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Compliance November 20, 2013
Court Rules on Supplementary Benefit Cuts
A federal appeals court ruled certain benefit enhancements adopted within a pension plan are protected accrued benefits under the Employee Retirement Income Security Act (ERISA).
Reported by John Manganaro
Specifically, the court decided that additional benefits granted while a defined benefit (DB) plan participant is still employed cannot generally be scaled back under ERISA. However, should a pension plan participant start receiving supplementary benefits after retiring from or leaving a company, employers remain free to cut or reduce the additional benefits.
The 1st U.S. Circuit Court of Appeals handed down the decision after receiving a case on appeal from the U.S. District Court for the District of Rhode Island. The Rhode Island court ruled similarly, leading to the appeal.
The original case, Bonneau v. Plumbers & Pipefitters Local Union 51 Pension Trust Fund, involved a dispute between a group of now-retired union employees over “banked hour” benefits that the distressed union trust hoped to roll back.
In short, the “banked hours” are hours worked within a given year in excess of the minimum number of hours required to earn a full year of service for pension credit. These hours are “banked” for a variety of uses, including filling in of hours of service for years in which a participant fell short of the minimum required to earn pension credit and “cashing in” as additional pension credits upon retirement.
The union pension trust was actually formed from the merger of four distinct pension plans in 1997. Each of the pre-merger plans had different rules for how many banked hours are needed to cash in for a full year of pension credit—ranging from 1,200 to 1,710 hours. The post-merger plan adopted the lowest threshold.
When the pension ran into financial difficulties in 2011, the plan’s trustees voted to approve an amendment that would return the thresholds to a participant’s pre-merger levels, potentially reducing the value and duration of pension benefits for those still working at the company.
The plan’s trustees agreed not to impose the new threshold until a court had determined whether these cuts, effected through a plan amendment, violated the anti-cutback provisions of ERISA, as codified under 29 U.S.C. § 1001 et seq. Those provisions protect "accrued benefits" against reduction, especially Id. § 1054(g)(1).
According to case documents, at issues was a question as to whether a benefit conferred retroactively during the course of employment constitutes a "benefit attributable to service" and so an "accrued benefit" for purposes of ERISA's anti-cutback rule.
The district court had entered summary judgment for the plaintiffs that rules such benefits are, in fact, "accrued" and that the pension plan amendment would violate the anti-cutback provisions.
The full text of the decision can be viewed here.