     08-0459-cv (L); 08-0538-cv (XAP)
     In Re: Citigroup Pension Plan ERISA



 1                      UNITED STATES COURT OF APPEALS
 2
 3                              F OR THE S ECOND C IRCUIT
 4
 5
 6
 7                               August Term 2008
 8
 9    (Argued: March 20, 2009                     Decided: October 19, 2009)
10
11             Docket Nos. 08-0459-cv (L); 08-0538-cv (XAP)
12
13
14
15                     M ICHAEL L ONECKE, R AYMOND D UFFY,
16                     A NNE N ELSON, R OBERT S. F ASH, AND
17                     C RAIG A. H ARRIS, I NDIVIDUALLY AND ON
18                     BEHALF OF ALL THOSE SIMILARLY SITUATED,
19
20                           Plaintiffs-Appellees-Cross-Appellants,
21
22                     W ILLIAM W OODWARD, INDIVIDUALLY AND
23                     ON BEHALF OF ALL THOSE SIMILARLY SITUATED,
24
25                           Plaintiff-Appellee,
26
27                                         –v.–
28
29                     C ITIGROUP P ENSION P LAN, P LANS A DMINISTRATION
30                     C OMMITTEE OF C ITIGROUP, I NC., C ITIGROUP, I NC.,
31
32                           Defendants-Appellants-Cross-Appellees.
33
34
35
36
37
38
39
40
41
 1   Before:   J ACOBS, Chief Judge, W ESLEY, Circuit Judge, and
 2             C ROTTY, * District Judge.
 3
 4        Appeal from an order of the United States District
 5   Court for the Southern District of New York (Scheindlin,
 6   J.), entered on December 11, 2006, granting partial summary
 7   judgment to Plaintiffs.
 8
 9                               R EVERSED.
10
11
12
13             E DGAR P AUK, Law Office of Edgar Pauk, Esq.,
14                    Brooklyn, New York, and Brad Nelson Friedman,
15                    Milberg LLP, New York, New York, for
16                    Plaintiffs-Appellees-Cross-Appellants.
17
18             D EREK W. L OESER, Keller Rohrback LLP, Seattle,
19                    Washington, for Plaintiff-Appellee.
20
21             M YRON D. R UMELD, Proskauer Rose LLP, New York, New
22                    York; L EWIS R. C LAYTON, Paul, Weiss, Rifkind,
23                    Wharton & Garrison, LLP, New York, New York,
24                    for Defendants-Appellants-Cross-Appellees.
25
26
27
28   W ESLEY, Circuit Judge:

29        Plaintiffs are five present or former employees of

30   either Smith Barney or Citibank, N.A., both of which are

31   divisions of Citigroup, Inc. (“Citigroup”).      Plaintiffs, and

32   the class they represent, allege that the Citibuilder Cash



          *
           The Honorable Paul A. Crotty, United States District
     Judge for the Southern District of New York, sitting by
     designation.

                                     2
 1   Balance Plan (“Plan”) violates the Employee Retirement

 2   Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C.

 3   § 1001 et seq.    Plaintiffs seek injunctive and declaratory

 4   relief as well as monetary damages.

 5        By order dated December 11, 2006, the United States

 6   District Court for the Southern District of New York

 7   (Scheindlin, J.) granted partial summary judgment to

 8   Plaintiffs on various grounds, including: first, that the

 9   Plan violated ERISA’s minimum benefit accrual rules through

10   its use of the “fractional rule”; and second, that Citigroup

11   violated ERISA’s § 204(h) notice requirement.    29 U.S.C. §

12   1054(h). 1   Citigroup challenges those two conclusions.

13   Plaintiffs cross-appeal, raising a number of issues.       On

14   appeal, both parties agree that the district court erred in

15   concluding that the “fractional rule” can never properly be



          1
           The district court also concluded that the structure
     of the Plan violated ERISA’s age discrimination rules.
     However, subsequent to the district court’s opinion in this
     case, a panel of this court held that “cash balance . . .
     plans do not by definition violate ERISA’s prohibition
     against age-based reductions in the rate of benefit
     accrual.” Hirt v. Equitable Ret. Plan for Employees,
     Managers & Agents, 533 F.3d 102, 110 (2d Cir. 2008). The
     age discrimination count, therefore, is not part of this
     appeal.

                                     3
 1   applied to cash balance plans, such as Citigroup’s Plan.

 2   Because we find that Citigroup’s Plan does not violate

 3   ERISA’s minimum benefit accrual rules, and that Citigroup

 4   did not violate ERISA’s § 204(h) notice requirements, we

 5   reverse.

 6   I.   B ACKGROUND

 7        A.    ERISA Benefit Plans Generally

 8        ERISA recognizes two basic types of retirement plans:

 9   defined contribution plans and defined benefit plans.           Hirt

10   v. Equitable Ret. Plan for Employees, Managers & Agents, 533

11   F.3d 102, 104 (2d Cir. 2008).          Defined contribution plans,

12   also known as individual account plans, “guarantee only that

13   the employer will contribute [a certain amount] to the

14   [employee’s retirement] account,” without providing any

15   guarantee as to that account’s value upon the employee’s

16   retirement.        Id. at 105; see also 29 U.S.C. § 1002(34).     A

17   defined contribution plan is a “pension plan which provides

18   for an individual account for each participant and for

19   benefits based solely upon the amount contributed to the

20   participant’s account, and any income, expenses, gains and




                                        4
 1   losses.”       29 U.S.C. § 1002(34). 2    Both the employee and the

 2   employer may contribute to a defined contribution plan, but

 3   the employer’s contribution is fixed.           Hughes Aircraft Co.

 4   v. Jacobson, 525 U.S. 432, 439 (1999).

 5          Defined benefit plans “generally guarantee [employees]

 6   a specific benefit [upon retirement] without regard to how

 7   the market performs.”       Hirt, 533 F.3d at 105; see also 29

 8   U.S.C. § 1002(35).       In contrast to a defined contribution

 9   plan, a defined benefit plan “consists of a general pool of

10   assets rather than individual dedicated accounts.”            Hughes

11   Aircraft Co., 525 U.S. at 439.           The pool of assets “may be

12   funded by employer or employee contributions, or a

13   combination of both.”       Id.   In a defined benefit plan, “no

14   plan member has a claim to any particular asset that

15   composes a part of the plan’s general asset pool.”            Id. at

16   440.       Rather, members have a right to a defined level of

17   benefits, known as accrued benefits.           Id.   In a defined

18   benefit plan, an accrued benefit is “expressed in the form

19   of an annual benefit commencing at normal retirement age.”



            2
           A 401(k) plan is a common defined contribution plan.
     See Hirt, 533 F.3d at 104; see also 29 U.S.C. § 1002(34).

                                        5
 1   29 U.S.C. § 1002(23)(A).     Whereas, in a defined contribution

 2   plan, the accrued benefit is understood as “the balance of

 3   the individual’s account.”     29 U.S.C. § 1002(23)(B).

 4          Defined contribution and defined benefit plans

 5   primarily “differ in who bears the risk of investment

 6   performance.”    Hirt, 533 F.3d at 105.   In a defined

 7   contribution plan, the employee bears the risks, while in a

 8   defined benefit plan, “the employer typically bears the

 9   entire investment risk.”     Hughes Aircraft Co., 525 U.S. at

10   439.    In a defined benefit plan, the employer is obligated

11   to “cover any underfunding as the result of a shortfall that

12   may occur from the plan’s investments.”     Id.    And, if a

13   defined benefit plan is overfunded, the employer “may reduce

14   or suspend [its] contributions.”     Id. at 440.

15          Within the context of these two types of retirement

16   plans, employers have developed a relatively new kind of

17   plan called a “cash balance plan.”     Hirt, 533 F.3d at 105.

18   The cash balance plan is “intended to combine attributes of

19   both defined contribution and defined benefit plans.”          Id.

20   “[C]ash balance plans are often described as ‘hybrid’: they

21   create a benefit structure that simulates that of defined


                                     6
 1   contribution plans, but employers do not deposit funds in

 2   actual individual accounts, and employers, not employees,

 3   bear the market risks.”   Id.     Cash balance plans are

 4   considered defined benefit plans under ERISA because the

 5   accounts are hypothetical in nature and the employee

 6   receives a specified lump-sum payout upon retirement.      Esden

 7   v. Bank of Boston, 229 F.3d 154, 158 (2d Cir. 2000); see

 8   also 29 U.S.C. § 1002(35).      As a result of this

 9   classification, the term “accrued benefit” in a cash balance

10   plan is “expressed in the form of an annual benefit

11   commencing at normal retirement age.”      Esden, 229 F.3d at

12   163 (quoting 29 U.S.C. § 1002(23)(A)). 3

13       When an employer establishes a cash balance plan, an

14   account is created in the name of each participant to keep

15   track of his or her accrued benefits.      Bilello v. JPMorgan


         3
           In 2006, Congress enacted the Pension Protection Act
     (“PPA”), which amended ERISA to allow specifically for cash
     balance defined benefit plans. Pub. L. No. 109-280, §
     701(a)(1), 120 Stat. 780, 981 (2006). The amendment applies
     to periods commencing on or after June 29, 2005. Id.; §
     701(e)(1), 120 Stat. at 991. Because Plaintiffs’ challenge
     to the Citibuilder Cash Balance Plan concerns a period prior
     to the PPA’s effective date, the terms of the PPA are not
     implicated by this appeal. In any event, as we have held,
     “[e]ven prior to the PPA, cash balance plans could survive
     scrutiny under ERISA.” Hirt, 533 F.3d at 104.

                                      7
 1   Chase Ret. Plan, — F. Supp. 2d —, No. 07-cv-7379 (DLC), 2009

 2   WL 2461005, at *1 (S.D.N.Y. Aug. 12, 2009).      In a cash

 3   balance plan, the account contains “pay credits,” which

 4   “represent[] a percentage of the participant’s salary that

 5   is periodically deposited into the account, as well as

 6   ‘interest credits,’ which apply a common interest rate to

 7   the account balances.”    Id.    Pay credits only accumulate

 8   until the termination of the participant’s employment, but

 9   interest credits continue to accrue until the benefits are

10   distributed.   Id.   In a cash balance plan, the employer may

11   offer the employee the option of a lump sum payout instead

12   of an annuity; however, “any such payout must be worth at

13   least as much, in present terms, as the annuity payable at

14   normal retirement age.”    Id.

15       Proponents of cash balance pension plans assert that

16   this “hybrid” structure is beneficial for employees because

17   it is easier for them to understand, it allows for greater

18   portability, it establishes a system whereby benefits accrue

19   more evenly over an employee’s career, and it is

20   “therefore[] better suited to the increased job-mobility of

21   contemporary labor markets.”      Esden, 229 F.3d at 158 n.5.


                                      8
 1       Advocates of cash balance plans also maintain that they

 2   benefit employers.     They suggest that “because employees

 3   better appreciate the value of their pension rights, the

 4   employer’s fringe benefit dollar has greater impact.”        Id.

 5   They also argue that a cash balance plan “retains the

 6   funding advantages of a defined benefit plan” for the

 7   employer.    Id.   Specifically, “actual contributions are made

 8   to a single trust fund, based on actuarial assumptions;

 9   therefore . . . the employer retains funding flexibility as

10   long as the solvency of the plan is maintained;” and

11   investment returns that exceed “the promised interest

12   credits (as well as forfeitures of the non-vested benefits

13   of any terminated participants)” are retained by the

14   employer.    Id.   Almost one-third of all single-employer

15   defined benefit plan participants — approximately ten

16   million workers — are covered by cash balance plans, or

17   other similar hybrid plans.

18               B.   The Citigroup Plan
19
20       In 1998, Citicorp merged with Travelers Corporation.

21   Authority to amend Citibank’s pension plan was vested in the

22   plan sponsor, Citigroup, by action of its Board of


                                     9
 1   Directors.     In 1999, at a meeting of the Board of Directors,

 2   Citigroup converted its traditional, final pay pension

 3   formula into a cash balance plan.     The Citigroup Board

 4   adopted a series of resolutions in October of 1999

 5   incorporating the cash balance design into the Plan.        The

 6   conversion had an effective date of January 1, 2000.

 7       In May of 2001, the provisions of the newly adopted

 8   cash balance plan were set forth in Plan Article 4.1.        Under

 9   the Plan, Citigroup created a hypothetical account for each

10   participating employee, and then “credited” each account

11   with two kinds of “deposits” — Benefit Credits and Interest

12   Credits.     Benefit Credits were awarded to participants as a

13   percentage of that year’s total compensation.     Under the

14   Plan’s formula, Benefit Credits increased with age and years

15   of service, ranging from two percent for participants under

16   age twenty-five in their first ten years of service, to

17   seven percent for participants fifty years or older with

18   fifteen or more years of service.     Interest credited to the

19   account was awarded based on an extrinsic index rate — the

20   thirty-year Treasury rate.     At retirement, participants

21   would be entitled to a lump sum payout based on the



                                     10
 1   accumulated value of their accounts, or to an actuarially

 2   equivalent pension.

 3       Although the provisions of the amendments were not set

 4   forth in an executed Citibuilder Retirement Plan document

 5   until May of 2001, in the months leading up to the effective

 6   date Citigroup sent out a number of brochures and pamphlets

 7   concerning the changes to the structure of the benefit plan.

 8   Pursuant to ERISA § 204(h), official notice of the amendment

 9   was given to all Plan participants in a letter from Tim

10   Peach, Director of Retirement Benefits, dated December 9,

11   1999.   The letter was entitled: “The Citigroup Pension Plan

12   Notice of Significant Reduction in Benefit Accruals for

13   Certain Employees of Citigroup Inc. and its Subsidiaries”

14   (the “1999 Notice”).

15       The 1999 Notice contained a general summary of how the

16   new cash balance plan would work, as well as a table listing

17   the percentages of salaries credited to accounts annually,

18   as determined by an employee’s age and years of service.

19   The cover letter referenced ERISA § 204(h) and explained

20   that, due to the forthcoming amendments to the pension plan,

21   it was “likely that some employees would see some level of



                                   11
 1   reduction in total accumulations in the future.”     The

 2   documentation accompanying the letter, distributed to each

 3   affected employee, also outlined the mechanisms of a cash

 4   balance plan.   It explained that under the Plan as amended,

 5   the “company credits a percentage of your total compensation

 6   each year to a hypothetical account.   That percentage

 7   generally increases with your age and service.”     The 1999

 8   Notice also explained that “the hypothetical account earns

 9   interest credits at a rate based on 30-year Treasury bonds.”

10   The 1999 Notice did not, however, indicate the formula that

11   the Plan would apply in order to achieve compliance with

12   statutory accrual principles.

13       The Plan was again amended, effective January 1, 2002.

14   This amendment incorporated the same cash balance regime

15   adopted in 2000, but recalibrated the range of Benefit

16   Credits allotted annually to employees’ accounts.     Pursuant

17   to this amendment, Benefit Credits ranged from one and one-

18   half percent for participants under age twenty-nine in their

19   first five years of service, to six percent for those fifty-

20   five or older with fifteen or more years of service.

21   Citigroup employed a notification process similar to the



                                     12
 1   process it utilized in 1999.     Pursuant to ERISA § 204(h), an

 2   information package dated December 2001 was sent to Plan

 3   participants informing them of the amendment.        As with the

 4   1999 Notice, there was no mention of the means by which the

 5   Plan would ensure compliance with ERISA’s accrual

 6   requirements.

 7            C.     The Minimum Benefit Accrual Tests

 8       Cash balance plans, such as the Citibuilder Plan, are

 9   defined benefit plans within the meaning of ERISA because

10   they guarantee a prescribed level of retirement benefits.

11   Esden, 229 F.3d at 158; see also 29 U.S.C. § 1002(35).           All

12   defined benefit plans must comply with ERISA’s minimum

13   benefit accrual rules, which are primarily designed to

14   minimize “backloading.”     Langman v. Laub, 328 F.3d 68, 71

15   (2d Cir. 2003); H.R. Rep. No. 93-807 (1974), reprinted in

16   1974 U.S.C.C.A.N. 4639, 4688.        Backloading occurs when a

17   plan awards a covered employee disproportionately higher

18   benefit accruals for later years of service.        Langman, 328

19   F.3d at 71.     Thus, while ERISA does not require pension

20   plans to pay out any specific dollar amount, it does

21   regulate the rate at which benefits accrue.        29 U.S.C. §


                                     13
 1   1054(b)(1); see Cent. Laborers’ Pension Fund v. Heinz, 541

 2   U.S. 739, 743 (2004).    Toward that end, ERISA sets forth

 3   three alternative minimum benefit accrual tests; pension

 4   plans are required to pass one.        29 U.S.C. § 1054(b)(1)(A)-

 5   (C).    Two of these tests are implicated by this appeal: the

 6   133 1/3 test and the fractional test.

 7          Under the 133 1/3 test, the rate of benefit accrual in

 8   any future year may not be more than one-third greater than

 9   the rate in the current year.        29 U.S.C. § 1054(b)(1)(B).

10   This test prevents “backloading” by cabining fluctuation in

11   accrual rates.    As the Supreme Court explained, the 133 1/3

12   test “permits the use of any accrual formula as long as the

13   accrual rate for a given year of service does not vary

14   beyond a specified percentage from the accrual rate of any

15   other year under the plan.”     Alessi v. Raybestos-Manhattan,

16   Inc., 451 U.S. 504, 514 n.9 (1981).

17          The fractional test “is essentially a pro rata rule

18   under which in any given year, the employee’s accrued

19   benefit is proportionate to the number of years of service

20   as compared with the number of total years of service

21   appropriate to the normal retirement age.”        Id; see also 29



                                     14
 1   U.S.C. § 1054(b)(1)(C).       In other words, this test uses a

 2   fractional calculation based on years of service to ensure

 3   that benefits accrue at a rate that approximates the

 4   prorated amount of the total benefits that the employee

 5   would receive if he or she worked until normal retirement

 6   age.       One unique feature of the fractional test formula is

 7   that it uses the employee’s current compensation rate to

 8   project the total benefits available at retirement.       This

 9   means that the formula assumes no salary increases for the

10   employee.

11          Article 4.1(e) of the Citibuilder Plan sets forth its

12   mechanism for compliance with ERISA’s minimum accrual

13   standards. 4     Although the percentage of compensation that

14   Citigroup contributes to participants’ accounts increases by

15   more than one third, based on increasing age and service

16   years, “the Plan may still qualify under the 133 1/3 percent

17   test because of the value of the interest credits compounded

18   annually through normal retirement age.”       Esden, 229 F.3d at


            4
           The full text of Article 4.1 is set out in the
     district court’s opinion. In re Citigroup Pension Plan
     ERISA Litig., 470 F. Supp. 2d 323, 329-30 (S.D.N.Y. 2006)
     (“Citigroup I”).


                                       15
 1   167 n.18.   Compliance with the 133 1/3 percent rule depends

 2   upon the balance between Benefit Credits, which increase

 3   with age, and Interest Credits, which decrease with age.

 4   Compliance is also contingent upon the variable interest

 5   rate remaining sufficiently high to counterbalance the

 6   increase in Benefit Credits with the decrease in Interest

 7   Credits.

 8       In order to ensure compliance, regardless of

 9   fluctuations in the interest rate, Citigroup’s Plan provides

10   that when the rate of accrual does not satisfy the 133 1/3

11   test, participants’ accounts will be made to comply with the

12   fractional rule of accrual upon the termination of the

13   period of employment.   If the variable interest rate falls

14   to a level at which compliance with the 133 1/3 test is not

15   possible, Citigroup will calculate the minimum account

16   requirements pursuant to Article 4.1(e) and then add the

17   difference to the participants’ accounts.     Under the

18   interest rates in effect in 2000 and 2001, the Plan was in

19   compliance with the 133 1/3 test, and neither Article 4.1(e)

20   nor the fractional test was implicated.     However, beginning

21   in 2002, a change in the interest rate brought the Plan out



                                   16
 1   of compliance with the 133 1/3 test for some participants.

 2   Article 4.1(e) was invoked with respect to the affected

 3   participants in order to bring the Plan into compliance with

 4   ERISA’s minimum accrual rules.

 5            D.   ERISA’s Notice Requirement

 6       In order to safeguard benefits promised to employees

 7   and to ensure that employees can form realistic expectations

 8   about the benefits that they will receive, ERISA prohibits

 9   employers from reducing the accrual of future benefits

10   without adequate notice to plan participants.     See Frommert

11   v. Conkright, 433 F.3d 254, 263 (2d Cir. 2006).     At all

12   times relevant to the amendments at issue on this appeal,

13   ERISA § 204(h) provided that a pension plan:

14            may not be amended so as to provide for a
15            significant reduction in the rate of future
16            benefit accrual, unless, after adoption of
17            the plan amendment and not less than 15
18            days before the effective date of the plan
19            amendment, the plan administrator provides
20            a written notice, setting forth the plan
21            amendment and its effective date, to . . .
22            each participant in the plan.
23
24   29 U.S.C. § 1054(h). 5


         5
           The statute was subsequently amended, but it is this
     version that controls in this appeal. See Pub. L. No. 107-
     16, § 659(b), 115 Stat. 38, 139-41 (2001).

                                  17
 1         Guidelines promulgated by the Internal Revenue Service

 2   (“IRS”) clarify that notice is required when an amendment is

 3   “reasonably expected to change the amount of the future

 4   annual benefit commencing at normal retirement age.”            Notice

 5   of Significant Reduction in the Rate of Future Benefit

 6   Accrual, 63 Fed. Reg. 68,678, 68,680 (Dec. 14, 1998)

 7   (codified at 26 C.F.R. pts. 1, 602).            Whether an amendment

 8   creates a “significant reduction” in accrual rates is

 9   determined “based on reasonable expectations taking into

10   account the relevant facts and circumstances at the time the

11   amendment is adopted.”         Id. at 68,681.     According to the IRS

12   guidelines, notices may contain “a summary of the amendment,

13   rather than the text of the amendment, if the summary is

14   written in a manner calculated to be understood by the

15   average plan participant.”           Id. at 68,682; see also Register

16   v. PNC Fin. Servs. Group, Inc., 477 F.3d 56, 72 (3d Cir.

17   2007).

18   II.   P ROCEEDINGS IN THE D ISTRICT C OURT

19         Plaintiffs filed consolidated actions on behalf of

20   themselves and a class of similarly situated individuals

21   against Citigroup and its Plan’s Administration Committee,


                                           18
 1   alleging that the Citibuilder Plan violates ERISA.     In re

 2   Citigroup Pension Plan ERISA Litig., 470 F. Supp. 2d 323,

 3   326 (S.D.N.Y. 2006) (“Citigroup I”).   Plaintiffs seek

 4   injunctive and declaratory relief as well as monetary

 5   damages.   Plaintiffs allege, among other things, that the

 6   Plan is impermissibly backloaded due to insufficient

 7   Interest Credits; that the Plan’s fractional test method of

 8   computing accrued benefits is precluded under ERISA; and

 9   that Defendants failed to provide Plan participants with

10   adequate notice that the 2000 and 2002 cash balance

11   amendments would reduce the rate of future benefit accrual.

12   Id. at 326-27.

13       On December 12, 2006, on cross-motions for summary

14   judgment, the district court denied Defendants’ motion for

15   summary judgment and granted Plaintiffs’ motion in part.

16   Id. at 327.   The court ruled, in relevant part, that, as a

17   matter of law, the Plan violated ERISA’s minimum benefit

18   accrual rules, 29 U.S.C. § 1054(b)(1)(A)-(C); and, that the

19   Plan violated ERISA’s requirement that Plan administrators

20   provide advance notice of significant reductions in the rate

21   of future benefit accrual, as set out in 29 U.S.C. §


                                   19
 1   1054(h).     Id. at 337-40.

 2       The district court concluded that “[b]y its very terms,

 3   the fractional rule may only be applied to participants with

 4   ten or fewer years of service,” and that “the only

 5   applicable accrual test is the 133 1/3 rule” because

 6   Citigroup utilizes a “career average plan.”     Id. at 337.

 7   The court went on to opine that the “Citigroup formula . . .

 8   contravenes the well-acknowledged purpose of the mandatory

 9   accrual tests, which is to prevent the backloading of

10   benefits.”     Id. at 337-38.

11       With respect to the § 204(h) notices provided by

12   Citigroup, the district court found that they “omitted any

13   mention of the benefit formula’s unorthodox approach to

14   calculating benefits and monitoring accrual rates,” and that

15   “defendants’ failure to either include or summarize Article

16   4.1(e) in the notices violated § 204(h).”     Id. at 339.     The

17   district court found that the notice provided was

18   “substantively inadequate,” and rejected Defendants’

19   argument that the notice claims should be “dismissed for

20   plaintiffs’ failure to show that they suffered any

21   prejudice.”     Id. at 339-40 & n.88.


                                     20
 1       By Opinion and Order dated December 19, 2006, the

 2   district court certified a class of plaintiffs consisting of

 3   all individuals who were participants in the Plan at any

 4   time on or after January 1, 2000, their beneficiaries and

 5   estates, and those who are currently subject to the Plan’s

 6   cash balance formula under ERISA.   In re Citigroup Pension

 7   Plan ERISA Litig., 241 F.R.D. 172 (S.D.N.Y. 2006).

 8       On April 4, 2007, the district court clarified its

 9   summary judgment ruling with respect to its finding that

10   Defendants had provided inadequate § 204(h) notice.     In re

11   Citigroup Pension Plan ERISA Litig., No. 05-cv-5296 (SAS),

12   2007 WL 1074912 (S.D.N.Y. Apr. 4, 2007) (“Citigroup II”).

13   The court concluded that application of the fractional test

14   under the Citigroup Plan was a “deliberate end-run around

15   statutory guidelines that effectively kept the Plan’s

16   accrual rates below the minimum prescribed by Congress.”

17   Id. at *3.   The court held that “[i]nsofar as [its] ruling

18   [of December 12, 2006] suggests that the § 204(h) notices

19   were required to describe how the amendments were going to

20   reduce rates of benefit accrual, their lack of detail was of

21   secondary importance to their material omission of an


                                   21
 1   unorthodox yet vital component of the Plan’s formula.”       Id.

 2   at *4.   The court stated “that had the notices merely

 3   identified the Plan’s novel compliance mechanism, those few

 4   words would likely have been adequate.”     Id.   However,

 5   because the notice omitted this information, the court’s

 6   prior conclusion that it was defective remained unchanged.

 7   Id.   On appeal, Plaintiffs contend that this “clarification”

 8   constitutes an abuse of discretion on the part of the

 9   district court because it prejudiced their notice arguments

10   without an opportunity to be heard.

11         On November 20, 2007, the district court issued a

12   ruling directing Defendants to adjust the Plan formula in a

13   manner that would bring it into full compliance with the 133

14   1/3 minimum benefit accrual test.     In re Citigroup Pension

15   Plan ERISA Litig., No. 05-cv-5296 (SAS), 2007 WL 4205855, at

16   *3 (S.D.N.Y. Nov. 20, 2007) (“Citigroup III”).      The court

17   rejected Plaintiffs’ arguments that further relief was

18   appropriate on the backloading and notice claims. Id.

19         Pursuant to Federal Rule of Civil Procedure 54(b), the

20   district court entered final judgment on the backloading and

21   notice claims, and simultaneously stayed enforcement of that


                                   22
 1   judgment pending this appeal.         Defendants appeal from those

 2   portions of the final judgment that find violations of

 3   ERISA’s minimum benefit accrual and notice provisions.

 4   Plaintiffs thereafter cross-appealed from the final

 5   judgment.

 6   III.        D ISCUSSION6

 7               A.    The Fractional Rule May be Applied to Cash
 8                     Balance Plans
 9
10          The district court concluded that the fractional test

11   can never be applied to career average plans like the cash

12   balance plan at issue in this case.         The court determined

13   that “[b]y its very terms, the fractional rule may only be

14   applied to participants with ten or fewer years of service.”

15   Citigroup I, 470 F. Supp. 2d at 337.         On appeal, both

16   Citigroup and Plaintiffs agree that a fractional test may

17   legally be applied to a cash balance plan without violating

18   ERISA’s minimum benefit accrual rules.         The American


            6
           It is well known that we review a grant of summary
     judgment de novo. State St. Bank & Trust Co. v. Salovaara,
     326 F.3d 130, 135 (2d Cir. 2003). When, as in this case,
     there are no material facts in dispute, this court is
     charged with making a determination as to whether the
     district court properly applied the relevant law. McDonald
     v. Pension Plan of the NYSA-ILA Pension Trust Fund, 320 F.3d
     151, 155 (2d Cir. 2003).

                                      23
 1   Benefits Council, as amicus curiae, joins this position.        In

 2   our view, the position now advanced by all the litigants and

 3   the amicus curiae is the correct interpretation of ERISA.

 4   Contrary to the conclusion of the district court, ERISA §

 5   204(b) provides that all defined benefit plans may use any

 6   of the three minimum accrual tests to comply with anti-

 7   backloading rules.    29 U.S.C. § 1054(b)(1)(A)-(C).

 8        The fractional rule does not, in fact, state that it

 9   may only be applied to participants with ten or fewer years

10   of service. 7   Rather, the rule notes only that in

11   calculating benefits owed, it “tak[es] into account no more

12   than the 10 years of service immediately preceding his

13   separation from service.”    29 U.S.C. § 1054(b)(1)(C).   The

14   provision is an instruction as to how to perform the accrual

15   calculation, not a blanket prohibition on the types of plans

16   that can utilize the fractional rule.    Further, compliance


          7
           Several district courts in other circuits have also
     adopted the district court’s interpretation. See, e.g.,
     Wheeler v. Pension Value Plan for Employees of Boeing Co.,
     No. 06-cv-500 (DRH), 2007 WL 2608875, at *7 (S.D. Ill. Sept.
     6, 2007); Sunder v. U.S. Bank Pension Plan, No. 05-cv-01153
     (ERW), 2007 WL 541595, at *11 (E.D. Mo. Feb. 16, 2007);
     Eaton v. Onan Corp., 117 F. Supp. 2d 812, 843 (S.D. Ind.
     2000). But, for the reasons discussed in this opinion, we
     find it unpersuasive.

                                    24
 1   with the fractional rule is tested “upon [the employee’s]

 2   separation from [the employer’s] service,” not, as the

 3   district court concluded, on a “year-by-year basis.”     26

 4   U.S.C. § 411(b)(1)(C); 29 U.S.C. § 1054(b)(1)(C); Citigroup

 5   I, 470 F. Supp. 2d at 338.

 6       Congress has authorized the IRS to issue binding

 7   regulations under ERISA, and we have noted that these

 8   regulations “represent[] the fair and considered judgment of

 9   the IRS” and are therefore “entitled to deference.”     Esden,

10   229 F.3d at 168; see also Notice of Significant Reduction in

11   the Rate of Future Benefit Accrual, 68 Fed. Reg. 17,277

12   (Apr. 9, 2003) (codified at 26 C.F.R. pts. 1, 54 & 602).      In

13   fact, the IRS “was given primary jurisdiction and rule-

14   making authority over ERISA’s funding, participation,

15   benefit accrual and vesting provisions.”   Esden, 229 F.3d at

16   157 n.2.   Both the IRS regulations and Revenue Ruling 2008-7

17   contain an example of a defined benefit plan tested under

18   the fractional rule where the plan’s benefit formula takes

19   into account more than ten years of employment.   See 26

20   C.F.R. § 1.411(b)-1(b)(3)(iii)(Ex. 2); Rev. Rul. 2008-7,

21   2008-7 I.R.B. 419; see also I.R.S. Notice 96-8, 1996-1 C.B.


                                   25
 1   359 (Jan. 18, 1996) (stating that cash balance plans may

 2   comply by utilizing any one of the three minimum accrual

 3   tests).   Thus, the district court erred in concluding that

 4   application of the fractional test is per se illegal in the

 5   context of cash balance plans.

 6             B.    Application of the Fractional Test to the
 7                   Citibuilder Cash Balance Plan Does Not Violate
 8                   ERISA’s Minimum Benefit Accrual Rules
 9
10       The district court concluded that under ERISA, benefits

11   must accrue in a way so that in any given year, the amount

12   of accrued benefit complies with the fractional rule’s

13   minimum standards.    Article 4.1(e) of the Citibuilder Plan

14   calls for the compliance calculation to occur when benefits

15   are paid out.    If, on the determination date, the amount of

16   accrued benefit does not meet the fractional test, Citigroup

17   adds money to the account to bring it into compliance with

18   the minimum accrual requirements.     Plaintiffs argue that

19   this amounts to impermissible backloading.     The district

20   court characterized Article 4.1(e) as “unorthodox,” and

21   agreed with Plaintiffs that it was a “novel end-run around

22   ERISA’s minimum accrual standards.”     Citigroup I, 470 F.

23   Supp. 2d at 337-38.    We disagree; the text of ERISA dictates


                                    26
 1   a different result.

 2       The provision governing the fractional rule states that

 3   a defined benefit plan, which includes a cash balance plan,

 4   “satisfies the requirements of this paragraph if the accrued

 5   benefit to which any participant is entitled upon his

 6   separation from the service is not less than a fraction of

 7   the annual benefit commencing at normal retirement age to

 8   which he would be entitled under the plan as in effect on

 9   the date of his separation.”     29 U.S.C. § 1054(b)(1)(C)

10   (emphasis added).     Thus, by its own language, the fractional

11   rule indicates that the relevant calculations are to be made

12   at the time of separation.

13       The statute’s plain language is in accord with the

14   purpose of the minimum benefit accrual rules.     Minimum

15   benefit accrual rules under ERISA are designed to prevent

16   participants who leave their employment before normal

17   retirement age from receiving benefits that are

18   disproportionately low relative to benefits they would have

19   received if they had continued to work until normal

20   retirement age.     See, e.g., Langman, 328 F.3d at 71; Hurlic

21   v. S. Cal. Gas Co., 539 F.3d 1024, 1033 (9th Cir. 2008).



                                     27
 1   The fractional test employed by Article 4.1(e) accomplishes

 2   this statutory objective by guaranteeing departing employees

 3   a benefit proportional (based upon years of service) to the

 4   benefit they would have received had they worked until

 5   normal retirement age.   Under this test, adjustments are

 6   made to departure-time benefits to ensure that the

 7   participant is not penalized for leaving prior to normal

 8   retirement age.   The rate of benefit accrual during a

 9   participant’s employment is unimportant under this test, as

10   long as proportional benefits are paid at the time of

11   departure.

12       Revenue Ruling 2008-7 is instructive in the case at

13   bar; it provides an example in which it first tests the plan

14   using the 133 1/3 percent method and finds it satisfied for

15   some, but not for all, participants.          Rev. Rul. 2008-7.   The

16   example provided by the Revenue Ruling then applies the

17   fractional rule to those participants for whom the plan did

18   not satisfy the 133 1/3 test.        Id.    The Ruling specifically

19   states that this is “not a classification that is structured

20   to evade the accrued benefit requirements of § 411(b)(1)(A),

21   (B), and (C) or § 1.411(b)-1.”        Id.    Again, this court has



                                     28
 1   noted that “[r]evenue rulings issued by the I.R.S. are

 2   entitled to great deference, and have been said to have the

 3   force of legal precedent unless unreasonable or inconsistent

 4   with the provisions of the Internal Revenue Code.”

 5   Gillespie v. United States, 23 F.3d 36, 39 (2d Cir. 1994)

 6   (quotation marks omitted).       Here, the Revenue Ruling

 7   provides a reasonable interpretation of the statutory

 8   language.    Therefore, we hold that Article 4.1(e)’s

 9   application of the fractional test at the time of separation

10   from employment is proper, and that it achieves the purposes

11   of ERISA’s minimum benefit accrual rules.

12               C.    Citigroup Complied with ERISA’s § 204(h)
13                     Notice Requirements
14
15       In its original opinion, the district court incorrectly

16   reasoned that because the notices given by Citigroup

17   “omitted any mention of the benefit formula’s unorthodox

18   approach to calculating benefits and monitoring accrual

19   rates,” and because the court ultimately concluded that the

20   formula violated ERISA, “defendants’ failure to either

21   include or summarize Article 4.1(e) in the notices violated

22   § 204(h).”       Citigroup I, 470 F. Supp. 2d at 339.

23   Essentially, the district court converted a perceived

                                       29
 1   substantive defect in the Plan into a basis for finding that

 2   the notice given was defective.     The district court

 3   recognized this error and attempted to cure it in its

 4   Memorandum Opinion and Order of April 4, 2007.        The court

 5   suggested “that had the notices merely identified the Plan’s

 6   novel compliance mechanism,” and presumably alerted the

 7   participants to the existence of Article 4.1(e), they would

 8   have been sufficient.   Citigroup II, 2007 WL 1074912, at *4.

 9   But, because the notice did not provide participants with

10   this information, the lower court still found that it failed

11   to comply with ERISA § 204(h).     Id.     We disagree with both

12   of the district court’s formulations of ERISA’s § 204(h)

13   notice requirements, and find that the Citibuilder Plan

14   Administrator complied with ERISA § 204(h).

15       As an initial matter, we reject Citigroup’s argument

16   that Plaintiffs lack standing to maintain a notice claim

17   under § 204(h).   The cases Citigroup cites for this

18   contention are inapposite; they discuss ability to maintain

19   a claim pertaining to the statutory requirement to provide a

20   Summary Plan Description (“SPD”).        See, e.g., Weinreb v.

21   Hosp. for Joint Diseases Orthopaedic Inst., 404 F.3d 167,



                                   30
 1   170 (2d Cir. 2005) (citing 29 U.S.C. §§ 1021(a), 1022(a)-

 2   (b), and 1024(b)).     ERISA specifically sets out the

 3   information that must be contained in a SPD.     29 U.S.C. §

 4   1022(b).     “Among other things, [the] SPD must set out the

 5   ‘circumstances which may result in disqualification,

 6   ineligibility, or denial or loss of benefits.’”     Wilkins v.

 7   Mason Tenders Dist. Council Pension Fund, 445 F.3d 572, 580-

 8   81 (2d Cir. 2006) (quoting 29 U.S.C. § 1022(b)).     This

 9   circuit has held that to prevail on a claim alleging that a

10   SPD provided deficient notice, a plaintiff must show that he

11   or she was “likely to have been harmed,” or prejudiced.

12   Burke v. Kodak Ret. Income Plan, 336 F.3d 103, 113 (2d Cir.

13   2003).     To apply this “likely prejudice” standard in this

14   case would be to conflate the requirements for bringing a

15   claim challenging the sufficiency of a SPD under 29 U.S.C. §

16   1024(b) with those governing the provision of notice under

17   29 U.S.C. § 1054(h).     See Burke, 336 F.3d at 113-14.

18       Notice of an amendment to a pension plan “need not

19   contain an exact quotation of the text of the amendment, but

20   may contain ‘a summary of the amendment . . . if the summary

21   is written in a manner calculated to be understood by the



                                     31
 1   average plan participant and contains the effective date.’”

 2   Register, 477 F.3d at 72 (quoting Scott v. Admin. Comm. of

 3   the Allstate Agents Pension Plan, 113 F.3d 1193, 1200 (11th

 4   Cir. 1997) (quoting 26 C.F.R. § 1411(d)-6T (1996))). 8    The

 5   notices distributed by Citigroup to all Plan participants

 6   properly provided a general summary of how the cash balance

 7   plan would function.   See Osberg v. Footlocker, Inc. &

 8   Footlocker Ret. Plan, – F. Supp. 2d –, No. 07-cv-1358 (DAB),

 9   2009 WL 2971834, at *9 (S.D.N.Y. Sept. 16, 2009) (discussing

10   applicable version of ERISA § 204 and concluding that it

11   “required the disclosure of only the amendment and its

12   effective date, and did not seek to regulate the content of

13   the communication any further”).

14       ERISA does not require that notice pursuant to § 204(h)

15   include a description of how the plan will comply with

16   minimum benefit accrual rules.     The Citigroup 1999 and 2001



         8
           Congress amended ERISA in 2002 to provide that an
     amendment must “be written in a manner calculated to be
     understood by the average plan participant and shall provide
     sufficient information . . . to allow applicable individuals
     to understand the effect of the plan amendment.” 29 U.S.C.
     § 1054(h)(2). We express no view on whether notice given by
     Citigroup would satisfy current law. Rather, we analyze the
     law in effect at the time relevant to Plaintiffs’ challenge.

                                   32
 1   Notices properly alerted Plan participants that the

 2   amendments could result in a reduction in rates of benefit

 3   accrual.     The Notices also made disclosures regarding the

 4   Benefit Credit formula and Plan interest rate, which

 5   permitted participants to compare this formula to their

 6   prior benefits formula.     Section 204(h) only requires notice

 7   of plan amendments that “provide for a significant reduction

 8   in the rate of future benefit accrual.”     29 U.S.C. 1054(h).

 9   Article 4.1(e) does not, in and of itself, reduce

10   participants’ benefits.     Rather, it increases benefits when

11   necessary to ensure compliance with ERISA’s minimum accrual

12   rules.     The participants had proper notice that the

13   conversion to a cash balance plan could have the effect of a

14   reduction of rates of benefit accrual.     The 1999 and 2001

15   Notices complied with the requirements of ERISA § 204(h).

16   IV.   C ONCLUSION

17         Based on the foregoing analysis, the district court’s

18   order of December 11, 2006, granting partial summary

19   judgment to Plaintiffs, is hereby REVERSED and the complaint

20   is DISMISSED.




                                     33
