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The tardy disclosure by Xerox Corp. that it was reducing the benefits of more than 100 employees who left the company but were subsequently rehired has been called a violation of the Employee Retirement Income Security Act (ERISA) by a federal appeals court. The 2d U.S. Circuit Court of Appeals said the way the company implemented a “phantom account” offset, through which the hypothetical growth of an employee’s previous lump-sum retirement benefits payment was factored into his current benefits calculation, “reduced the amount of benefits on which the employees justifiably relied.” The appeal in Frommert v. Conkright, No. 04-4609-cv, was decided by 2d Circuit judges Rosemary Pooler and Robert Sack, with Judge Nicholas Garaufis of New York’s Eastern District sitting by designation. Judge Garaufis wrote the opinion for the court. ‘Phantom accounts’ The plaintiffs were more than 100 Xerox employees who had received lump-sum retirement benefits upon leaving the company and, upon their return, began once again to earn retirement benefits. So that previously retired employees do not receive a windfall in the form of duplicative benefits, the company subjects employees who have previously received a lump-sum distribution to an offset based on so-called “phantom accounts.” The term “phantom” is used because that calculation is dependent upon the hypothetical growth, through investments, of the lump-sum amounts that were paid to the employee when he or she left the company. For instance, according to the decision, when plaintiff Paul Frommert left the company in 1986, after 26 years of service, he received a lump sum of $147,780. After Frommert was rehired in 1989, and phantom investment gains were deducted from his projected pension benefits, he learned that his monthly pension benefit when he retired at age 65 would be only $5.31. This information “came as a shock since I believed the number in the value-added statements year over year.” Frommert and his fellow employees filed suit in the Western District of New York, where Chief Judge David Larimer dismissed some claims in 2002 and ultimately dismissed the remainder of the complaint in 2004. The circuit disagreed, holding that ERISA had been violated. Garaufis said that one of ERISA’s main objectives is protecting employees’ justified expectations on the benefits they will receive.

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