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Guest Article

Court Rules Supplemental Benefits Must Stay in Plan


by Joseph S. Adams

In yet another pro-employee ERISA ruling, the 3rd U.S. Circuit Court of Appeals has ruled that plant shutdown benefits are retirement-type subsidies at the time added to the plan, and as a result, they are accrued benefits subject to the anti-cutback rules under ERISA and the tax code. The case is Harry Bellas v. CBS, Inc.; Westinghouse Pension Plan, 2000 U.S. App. LEXIS 19948 (3d Cir., Aug. 14, 2000).

Facts of the Case

Harry Bellas worked for CBS/Westinghouse from 1964 until Dec. 31, 1997. Prior to 1994, the Westinghouse Pension Plan provided a "special retirement provision" for those employees whose employment was terminated as a result of a permanent job separation. An employee whose employment was terminated as a result of a permanent job separation and who did not satisfy any of the normal requirements for retirement under the plan at the time of his or her termination of employment could nonetheless retire on the termination date in accordance with the PJS benefit if he or she satisfied certain reduced age and service requirements specified in the plan. The amount of the benefit under this special provision was the participant's normal retirement benefit under the plan without any reductions for commencement before normal retirement age, as well as some minor supplemental benefits that ran until the participant turned 62.

Prior to 1994, the term "permanent job separation" was defined as the termination of employment, through no fault of the employee, for lack of work for reasons associated with the business and for whom the employer believes there is no reasonable expectation of recall. On Jan. 1, 1994, the plan was amended in two ways: (1) by making it more difficult for participants to qualify for the PJS benefit by narrowing the definition of permanent job separation to only those terminations due to a job movement, product line relocation or location close-down; and (2) by eliminating the PJS benefit completely for terminations on or after Sept. 1, 1998.

Effective Dec. 31, 1997, CBS terminated Bellas' employment through no fault of his own. Although Bellas was not entitled to a PJS benefit upon termination in 1997, he would have satisfied all of the conditions necessary to receive the PJS benefit (age, years of service and reason for termination) under the pre-1994 version of the plan. Bellas filed a complaint against CBS and the Westinghouse Pension Plan on Aug. 31, 1998, alleging that the 1994 amendment violated Section 204(g) of ERISA and, in adopting the amendment, the fiduciaries violated their fiduciary duties under ERISA.

Section 204(g) of ERISA prohibits an employer from decreasing or eliminating a participant's accrued benefits by plan amendment. In 1984, Congress modified Section 204(g) by adding early retirement benefits and retirement-type subsidies to the list of what is "accrued" for purposes of these anti-cutback provisions.

The U.S. District Court for the Western District of Pennsylvania granted Bellas' motion for summary judgment on the question of whether the 1994 amendment violated Section 204(g) of ERISA. Before the issue of violation of fiduciary duties could be resolved, the 3rd Circuit agreed to hear CBS/Westinghouse's appeal of the district court's ruling to resolve the issue of whether the PJS benefit is a retirement-type subsidy protected by Section 204(g) of ERISA. The district court permitted CBS/Westinghouse to appeal this particular issue in the middle of the trial, and the 3rd Circuit agreed to hear the appeal, partly because the district court's ruling directly conflicted with an IRS interpretation of Section 411(d)(6), the Internal Revenue Code counterpart to ERISA Section 204(g).

Circuit Court Affirms Lower Court's Finding

The 3rd Circuit affirmed the lower court's finding, holding that the plan's PJS benefit is a retirement-type subsidy subject to Section 204(g) of ERISA at its inception. Under both ERISA and the Code, an early retirement benefit or retirement-type subsidy may only be decreased prospectively. In other words, an amendment may not adversely affect that portion of the early retirement benefit that already accrued to a participant who satisfied all of the pre-amendment conditions - either before or after the date of the amendment. Participants must be permitted to "grow into" or meet the requirements for the early retirement subsidy on any pension benefits they accrued prior to the date of the amendment.

In determining whether the PJS benefit is subject to these anti-cutback rules, the court noted that ERISA does not define the terms "early retirement benefit" or "retirement-type subsidy." In fact, Congress contemplated that such terms would be defined in Treasury regulations, but no such regulations have been published or proposed to date. The legislative history of the 1984 amendment to ERISA Section 204(g) suggests that Congress intended the Treasury regulations to define "retirement-type subsidy" as a subsidy that continues after retirement - a plant shutdown benefit that does not continue after retirement age will not be considered a retirement-type subsidy. The court reasoned that the reverse must also be true - a plant shutdown benefit that does continue after retirement age is a retirement-type subsidy subject to the anti-cutback rules of ERISA Section 204(g) and Code Section 411(d)(6). Because part of the PJS benefit did continue after a participant's normal retirement age, the court concluded that the PJS benefit was a retirement-type subsidy.

The court next addressed a 1990 IRS general counsel memorandum, GCM 39869, which concluded that a shutdown benefit that is a retirement-type benefit is not subject to the anti-cutback provisions of 411(d)(6) until the occurrence of the contingent event - the plant shutdown. Unpredictable contingent event benefits are not taken into account for funding purposes under Section 412 until the occurrence of the event on which the benefit is contingent, the memorandum noted. The IRS reasoned that because the legislative history of Section 412 states that shutdown benefits are unpredictable contingent event benefits, shutdown benefits become accrued benefits under Section 411(d)(6) only upon the occurrence of the event that triggers the right to payment of benefits.

The court rejected the reasoning of the IRS and CBS/Westinghouse that shutdown benefits are not subject to the anti-cutback provisions until the triggering event occurs. Such a result is contrary to the protection Congress sought to give such benefits in the 1984 amendment to ERISA Section 204(g), the court noted. Furthermore, the court said the IRS' argument read additional requirements - the occurrence of a contingent event - into the language of ERISA Section 204(g) without any support for those requirements. The court concluded that the PJS benefit is a retirement-type subsidy that accrued upon the creation of the benefit, not the occurrence of an event, and therefore is immediately subject to the anti-cutback provisions of ERISA Section 204(g) and Section 411(d)(6). The court upheld Bellas' motion for summary judgement against CBS/Westinghouse and the plan, finding that they violated ERISA Section 204(g) by reducing and subsequently eliminating the PJS benefit.

Impact of the Decision

Many employers have relied upon GCM 39869 in eliminating contingent benefits such as shutdown and disability benefits if necessary. This decision in Bellas could result in millions of dollars of additional employee benefits for manufacturing and other types of companies that included shutdown benefits in their plans based on the understanding that such benefits could be removed at any time.

The ruling creates a conflict with decisions of two other circuit courts, increasing the likelihood that the U. S. Supreme Court would be willing to hear an appeal of Bellas. However, until any such Supreme Court ruling - or until the Treasury Department promulgates regulations defining early retirement benefits and retirement-type subsidies - companies will have to look to the courts for guidance on whether they may cut back or eliminate plant shutdown benefits. To the extent plan sponsors may not cut back such benefits, they may need to increase the amount of funding in their plans, perhaps dramatically.

About the Author. Joseph S. Adams is a partner in the Employee Benefits Department of McDermott, Will & Emery's Chicago office. He is a specialist in the design, drafting, and ongoing qualification of pension plans, profit sharing/401(k) plans and ESOPs. Adams is the contributing editor for the Pension Plan Fix-It Handbook.

Reprinted with permission from the November 2000 supplement to The Pension Plan Fix-It Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.


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