Matsuda v. Cook County Employees' and Officers' Annuity and Benefit Fund

Matsuda v. Cook County Employees & Officers' Annunity and Benefit Fund, No. 808736
(9/18/97)

NOTICE: Under Supreme Court Rule 367 a party has 21 days after the filing of the opinion
to request a rehearing. Also, opinions are subject to modification, correction or withdrawal at
anytime prior to issuance of the mandate by the Clerk of the Court. Therefore, because the
following slip opinion is being made available prior to the Court's final action in this matter,
it cannot be considered the final decision of the Court. The official copy of the following
opinion will be published by the Supreme Court's Reporter of Decisions in the Official
Reports advance sheets following final action by the Court.

Docket No. 80873--Agenda 11--March 1997.
TAKAYOSHI MATSUDA, Appellee, v. THE COOK COUNTY EMPLOYEES' AND
OFFICERS' ANNUITY AND BENEFIT FUND et al., Appellants.
Opinion filed September 18, 1997.

JUSTICE HEIPLE delivered the opinion of the court:
At issue is whether appellants, the Cook County Employees' and Officers' Annuity and
Benefit Fund and the Retirement Board of the County Employees' Annuity and Benefit Fund of
Cook County (hereinafter the Funds), during the period relevant to this dispute, could set up an
excess benefit fund as required by section 1--116 of the Illinois Pension Code (40 ILCS 5/1--116
(West 1996)) without violating section 415 of the Internal Revenue Code (26 U.S.C. sec. 415
(1988)). The trial court held that the Funds could not and granted their combined motion for
summary judgment. The appellate court reversed. 278 Ill. App. 3d 378. For the reasons that
follow, we affirm the appellate court's decision.

BACKGROUND
Appellee, Dr. Takayoshi Matsuda, an employee of Cook County Hospital for 24 years,
retired on May 29, 1993, at age 55. As an employee of Cook County, Dr. Matsuda was a
contributing member of the Annuity and Benefit Fund, an annuity and benefit fund established
and operated under article 9 of the Illinois Pension Code. 40 ILCS 5/9--101 et seq. (West 1992).
On September 16, 1992, the Illinois General Assembly enacted section 9--134.2 of the
Illinois Pension Code to provide early retirement incentives to certain members of the Annuity
and Benefit Fund. Section 9--134.2 specifically provided that a contributing member would
receive a specified increase in his retirement annuity without any reduction in benefits otherwise
caused by retiring below age 60 if that member: (1) filed a written application with the
Retirement Board before May 1, 1993, requesting early retirement benefits; (2) elected to retire
between December 1, 1992, and May 29, 1993; (3) attained the age of 55 on or before the date
of retirement; and (4) provided at least 10 years of service prior to retirement. 40 ILCS 5/9--
134.2 (West 1996).
In November of 1992, the Funds mailed to Dr. Matsuda unsolicited information regarding
the requirements and advantages of the new early retirement incentives, including an estimated
personal benefit statement subject to final audit. On April 30, 1993, Dr. Matsuda, who met all
the necessary requirements, filed an early retirement application stating that he would retire on
May 29, 1993. The Funds subsequently sent Dr. Matsuda an estimated personal benefit statement
dated May 13, 1993, calculating that if Dr. Matsuda took early retirement and made additional
contributions of $60,317.84 his monthly annuity would amount to $9,967.31. On May 26, 1993,
Dr. Matsuda contributed $60,317.84, and three days later he retired.
Several months later, the Funds notified Dr. Matsuda that his monthly annuity would
amount to $7,219.85, substantially lower than the previous estimate of $9,967.31, because of the
limitations set forth in section 415 of the Internal Revenue Code for qualified retirement plans.
26 U.S.C. sec. 415 (1988). On December 23, 1993, Dr. Matsuda filed a complaint against the
Funds in the circuit court of Cook County, alleging, inter alia, that the Funds violated section
1--116 of the Illinois Pension Code by failing to establish an excess benefit fund to pay out his
earned benefits that exceeded any limits set by section 415 of the Internal Revenue Code. The
Funds responded by filing a joint motion for summary judgment in which they asserted that, as
a matter of federal law, they were prohibited from establishing an excess benefit fund. The trial
court granted the Funds' motion for summary judgment. The appellate court reversed and
remanded, holding that section 415 of the Internal Revenue Code did not prohibit the Funds from
setting up an excess benefit fund as required by section 1--116 of the Illinois Pension Code. 278
Ill. App. 3d 378.
Subsequent to this court's granting the Funds' petition for leave to appeal to this court,
Congress amended section 415 of the Internal Revenue Code by adding section 415(m). 26
U.S.C. sec. 415(m) (1997). Both parties agree that section 415(m) of the Internal Revenue Code
permits the Funds to provide Dr. Matsuda with benefits in excess of section 415's limitations.
Moreover, both parties agree that Congress indicated that section 415(m) would apply beginning
January 1, 1995, or 19 months after Dr. Matsuda retired. At issue, then, is whether section 415
prohibited the Funds from establishing an excess benefit fund pursuant to section 1--116 of the
Illinois Pension Code during this interim 19-month period.

ANALYSIS
We commence by noting that interpreting or construing a statute is a matter of law for
the court and appropriate for summary judgment; however, such a drastic measure should be
granted only if the movant's right to judgment is clear and free from doubt. Outboard Marine
Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992). To this end, we conduct a de
novo review. Delaney v. McDonald's Corp., 158 Ill. 2d 465, 467 (1994).
Article 9 of the Illinois Pension Code governs both the Fund and the Retirement Board.
See 40 ILCS 5/9--101 et seq. (West 1992). Section 9--150(3) provides:
"Notwithstanding any other provision of this Article, any benefit payable
under this Article which would otherwise exceed the maximum limitations on
benefits provided by `qualified plans' as set forth in Section 415 of the federal
Internal Revenue Code of 1986, as now or hereafter amended, or any successor
thereto, shall be paid only in accordance with Section 1--116 of this Code." 40
ILCS 5/9--150(3) (West 1992).
Section 1--116 of the Illinois Pension Code, referred to in the above statute, provides as follows:
"Federal benefit limitation.
(a) This Section shall apply only to pension funds and retirement systems
established under Article 2, 7, 8, 9, 11, 13, 14, 15, 16 or 18.
(b) If any benefit payable by a pension fund or retirement system subject
to this Section exceeds the applicable benefit limits set by Section 415 of the U.S.
Internal Revenue Code of 1986 for tax qualified plans under Section 401(a) of that
Code, the excess shall be payable only from an excess benefit fund established
under this Section in accordance with federal law.
(c) An excess benefit fund shall be established by any pension fund or
retirement system subject to this Section that has any member eligible to receive
a benefit that exceeds the applicable benefit limits set by Section 415 of the U.S.
Internal Revenue Code of 1986 for tax qualified plans under Section 401(a) of that
Code. Amounts shall be credited to the excess benefit fund, and payments for
excess benefits made from the excess benefit fund, in a manner consistent with the
applicable federal law." 40 ILCS 5/1--116 (West 1996).
Section 415 of the Internal Revenue Code, referred to in both of the above Illinois statutes, limits
the employer share of Dr. Matsuda's pension benefits to $75,000 per year or $6,250.00 per month
($7,219.85 when the $969.85 employee portion is included). 26 U.S.C. sec. 415(b)(2)(F)(i)(II)
(1988).
We must first attempt to ascertain and give effect to the legislature's intent regarding the
statutes at issue by considering their language, as this affords the best means of deciphering
legislative intent. Balmoral Racing Club, Inc. v. Illinois Racing Board, 151 Ill. 2d 367, 390
(1992). We note, however, that the language of Illinois' pension statutes must be liberally
construed in favor of the rights of the pensioner. Johnson v. Retirement Board of the Policemen's
Annuity & Benefit Fund, 114 Ill. 2d 518, 521 (1986). We must also avoid interpretations that
render the statutes at issue "insignificant, meaningless, inoperative, or nugatory." Pliakos v.
Illinois Liquor Control Comm'n, 11 Ill. 2d 456, 460 (1957).
We observe that section 1--116(c) mandates that "[a]n excess benefit fund shall be
established" for any member whose benefits exceed those limited by section 415 of the Internal
Revenue Code and that payments for such excess benefits shall be made "in a manner consistent
with applicable federal law." (Emphasis added.) 40 ILCS 5/1--116(c) (West 1996). While the
Funds acknowledge section 1--116's mandate, they nevertheless assert that the Pension Code
required the Funds to remain tax qualified and that the mandate could not be complied with
because it conflicted with section 415's ceiling. Specifically, the Funds contend that section 415
prohibited the Annuity and Benefit Fund, as a qualified governmental plan, from establishing a
nonqualified excess benefit fund or from using its qualified assets to pay such excess benefits.
In support of their contention that they could not fully comply with section 1--116, the
Funds offer the following IRS letter written in 1991:
"Question 10. Would section 415 of the Code be violated if a governmental
plan transferred amounts in excess of the section 415 limits to a nonqualified
arrangement for distribution to the participant who had the excess?
A. Yes. Governmental plans would violate section 415 by transferring
amounts that exceed section 415 under a qualified plan from that plan to a
nonqualified arrangement, and distributing those benefits from the nonqualified
arrangement. Such a spin-off of qualified funds may also violate other
qualification requirements, such as the exclusive benefit rule under Section
401(a)(2)." IRS Information Letter on Section 415 Limitations on Public Plans, 18
Pensions and Benefits (BNA) No. 34, at 1,552 (August 26, 1991).
The Funds argue that this letter is dispositive of the instant case because the funding scheme of
article 9 of the Pension Code did not provide a mechanism through which a nonqualified excess
benefit fund could be funded independently without transferring assets directly from the Annuity
and Benefit Fund itself. As noted by the Funds, section 1--116 mandates the creation of an excess
benefit fund which, the Funds contend, is a spin-off from the Annuity Benefit Fund because
assets from the latter are transferred directly to the former. The Funds therefore posit that the IRS
letter and the funding scheme of article 9 indicate that the IRS is likely to view the establishment
of a nonqualified excess benefit fund pursuant to section 1--116 of the Illinois Pension Code as
a violation of the Annuity and Benefit Fund's tax qualified status.
The Funds correctly observe that article 9's funding scheme does not specifically provide
the means for independently funding an excess benefit fund pursuant to section 1--116. However,
this fact does not necessarily mean that the IRS would consider that such an excess benefit fund
violated federal law. Indeed, we find absolutely nothing within the Internal Revenue Code that
prohibits government plans from setting up excess benefit funds pursuant to section 1--116.
Moreover, we note that this IRS letter specifically provides: "This is not a ruling, however, and
may not be relied on with respect to any transaction." IRS Information Letter on Section 415
Limitations on Public Plans, 18 Pensions and Benefits (BNA) No. 34, at 1,552 (August 26, 1991).
This letter merely advises against transfers between qualified and nonqualified plans, and
therefore falls short of proving that, as a matter of federal law, the Funds could not separately
establish a nonqualified plan to pay out benefits in excess of section 415's limits.
The Funds further assert, however, that section 415(m), amending section 415 of the
Internal Revenue Code to allow for excess benefit plans such as called for in section 1--116,
indicates that the Internal Revenue Code did not permit the Funds to establish an excess benefit
fund and still maintain its tax qualified status prior to this amendment. In support of this
assertion, the Funds argue that if a qualified governmental pension plan could have paid benefits
exceeding the section 415 cap by paying supplemental benefits through an excess benefit fund,
then section 415(m) would not have been necessary.
As the Funds correctly observe, an amendment to a federal statute creates a presumption
that Congress intended to change the law. Stone v. Immigration & Naturalization Service, 514 U.S. 386, 397-98, 131 L. Ed. 2d 465, 476-77, 115 S. Ct. 1537, 1545 (1995). However, we agree
with Dr. Matsuda that section 415(m) does change the law to the extent that it now allows
government entities to establish a qualified governmental excess benefit arrangement as part of
their qualified plans. This permits the Funds to pay excess benefits out of their qualified plan
without having to first establish and fund a separate nonqualified excess benefit fund as
contemplated in section 1--116. In other words, this amendment makes it easier and less
expensive for such government entities to set up excess benefit funds for their employees. Section
415(m) does not therefore prove that establishing an excess benefit fund pursuant to section 1--
116 would have violated the Internal Revenue Code.
The Funds next assert that section 1--116's mandate to set up a nonqualified excess
benefit fund was contingent upon enabling federal legislation, which did not exist until Congress
passed section 415(m). The Funds note that in 1991 section 1--116(c) provided in part: "An
excess benefit fund shall be established as a special fund in the State Treasury for any pension
fund or retirement system subject to this Section ***." (Emphasis added.) 40 ILCS 5/1--116(c)
(West 1992). The Funds point out that in 1993 the state legislature amended section 1--116 to
provide in part: "An excess benefit fund shall be established by any pension fund or retirement
system subject to this Section ***." (Emphasis added.) 40 ILCS 5/1--116 (West 1996). The Funds
interpret the language in the 1991 version of section 1--116 as establishing an excess benefit fund
through the state treasury, thereby avoiding section 415's ceiling. In contrast, the Funds interpret
the amended language in the 1993 version of section 1--116 as providing for funding to pass
through the Annuity and Benefit Fund itself rather than through the state treasury, thus causing
the excess benefit fund under section 1--116 to run afoul of section 415's limitations at that time.
The Funds infer from all this that the state legislature intended that the 1991 version of section
1--116 would be operative and noncontingent but that the 1993 version of section 1--116 would
be inoperative and silently contingent upon unspecified, future federal enabling legislation.
What the Funds' argument fails to explain, however, is why the state legislature would
amend section 1--116, in the manner proffered by the Funds, when that section already provided
for an excess benefit fund that fully complied with section 415's ceiling. It would be anomalous
to suggest that the state legislature intended to amend section 1--116 to become inoperative and
silently contingent upon future federal enabling legislation without detailing this intent in the
statute. Indeed, the Funds fail to cite any language whatsoever in either the Illinois Pension Code
or the Internal Revenue Code that even remotely supports their interpretation of section 1--116.
We therefore reject the Funds' contention that the 1993 amendments to section 1--116 operated
to make the continuation of excess benefit funds contingent upon future federal legislation, as
this interpretation would have rendered section 1--116 inoperative and meaningless. See Pliakos
v. Illinois Liquor Control Comm'n, 11 Ill. 2d 456, 460 (1957) (holding that courts should avoid
interpretations that render a statute "meaningless, inoperative, or nugatory"). We instead conclude
that the state legislature amended section 1--116 in 1993 quite simply to allow pension funds to
establish excess benefit funds directly.

CONCLUSION
For the foregoing reasons, we affirm the appellate court's reversal of the trial court's order
granting the Funds' motion for summary judgment.

Appellate court judgment affirmed.