No partial termination of plan.

• Author: Cvach, Gary Q.
• Position: Employee benefit 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...