The “anti-cutback rule” under ERISA and the Internal Revenue Code is well-known to benefits lawyers and involves the idea that, once benefits are promised under a qualified plan and participants vest in those benefits, those benefits cannot be taken away from the participant. However, in determining what “benefits” are protected by this rule, one must understand the definition of “accrued benefit” which was the focus of this recent Sixth Circuit opinion–Thornton v. Graphic Communications Conference of the International Brotherhood of Teamsters Supplemental Retirement and Disability Fund, et al.case.
The case involved a multi-employer plan that provided retirement benefits to employees in the graphic communications industry. The plan’s Board of Trustees served as the plan’s sponsor and administrator. Certain individuals retired and began receiving benefits under the plan. During their retirement, on several occasions and on what appears to be an ad hoc basis, the Board amended the plan to provide increases in benefits for all active and retired participants. However, five years later, the Board then voted to rescind those benefit increases due to a funding shortfall which threatened to jeopardize the plan’s long term financial viability.
The retirees filed a class action, claiming an improper cut-back of accrued benefits in violation of the anti-cutback rule under ERISA and a breach of fiduciary duty by the Board in passing the amendment. The district court ruled that the action by the Board of rescinding the increase did not violate the ERISA anti-cutback rule because the plan amendment granting the increase was adopted after the individuals retired, and that the Board did not breach their fiduciary duty.
In affirming the decision of the district court, the Sixth Circuit provides a classic 15-page discussion on the definition of “accrued benefit” under ERISA and the Code that is a ‘must-read’ for benefits lawyers (IMHO).
Some key points of the decision:
(1) The court agreed with the Fourth Circuit that “Congress did not consider a post-retirement increase in pension benefits to be an ‘accrued benefit'”:
We believe the Fourth Circuit’s thorough analysis of the text and context of IRC § 411(a)(7)(A)(i) demonstrates that Congress did not consider a post-retirement increase in pension benefits to be an accrued benefit. Section 411’s repeated emphasis on the accrual of benefits during service makes plain that the terms of pension plan document(s) in effect while a participant worked for a covered employer dictate his or her accrued benefits. We do not find, and Thornton has not offered, any indication in the language of § 411(a)(7)(A)(i), or statutory construction thereof, that even remotely suggests that a given participant may amass accrued benefits after he or she permanently separates from covered employment. Consequently, we hold that a postretirement increase in benefits does not create an accrued benefit for a given participant under IRC § 411(a)(7)(A)(i) unless it is in accordance with the plan in effect while the employee works in the service of the employer. . .
(2) The most interesting aspect of the opinion, however, is the discussion by the court of the Code’s parallel anti-cutback provisions contained in Section 411(d)(6) of the Code and the Treasury’s resulting regulatory guidance regarding the definition of “accrued benefit” for purposes of the anti-cutback rule. The court notes that the Treasury’s 2005 Regulation Section 1.411(d)-3 interprets the definition of “accrued benefit” to include post-retirement increases, which Regulation states in part:
The protection of section 411(d)(6) [anti-cutback rule] applies to a participant’s entire accrued benefit under the plan as of the applicable amendment date, without regard to whether the entire accrued benefit was accrued before a participant’s severance from employment or whether any portion was the result of an increase in the accrued benefit of the participant pursuant to a plan amendment adopted after the participant’s severance from employment.
However, the court refused to consider the Regulation as determinative of the outcome because of the Regulation’s effective date, which stated that the Regulation was only effective as to amendments “adopted on or after August 12, 2005”, and the Board’s adoption of the amendment rescinding the benefit increase took place before the amendment became effective. The court also rejected the plaintiffs’ argument that the Regulation reflected Treasury’s long-standing position on the issue. After a very long discussion of the Treasury’s treatment of this issue, the outcome appears to have boiled down to an IRS letter contained in the record on appeal, dated December 5, 2008 (unrelated to the plan at issue):
The record on appeal includes a recent IRS letter, dated December 5, 2008, discussing the agency’s audit of the Graphic Artists Industry Joint Pension Trust Plan (JPT), a multi-employer pension benefits plan entirely separate from the Defendant in this case. Letter from Monika A. Templeman, Director Employee Plans (EP) Examinations, Internal Revenue Service, to Graphic Arts Industry Joint Pension Plan Trust (Dec. 8, 2008). The letter indicates the IRS had initially considered a JPT amendment to eliminate a COLA benefit, previously granted to retirees, to be a violation of the anti-cutback rule under the 2005 Regulation, consistent with its litigation position in Sheet Metal Workers. Id. But the letter goes on to state that the IRS abandoned this position after realizing JPTs amendment occurred prior to August 12, 2005, the effective date of the 2005 Regulation. As a result, the IRS advised JPT that rescinding the COLA previously granted to plan participants who were already retired at the time the COLA was introduced did not violate the anti-cutback rule:
However, the Service recognizes, in light of the 2005 final section 411(d)(6) regulations, the plan should not be considered as failing to satisfy [the anti-cutback rule of IRC § 411(d)(6)] as a result of the amendments eliminating the retirees benefit increases, because the amendments were adopted before the effective date of the final regulations.
Id. (emphasis added). We can logically deduce from this declaration that the IRS did not consider the post-retirement COLA an accrued benefit under the 2002 Regulation, which was unquestionably applicable prior to August 12, 2005. This position is diametrically opposed to Treasury’s proffered interpretation in Sheet Metal Workers.Because Treasury has abandoned the litigation position it took in that case, the Court is relieved of any obligation to defer to it under Auer. Cf. Rust v. Sullivan, 500 U.S. 173, 186-87 (1991) (holding that a longstanding agency interpretation was no longer entitled to Chevron deference given that the agency had changed its position on the issue).
(3) There was also a very interesting discussion of the “Pattern Regulation” which says:
if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of [the anti-cutback rule].
The plaintiffs tried to argue that the increases were protected under this Pattern Regulation, but the court rejected the argument because the increases occurred on a post-retirement basis.
(4) Finally, the court also takes note of the defendants’ argument that when they had submitted the plan document for IRS review, they had clearly indicated in the application that they had amended the plan to rescind the benefits increase and the IRS issued a favorable determination letter. However, the court said the Determination letter did not “carry any weight” for two reasons:
First, it is not clear that Treasury in fact endorsed the December 2002 Amendment in light of the anti-cutback rule. The letter merely provides a summary conclusion regarding the Plans tax-exempt status and does not make any specific findings regarding the anti-cutback rule. See Hickey, 980 F.2d at 469 (citing the informal nature of [IRS determination] letters, the express limitations included in the IRS letter, and the absence of any reasoning in refusing to accord a favorable IRS tax-exempt status determination letter any weight in interpreting the anti-cutback rule). Second, even if we assume Treasury found that the December 2002 Amendment complied with the anti-cutback rule, the absence of a rationale explaining how the agency arrived at this conclusion militates against granting deference under Mead. See 533 U.S. at 228. Thus, the IRS Determination letter lacks the power to persuade this Court in our construction of the statutory definition of accrued benefit and the corresponding scope of the anti-cutback rule.
Conclusion: Employers faced with difficult decisions in this economy may find themselves evaluating their options and will most certainly look to this Sixth Circuit decision as important in their decision-making. Certainly, for benefits increases granted before the effective date of Treasury’s 2005 regulations, the result is more clear than for benefits increase granted after the effective date.