Post-Termination Plan Amendment Impermissibly Reduced Payments

The 6th U.S. Circuit Court of Appeals agreed with a lower court that the Pension Benefit Guaranty Corporation (PBGC) did not err when it found that Kentucky Bancshares failed to pay all benefits due to employees under its pension plan when the plan was terminated.

In 2008, as it was preparing to terminate its pension plan, Kentucky Bancshares also began implementing changes to meet the requirements of the Pension Protection Act of 2006 (PPA). The company incorporated new interest-rate and mortality assumptions for computing the minimum lump-sum benefits payable to participants under the plan, which generally lowered the lump-sum benefits for participants. The court found that nothing in the PPA or the Internal Revenue Code made it necessary for Kentucky Bancshares to amend the plan in a way that caused a decrease in the value of benefits.

In addition, even though it began implementing the changes in 2008, Kentucky Bancshares did not adopt an amendment to the terms of the plan until February 2009—two months after the plan was terminated on December 31, 2008. Kentucky Bancshares noted that the PBGC acknowledged that the plan amendment resulting in decreased benefits would have been permissible if only it had been adopted two months earlier. The company argued that the PBGC’s finding of a deficiency is based on a technical timing violation that results in an unwarranted windfall to plan participants.

While the appellate court agreed the argument had appeal, it pointed out that it is not free to simply substitute its judgment for that of the agency. The court noted that PBGC’s enforcement of its own regulation that “plan benefits are determined under the plan’s provisions in effect on the plan’s termination date” and “post-termination decreases are permissible if necessary to meet qualification requirements” cannot be deemed arbitrary or capricious, an abuse of discretion, or not in accordance with law.

The court added that PBGC’s rationale for its decision that benefit payments made upon plan termination were deficient explains the importance of the statutory requirements that benefit plans be established and maintained pursuant to a written instrument and that the plan specify the basis on which payments are made, so that every employee may, on examining the plan document, determine exactly what his rights and obligations are under the plan.

The 6th Circuit’s decision in PBGC v. Kentucky Bancshares is here.