Lilly v. Oneida Ltd. Employee Benefits Administrative Committee, Case No.6:07-CV-0340 (NPM/GJD) (N.D.N.Y. May 8, 2008)

A recent order by the United States District Court Northern District of New York, Lilly v. Oneida Ltd. Employee Benefits Administrative Committee, Case No.6:07-CV-0340 (NPM/GJD) (N.D.N.Y. May 8, 2008), found that the Oneida participants can continue their claim of fiduciary breach.

The plan in question was a defined benefit plan with a floor-offset ESOP arrangement. The last time you may have heard of this arrangement was with Enron, which ironically was being discussed in this PBGC testimony describing floor-offset ESOP arrangements:

Under the floor-offset arrangement, the benefit computed under the final pay formula was "offset" by the benefit amount the ESOP account could provide. For example, consider a participant who began working for Enron during the years the floor-offset arrangement was in effect. Assume the participant's final pay formula benefit is $600 per month, and the ESOP is able to provide $400 per month at retirement. The participant would receive the ESOP account plus $200 per month from the defined benefit plan ($600 minus the $400 ESOP offset). As this example shows, the participant would receive a combined benefit that was never less than the benefit under the final pay formula ("the floor"). If the ESOP is able to provide more than $600 per month, the participant would receive the entire ESOP account but would not be entitled to a benefit from the defined benefit plan (because the $600 was fully offset by the ESOP)…

Enron's floor-offset arrangement is not common. The Omnibus Budget Reconciliation Act (OBRA) of 1987 generally banned ESOP offset arrangements in which more than 10% of the combined asset values of the defined benefit plan and the ESOP plan are invested in employer securities. However, OBRA contained a "grandfather" provision that permitted ESOP offset arrangements that were already in existence to remain in effect. Enron's floor-offset ESOP arrangement and those of about 150 other companies were permitted under the "grandfather" provision.

The company filed for bankruptcy in 2006 and the PBGC took over the defined benefit plan and argued that the participants would still receive payment by the PBGC and therefore not lose any benefits. The participants argued that the floor-offset ESOP arrangement was a funding mechanism for the DB plan and that they lost rights as a result of the fiduciary breach, including the following:

1. Loss of the right to a lump-sum distribution (and the ability to reinvest the proceeds and earn a potentially higher rate of return)
   
2. Loss of the right to take a distribution without a survivor annuity restriction
   
3. Loss of the opportunity to receive a greater monthly benefit if the ESOP performed well