Pa. Court Sets Employer Burden of Proof for Pension Offsets

Saturday, December 16, 2006 | 0

By Daniel V. DiLoretto

When the General Assembly amended Section 204(a) of the Pennsylvania Workers' Compensation Act, the intent was to reduce the escalating costs of workers' compensation by allowing employers an offset against workers' compensation benefits for Social Security, severance packages and pension plans simultaneously received by injured workers.

Section 204(a) was also intended to prevent double recoveries by injured workers for benefit plans funded in some measure by their employers. In response to the 1996 reforms, the Bureau of Workers' Compensation promulgated a series of regulations to establish the framework and methodology for calculating employer benefit offsets. Some of these provisions are simple to follow, while others are quite complex. One such methodology addresses the amount of an offset against employer-funded pension plans.

In a sense, there are four basic pension plans that generally come to mind in workers' compensation matters. There is a fully funded, noncontributory pension plan in which the payments received by an injured worker are solely financed by the employer. In this case, the amount of the employer's offset is calculated by determining the weekly amount of the pension payment and subtracting it from the claimant's wage loss benefits.

Noncontributory pension plans are rapidly becoming a rare breed in today's economy, and are being replaced by defined-contribution plans. The most recognizable defined-contribution plan is the 401(k) plan where separate accounts are established by the employer or fund administrator for each employee into which both the employee and employer make contributions. Upon retirement, the accumulated contributions and earnings by the employer and employee determine the amount of the employee's benefit either in a lump-sum payment or annuity.

The employer's offset is determined by the percentage of their contributions into the investment vehicles (cash, stocks, bonds and mutual funds) selected by the employee. Since the price history of these investment vehicles can be easily tracked, the amount of the employer's contributions and earnings can be quickly calculated to determine the offset against the claimant's wage loss benefits.

The remaining two pension plans, however, are not so simple to determine. Multi-employer pensions are most common in trade union health and welfare plans where members may work with several employers over the course of their careers. Under such plans, the employer liable for workers' compensation benefits can only avail itself of an offset to the amount which they directly contributed into funding claimant's annuity, and then only as determined by the pension fund's actuary.

In some cases the actual percentage of the liable employer's contribution is so minimal that it's not worth considering an offset, and the corresponding burden of proof can be challenging. The remaining plan, or the defined benefit plan, is most the common pension within public sector employers, and it is this pension that drew the attention of Commonwealth Court.

In Pennsylvania State University v. WCAB (Hensal), decided Nov. 17, the claimant sustained a compensable injury that was accepted by the university under a notice of compensation payable. The claimant subsequently applied for and received a disability pension through the State Employees' Retirement System (SERS). The university subsequently issued a notice of compensation offset under Section 204(a) of PAWCA, which placed the claimant on notice that his compensation award was subject to an ongoing offset due to his receipt of the disability pension. In response, the claimant filed a petition to review.

In support of the offset, the university presented testimony from the fund's director of benefits determination division and SERS' actuary. After reviewing the testimony, the WCJ found and concluded that while the employer's evidence may be valid, the university failed to meet its burden of proof because the WCJ believed the law required the employer to establish "actual contributions." The appeal board affirmed, as did Commonwealth Court, but later reconsidered its decision to determine whether the WCJ improperly denied the employer's offset. On reconsideration, the Commonwealth Court considered the strength of the employer's evidence in light of their earlier decision in DPW/Polk Center v. WCAB (King).

In King, the court held that testimony from the director of benefits determination alone did not meet the employer's burden of proof because no actuary testified to the employer's contributions by way of actuarial tables. Unlike other pensions, an employee's annuity under the SERS defined benefit plan is fixed and based upon a specific formula which takes into consideration the employee's years of service, final average salary, projected investment returns and mortality projection.

Employers do not make separate contributions into any particular employee pension. Instead, employer contributions are determined by the return on investments maintained by the fund to adequately cover all employee annuities. Accordingly, when investment yields are low, employer contributions are correspondingly high, and visa versa.

In deciding the university's contribution for the claimant, the SERS' actuary took into consideration a growth of 8.5% currently in use by the pension fund. The rate was determined under the 15th investigation of actuarial experience submitted to SERS by the Hay Group. By applying the SERS formula (2% times years of service times final average salary times class multiplier times 12 equals annual annuity) and the present value based upon the claimant's life expectancy, the actuary established value of the claimant's pension over his projected lifetime. From this, he subtracted the claimant's contributions and 8.5% yield from the present value of the annuity to determine employer contributions that, in turn, was used to establish the employer's offset.

The court held that the actuary's testimony (and methodology), if deemed credible by the WCJ, was sufficient to support the offset; and, therefore, distinguished their holding in King.

In a thoughtful dissenting opinion, Judge Doris Smith-Ribner outlined what will probably set the stage for future contests of employer offsets to defined benefit pension plans. The key determinate is an analysis of market yields.

Smith-Ribner observed that while SERS' actuary used a conservative yield of 8.5% to determine employer contributions, actual market returns over a 19-year period from 1984 to 2003 (apparently representing the claimant's years of service with the university prior to retirement) averaged 10.9%. Accordingly, she argued, rather persuasively, that the employer's actual funding of the plan over the corresponding period was less than that calculated by the actuary. Smith-Ribner, therefore, concluded that SERS performed a calculation that results in an "excessively high pension offset to the advantage of the employer and to the disadvantage of the affected employee."

In a companion decision, the Commonwealth Court in DPW/Western Center v. WCAB (Cato), filed Nov. 17, held that credible testimony from the SERS director of benefits determination and its actuary was sufficient to support the employer's offset; and, therefore, reversed a decision from the appeal board which reversed the WCJ's offset of benefits relying upon their earlier decision King, supra. In rendering their decision in Cato, the court did not, in my opinion, endorse the testimony or the methodology of the SERS director or its actuary as the basic standard for establishing employer offsets in all cases involving public sector employees. To the contrary, the court merely reaffirmed the long-standing rule that credibility determinations by the WCJ will not be challenged if supported by substantial, competent evidence.

For claimant and defense practitioners, these cases will present unique challenges, because of the technical nature of determining actuarial funding by employers. For defense practitioners, the goal is to present a persuasive argument that market yields for the present value of pension annuities and from which employer contributions are determined in defined benefit plans are realistic to support a credible finding by the WCJ. For claimant's practitioners the same argument holds true except that the advantage for claimants may depend upon market yields during the tenure of a claimant's employment with the public sector employer.

It should be noted that in Smith-Ribner's dissent, the investment yields over the 19-year period from 1984 through 2003 were, with the exception of a major correction in October 1987, and the "dot-com" crash of 2000, the best during the last half of the 20th century. Whether investments will sustain that level of return over the coming years is difficult to predict. In fact, one of the main criticisms of the Hensel decision was the speculative nature of the evidence, but as the majority pointed out, in an indirect way, the speculative nature of investment yields is no different than the speculative nature of recovery from physical or psychiatric injuries, and that's the stuff of experts.

Daniel V. DiLoretto practices in the workers' compensation law practice area with Harvey Pennington in Philadelphia. He has experience in the defense of workers' compensation litigation, as well as related employment issues such as the Americans with Disabilities Act, and the Family and Medical Leave Act. He can be contacted at ddiloretto@harvpenn.com.

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