the life of the plan were greater than the liabilities incurred during the course of the plan or owed upon termination.
The PBGC rejected Firestone's proposed calculation and underlying theory on three grounds: it was inconsistent with the statute and regulation, it misconstrued the Plan, and it was insufficiently documented.
A. Construction of the Statute
The PBGC employed a three-step analysis in concluding that Firestone's proposed method was precluded by the statute. First, as a general proposition, the legislative history indicates that Congress intended for the statute, not plan terms, to govern the distribution of residual assets. Second, Congress specifically intended for employees to receive a portion of excess assets where the actual rate of return exceeded the expected rate of return. Finally, Firestone's interpretation would render the statutory phrase meaningless because if employee contributions could be exhausted before any employer contributions were spent, there would never be any residual assets attributable to employee contributions.
The agency's view that the statute trumps any inconsistent Plan terms is not disputed by Firestone. Instead, Firestone contends that spending employee contributions before employer contributions is not inconsistent with the statutory requirement that assets attributable to employee contributions be returned to the employees. In other words, the statute requires that employees share in residual assets only if there are assets attributable to employee contributions; it does not mandate that some portion of assets be attributed to employee contributions.
Firestone relies on LLC Corp. v. PBGC, 703 F.2d 301 (8th Cir. 1983), for the proposition that it is consistent with 29 U.S.C. § 1344(d)(2) to conclude that none of the residual assets are attributable to employee contributions for the reason that employee contributions were spent first. In LLC, the Eighth Circuit allowed the employer to receive all residual assets on the theory that employee contributions and earnings were insufficient to fund all plan benefits. The court held that the PBGC improperly withheld the Notice of Sufficiency upon plan termination.
The PBGC contended that a portion of the residual assets should be considered attributable to employee contributions because the plan was a contributory plan with comingled funds.
Firestone argued that the comingling of funds was irrelevant since total liabilities exceeded employee contributions. A certified public accountant hired by Firestone testified "that the residual assets resulted from excess contributions by LLC and did not include any assets attributable to employee contributions." Id. at 304. The accountant's conclusion was premised on the theory that the employee contributions and actual earnings on those contributions were exhausted before any employer contributions were spent. The court accepted the theory that employee funds were expended first because of what it termed the "differing duties" of the employees and LLC:
The employees were responsible for the primary pay-in of a fixed percentage and LLC was responsible for contributing the amount above the employee contribution necessary to fund the plan benefits. LLC carried the risk in the plan because the benefits were established. If the plan's investments went sour the company would have to contribute more to fund the benefits than if the investments produced solid earnings. The plan, by making LLC's responsibility variable with the amount necessary to fund the benefits, established that the employees' fixed contributions and earnings should first fund the termination benefits.
Id. at 304. The court was not presented with the argument raised by the PBGC in this case -- that 29 U.S.C. § 1344(d)(2) precludes the expenditure of all employee funds first because such a method would render the section meaningless.
The PBGC contends that such a plan provision would be inconsistent with 29 U.S.C. § 1344(d)(2) because the statute reflects congressional intent that employees receive the assets resulting from better-than-expected investment earnings. Return of excess to employees would never occur if employee earnings were spent first because "except in the rarest of circumstances, employee contributions with earnings will never pay for all accrued benefits. In fact, of the scores of excess assets cases before the agency in its 13-year history, there has been at most one such occurrence, and that involved a very small plan." PBGC's Final Determination Letter, A.R. at 11.
In promulgating the regulations for allocating residual assets between employer and employees, the PBGC has consistently adopted the position that employee contributions cannot be exhausted before employer contributions are spent. In the discussion of the final amendments to the regulations, the PBGC noted that some commentators objected to the proposed regulation on the ground
that the Act does not require that contributing employees share in 'excess interest' over the rate of interest specified in the plan. PBGC disagrees. . . . Employer and employee contributions are comingled and are therefore indistinguishable. Thus, they contribute proportionately to any investment income. It follows that employees and employer should share that income proportionately. . . . With respect to the contention that employees who contribute should be limited to the interest rate provided in the plan, the legislative history of the Act supports a contrary conclusion.