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Pensions and Retirement Benefits: Rescinding Retirement Benefits

07.01.2009

The Sixth U.S. Circuit Court of Appeals (which covers Kentucky) recently addressed whether rescinding an employee's postretirement increase in retirement benefits is barred by the Employee Retirement Income Security Act's (ERISA) anticutback rule.  Read on to find out whether you can take back retirement benefit increases without violating ERISA's anticutback rule.

Facts

ERISA's central mission is to protect "employee[s'] justified expectations of receiving the benefits their employers promise them.”  The anticutback rule helps protect employees' expectations by prohibiting pension plan amendments that decrease plan participants' "accrued benefits.”  The rule's scope is limited to "accrued benefits."

The Graphic Communication Conference of the International Brotherhood of Teamsters Supplemental Retirement and Disability Fund is a benefits plan that provides retirement benefits to employees in the graphic communications industry.  Charles Thornton was a participant in the plan and began receiving benefits after his retirement in 1995.  After he retired, plan administrators made three amendments to the plan that increased his benefits.  One amendment, the one of importance in this case, was made in 1999, increasing benefits by 9.4 percent.  In 2002, the plan was amended again, rescinding the 1999 increase. 

Thornton filed a class-action suit in the Western District of Kentucky alleging that the rescission of benefits violated the ERISA anticutback rule.  The district court ruled that the amendment rescinding the 1999 increase didn't violate the anticutback rule because it was adopted after he retired.  Thornton appealed to the Sixth Circuit.

Sixth Circuit's analysis

In the ERISA context, Congress has specifically stated that an "accrued benefit" in a defined benefit plan is "the employee's accrued benefit determined under the plan . . . in the form of an annual benefit commencing at normal retirement age.”  This was the first time the Sixth Circuit had ruled on the issue of whether a postretirement increase is an "accrued benefit.”  The court looked for guidance from another federal court of appeals, which had determined that the anticutback rule ensured the payout of benefits was in accordance with a plan in effect while the covered employee was working for the employer. 

The focus was on the terms of the plan during employment, not modifications made after retirement.  Later amendments to the plan increasing benefits were construed as nothing more than a gratuitous benefit, not an "accrued benefit.”  Those benefits may be withdrawn without violating the anticutback rule.  The Sixth Circuit held "a post-retirement increase in benefits does not create an 'accrued benefit' . . . unless it is in accordance with the plan in effect while the employee works in the service of the employer."

The court considered a U.S. Treasury regulation that makes postretirement amendments to a plan subject to the anticutback rule.  The regulation became effective on August 12, 2005, and had no retroactive effect.  Therefore, the Sixth Circuit held that the amendment of the benefits plan made before August 12, 2005, rescinding postretirement benefit increases was not subject to the anticutback rule.

Takeaway

The Sixth Circuit's decision clarifies that rescinding increases in an employee's retirement benefits under a retirement plan is not barred by the ERISA anticutback rule to the extent the rescinded benefits were granted postretirement and the amendment rescinding the benefits was adopted before August 12, 2005.  Postretirement benefit increases rescinded after August 12, 2005, would likely violate the anticutback rule under the U.S. Treasury regulation. 

This decision is important to employers looking to make changes to benefits plans in difficult economic times.  It also provides you with insight into what you and your employees can expect from benefits plans.  Those expectations may affect the employer-employee bargaining process.  Employers that guarantee their employee benefits (including guarantees of postretirement increases) under a multiemployer benefits plan are advised to ensure that there is clear language addressing such increases in the plan.


If you have any questions or need help, please contact any member of the Greenebaum Doll & McDonald Labor and Employment Department.


Copyright 2009 M. Lee Smith Publishers LLC
KENTUCKY EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kentucky employment law.  Questions about individual problems should be addressed to the employment law attorney of your choice.

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