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Stepnowski v. Commissioner of Internal Revenue

July 27, 2006

CHARLES P. STEPNOWSKI, APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE; HERCULES INCORPORATED



Appeal from the Decision of the United States Tax Court Docket No. 03-08383 Tax Court Judge: Honorable Mary Ann Cohen.

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued June 8, 2006

Before: AMBRO, FUENTES and NYGAARD, Circuit Judges.

OPINION OF THE COURT

Congress changed the applicable interest rate for the present-value calculation of pension plans' lump-sum payments to retirees. Hercules Inc. later amended its pension plan to match the changed interest rate, but that amendment resulted in a lower lump-sum payment to Charles Stepnowski, who retired several months after the amendment. To determine whether Hercules' amendment was valid, we decide whether the Commissioner of the Internal Revenue Service extended the deadline for this amendment. We hold that the Commissioner did so, and that Hercules' amendment was timely and valid. We therefore affirm.

I. Factual Background and Procedural History

Stepnowski worked at Hercules from 1973 to December 2002. He participated in Hercules' retirement plan, which allows participants to take a lump-sum payment upon retirement. This payment is the present-value equivalent of 51% of the retiree's expected lifetime monthly pension benefits. Pension Plan of Hercules Inc., sched. B., art. VII, § D.1. The present-value amount is calculated using the federally prescribed mortality table and a specified interest rate. Id. § D.4.

Hercules has a defined-benefit plan under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. It was established in 1913 and uses the calendar year as its plan year. Hercules made amendments to the plan in October 2001.*fn1

The amendments to Hercules' plan changed the interest rate used to calculate lump-sum payments. For payments made on or after January 1, 2002, the present-value amount is calculated using the interest rate on 30-year Treasury securities. Pension Plan, sched. B., art. VII, § D.4.a(2). The Treasury rate took the place of the interest rate published by the Pension Benefit Guaranty Corporation (PBGC).*fn2

Interest rates bear an inverse relationship to present-value amounts; a higher interest rate results in a lower present-value payment, and vice versa.*fn3 The Treasury rate has historically been higher than the PBGC rate, so-because he retired after January 2002 (i.e., after the amendment)-Stepnowski's lump-sum payment was lower than it would have been had Hercules kept the PBGC rate.*fn4

In February 2002, Hercules requested a determination from the Commissioner that its pension plan met all of the statutory qualification requirements. In March 2002, Stepnowski sent the Commissioner a letter contending that the amendment precluded the Hercules plan from so qualifying. In March 2003, the Commissioner issued Hercules a favorable determination letter on the plan. Stepnowski then filed a petition in the United States Tax Court for a declaratory judgment that the Hercules plan was not qualified.

The Tax Court held in favor of Hercules and the Commissioner, Stepnowski v. Comm'r, 124 T.C. 198, 220 (2005), and Stepnowski appeals.*fn5

II. Discussion

A. Statutory and Regulatory Background

Section 401(a) of the Internal Revenue Code describes the qualification requirements for pension plans. (Only qualified plans are tax exempt under I.R.C. § 501(a).) One of the requirements in § 401(a) is that, "except as provided in section 417," the plan must pay out a vested participant's accrued benefit "in the form of a qualified joint and survivor annuity." I.R.C. § 401(a)(11)(A). Section 417 allows plan participants to waive these annuity payments in favor of a "cash-out"-that is, a lump-sum payment of the participants' annuity benefits. See id. § 417(a).

Plan participants can therefore choose to take a lump-sum cash-out payment of the present value of their annuity, and § 417(e) governs the determination of that present-value amount. Specifically, § 417(e)(3)(A)(i) provides that the present value of a participant's benefits "shall not be less than the present value ...


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