Author: jfortenberry@fortenberrylaw.com

The U.S. Supreme Court has issued an opinion in Central Laborers’ Pension Fund v. Heinz, unanimously affirming a Seventh Circuit holding in the case that the “anti-cutback” rule of ERISA (29 U.S.C. 1054(g)(1)) prohibits “an amendment expanding the categories of postretirement employment that triggers suspension of payment of early retirement benefits already accrued under a pension plan.”

Facts of the case: Retired participants under a multiemployer pension plan (a defined benefit pension plan, referred to as the “Plan”) worked in the construction industry before retiring, and by 1996 had accrued enough pension credits to qualify for early retirement payments under the Plan. The Plan payed the participants the same monthly retirement benefit they would have received if they had retired at the usual age. The benefit was subsidized, meaning that monthly payments were not discounted even though they started earlier. The pension was subject to a condition that prohibited beneficiaries from “disqualifying employment” after they retired. The Plan provided that, if they accepted such employment, their monthly payments would be suspended until they stopped the forbidden work.

When the participants retired, the Plan had defined “disqualifying employment” as any job as “a union or non-union construction worker.” This condition did not cover employment in a supervisory capacity. The individuals took jobs as construction supervisors after retiring, and the Plan continued to pay their pension. However, two years after they retired, the Plan’s definition of “disqualifying employment” was expanded by amendment to include any job “in any capacity in the construction industry (either as a union or non-union construction worker).” The Plan interpreted this definition to mean that it covered supervisory work and warned the retired participants that if they continued on as supervisors, their monthly pension would be suspended. The participants kept working, and the Plan stopped paying.

Discussion: The participants sued to recover the suspended benefits on the ground that applying the amended definition of “disqualifying employment” so as to suspend payment of the accrued benefits violated ERISA’s anti-cutback rule. The District Court granted judgment for the Plan. The Seventh Circuit reversed, holding that imposing the new condition on rights to benefits already accrued was a violation of the anti-cutback rule. This was in direct conflict with the Fifth Circuit, which in the case of Spacek v. Maritime Association, I.L.A. Pension Fund, 134 F.3d 283 (5th Cir. 1998) had held that a post-retirement plan amendment which suspended a retiree’s early retirement benefits was not in violation of the anti-cutback rule. In Spacek, the Court had reasoned that the anti-cutback rule related to a reduction of benefits and not to a suspension of benefits.

The Supreme Court affirmed the Seventh Circuit’s holding in an opinion written by Justice Souter. A one-sentence concurrence was written by Justice Breyer, with the Chief Justice, Justice O’Conner and Justice Ginsberg joining in. The concurrence states that the Secretary of Labor or Secretary of Treasury should be allowed to issue regulations explicitly allowing plan amendments to enlarge the scope of “disqualifying employment” with respect to benefits attributable to already-performed services.

One of the most interesting parts of the case is that the Court notes a statement in the Internal Revenue Manual which had supported the position that the amendment could be made, and that the IRS had routinely approved amendments to plan definitions of “disqualifying employment.” However, the Court cited Treasury regulations under Internal Revenue Code section 411(d)(6) as creating a conflict with these provisions. The Court held that these Treasury regulations “flatly prohibit[ed] plans from attaching new conditions to benefits that an employee has already earned.”

In a footnote, the court states:

Nothing we hold today requires the IRS to revisit the tax-exempt status in past years of plans that were amended in reliance on the agency’s representations in its manual by expanding the categories of work that would trigger suspension of benefit payment as to already-accrued benefits. The Internal Revenue Code gives the Commissioner discretion to decline to apply decisions of this Court retroactively. . . [T]his would doubtless be an appropriate occasion for exercise of that discretion.

The court also states:

This is not to say that section 203(a)(3)(B) does not authorize some amendments. Plans are free to add new suspension provisions under section 203(a)(3)(B), so long as the new provisions apply only to the benefits that will be associated with future employment.

(This case could have far-reaching implications for the suspension of benefit rules even in the non-multiemployer setting. Query: Will the opinion affect IRS rules providing that, as noted in the briefs, no actuarial adjustment is required for benefits suspended under the suspension of benefit rules. As the Government’s Amicus Brief (filed in favor of the plan) states:

The regulations . . specify that, in computing the actuarial equivalent of the retirement benefit available at normal retirement age for the purposes of this provision, “[n]o adjustment to an accrued benefit is required on account of any suspension of benefits if such suspension is permitted under [ERISA] section 203(a)(3)(B).” 26 C.F.R. 1.411(c)-1(f). The Fifth Circuit correctly concluded in Spacek that, “because the reduction in total benefits paid over the lifetime of the plan participant as a result of the suspension need not be accounted for actuarially in computing the participant’s accrued benefit under [29 U.S.C.] § 1054(c)(3),” an amendment authorizing such a suspension “does not serve to decrease the participant’s accrued benefits, and thus cannot violate [the anti-cutback provision of] § 1054(g).” 134 F.3d at 291

Other Resources Pertaining to the Case:

Oral Argument Transcripts are here (via Appellate.net). Briefs are here and here with an amicus brief filed by the government on behalf of the Plan here.

A previous post about the case is here.

Articles:

• USA Today.com: “Supreme Court rules against pension plan”
• Reuters: “Court: Retiree Pension Benefits Can’t Be Cut”
• The New York Times: “Supreme Court Rules in Favor of Early Retirees Denied Pensions”

Regarding audioblogs highlighted here in this post, SCOTUSblog (a blog devoted to Supreme Court coverage) has a new Audio-Blog component which yesterday featured Lyle Denniston summarizing the rulings issued by the U.S. Supreme Court. Access it here.

The next big thing in blogs–blogs that speak, or “Audioblogs.” Check one out here. Who knows? Maybe one day soon, Benefitsblog will also have audio. . .

Speaking of blogs, Tom Peters has been blogified. See how a website here can be transformed into a blog here.

The IRS issued Revenue Ruling 2004-60 which provides the tax consequences of transfers of interests in nonqualified stock options and nonqualified deferred compensation from an employee to a former spouse incident to a divorce.

The American Jobs Creation Act of 2004, H.R. 4520, was introduced today in the House of Representatives in anticipation of a Ways and Means Committee markup next Thursday, June 10th. Summary of the legislation is here. (Thanks to a reader for the tip!)

More legislation:

• “House Approves Re-employment Account Plan” (via Findlaw.com). The bill, H.R. 444, would give eligible unemployed workers up to $3,000 to use for job training and other services that help them get back to work.
• The House also approved H.R. 4109 (“Simple Tax for Seniors Act”) on June 2. The bill would allow seniors to use Form 1040SR to file their Federal income tax returns. The bill would make new Form 1040SR available beginning in 2005 to taxpayers age 65 or older for filing their returns without regard to their receipt of Social Security benefits, interest, dividends, distribution from a qualified retirement plan, annuity (or other deferred payment arrangement) or capital gains or losses. (The Tax Guru has an “alleged” sample of the new return.)

Here’s an alternative to the retirement plan from the Tax Guru. (Actually, with all of the surveys indicating that (1) employers are trimming their retirement programs and (2) Baby Boomers are planning to continue to work as they age, there appears to be some truth in the jollity. . .)

GO READ Roth CPA.com’s update here on comments made last week regarding the IRS’s enforcement challenges pertaining to Health Savings Accounts. The topic was discussed in this previous post–“IRS Is Eyeing a Loophole in Health Savings Account Rules.”

This previous post discussed how trying to cut benefits costs can sometimes get you into trouble. Catbert has a possible solution to the problem here. (From the HR eSources Blog.)

Also, retirement can be an “adventure” as depicted in this cartoon from the Tax Guru.

Speaking at the 49th CEO Summit of the Chief Executive Leadership Institute at the Yale School of Management, U.S. Secretary of Labor Elaine L. Chao had some strong words for CEOs regarding the topic of pension plan governance:

1. “With trillions of dollars in assets, our nation’s retirement plans are major players in the economy. Pension plans are significant institutional investors in the Fortune 500. Out of the $15.5 trillion in corporate stock currently outstanding, ERISA regulated pension plans hold $1.9 trillion or about 12 percent. State and local pension plans hold another $1.3 trillion. This means about 20 percent of all corporate stock is held by pension plans. The health of our nation’s pension assets and our nation’s private economy, therefore, is deeply intertwined.”

2. “In the course of recovering workers’ pension assets, we have seen a clear lack of understanding or appreciation of the fiduciary’s responsibilities under ERISA. Today, a CEO is much more than the manager of an organization. He or she is a steward of the vitality of our economy and the public trust. Executive decisions need to be made not only in the short-term interest of the organization, but with an eye to the long-term interest of the economy and the preserving the benefits of the free enterprise system. That’s why I am here today to discuss the need for corporate and organizational CEOs to be more aware and vigilant about the responsibilities of being pension fiduciaries and to review the steps that should be taken to ensure that retirement promises made to workers are kept.”

3. “To begin with, it is important for CEOs to be aware of who are the fiduciaries of their employees’ pension plans. Under ERISA, each plan must have a named fiduciary, designated in the plan documents. In many cases, the named fiduciary is the CEO or the Board of Directors. But it is permissible, in fact common, for the CEO or Board to designate someone else. Often, an administrative committee serves as the fiduciary and manages the operation of the plan. It is important to note, however, that designating another person or entity to manage a plan does not relieve the CEO—or other named fiduciary—of responsibility or liability. The CEO or designating official has a responsibility to monitor the performance of the fiduciary of the plan. That means reading their reports, holding regular meetings regarding the performance of the plan, and providing the designated plan managers with necessary information. It also means updating plan documents and taking action if the designated fiduciary makes imprudent decisions.”

4. “Updating plan documents may sound pretty obvious. But you would be surprised how many times the Department has audited plans and found inconsistent provisions or the failure to make amendments that reflect corporate changes. This is not just a clerical problem. Under the law, the plan must be administered in accordance with its terms. If its terms are inconsistent or unclear, a whole host of legal problems can occur.”

5. “. . . [I]t is more important than ever for CEOs to be aware of and pay attention to pension plan governance. The time has come to move the focus of pension plan governance out of the human resources department and beyond compliance with tax laws. The executive level suite needs to focus on pension plan governance itself, especially the responsibility and liability of pension plan fiduciaries.“

How about this? The Big GoGriller, a grill that attaches to your car. (From the Trademark Blog.)

I was surprised not to find anything in the news about this appellate decision–Millsap et al. v. McDonnell Douglas Corporation (issued May 21, 2004) after there was so much publicity around the lower court decision last year. (Previous post here.) The case is notable due to the fact that it represents one of the few ERISA section 510 plant closing cases where employees have prevailed. The 510 claims were brought by former employees in a class action suit against their employer, alleging that the employer closed one of its plants for purposes of preventing employees from attaining eligibility for benefits under their pension and health care plans.

ERISA Section 510. For those not familiar with ERISA section 510, it provides as follows:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan. . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan. . .

District Court Decision. After a ten day bench trial, the lower court (no link available) had ruled in favor of the former employees, holding that the employer had indeed violated ERISA section 510 in closing the plant. Some of the most damaging evidence used to prove the ERISA 510 claims were memos from the actuaries analyzing the reduction in benefits which would occur if the plant were closed. One such memo prepared by the actuaries considered “various ‘what if’ scenarios, analyzing the effect on costs and savings if the company decided to reduce heads.” The kinds of costs analyzed included “pension cost, savings cost, savings plan cost, health care cost, and just direct overhead cost.” (This previous post discusses the attorney-client privilege aspect of the decision.)

The lower court held that plaintiffs could recover backpay because the award constituted “equitable relief” under ERISA section 502(a)(3).

The Settlement. The parties subsequently entered into a “Stipulation of Settlement” compensating plaintiffs in the amount of $36 million for their lost pension and health care benefits. (The court awarded attorneys’ fees in the total amount of $8.75 million and costs in the amount of $1 million to class counsel.) However, the settlement stipulation required judicial resolution of the availability of backpay under ERISA section 502(a)(3). The district court approved the settlement and certified the controlling question of law for appeal.

On Appeal. The question before the court, as stipulated by the parties, was this:

[W]hether, in this ERISA section 510 case and as a result of Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), backpay (and, as a result, any other damages based upon backpay) are available as “appropriate equitable relief” to the class members pursuant to ERISA section 502(a)(3).

The controversy stemmed from the remedies provided under ERISA section 502(a)(3):

A civil action may be brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of [Title I of ERISA] or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [Title I of ERISA] or the terms of the plan[.]

On appeal, the Tenth Circuit reversed the district court and ruled that the award of backpay was not recoverable under the statute because it did not constitute “equitable relief.” In reversing the lower court, the Tenth Circuit emphasized that under ERISA section 502(a)(3), unlike Title VII section 706(g) and NLRA section 10(c), Congress did not specifically make backpay part of an equitable remedy. The court also noted that the remedial purpose of section 502(a) was not to make the aggrieved employee whole, as plaintiffs had argued.

Circuit Judge Lucero dissenting. The dissent states as follows:

Under the majority’s result, the class plaintiffs are entitled to neither reinstatement nor back pay. Not only does the majority’s holding fail to deter ERISA violations, it also encourages employers who violate ERISA to delay proceedings as long as possible, “lead[ing] to the strange result that . . . . the most egregious offenders could be subject to the least sanctions.” Pollard v. E.I. du Pont de Nemours & Co., 532 U.S. 843, 853 (2001). Because I disagree that Congress intended this result or that precedent demands it, I respectfully dissent. . .

The majority’s result is similarly disconcerting. Here, reinstatement would have been an appropriate equitable remedy had [the defendants] not so delayed proceedings as to make reinstatement impossible. Thus, through no fault of their own, the class plaintiffs find themselves devoid of the undeniably appropriate equitable remedy of reinstatement. Back pay, which was integral to the relief sought by the plaintiffs at the onset of this litigation, provides an appropriate equitable alternative.

Both the Department of Labor (here) and the AARP (here) filed Amicus Briefs in the case, arguing that backpay should be awarded. The United States Chamber of Commerce filed an Amicus Brief (here [pdf]), arguing that the lower court decision should be overturned and that backpay should not be awarded under ERISA section 510.