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Guest Article

Deloitte logo

(From the February 22, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Amending Retiree Medical Plan to Provide Benefits only to Participants Who Elect Monthly Pension Payments Violates Anti-Cutback Rule


The Third Circuit recently ruled that a welfare plan amendment which added, as a condition of receiving retiree medical benefits under the plan, the requirement that the participant must elect monthly payments rather than a single lump sum payment under the pension plan, was a constructive amendment of the pension plan which violated the anti-cutback provisions of ERISA § 204(g). Battoni, et al. v.__________, Nos. 08-3743, 09-2030, and 08-3924 (3rd Cir. 2/5/2010).

ERISA's Anti-Cutback Rule

ERISA § 204(g) prohibits amendments to pension plans that reduce a participant's accrued benefit. It states:

The accrued benefit of a participant under a plan may not be decreased by an amendment of the plan, other than an amendment described in ... [sections inapplicable to this case]. Emphasis added.

The Third Circuit addressed the issue of whether an amendment to a welfare plan -- which is not subject to the anti-cut back rule of ERISA § 204(g) -- can operate as a constructive amendment of a pension plan and violate the anti-cutback rule. Under the facts of this case, the Third Circuit ruled that it did because the definition of "amendment" is to be broadly construed to cover indirect amendments to the pension plan.

Welfare Plan Amendment Following a Merger

In the case, the members of a bargaining unit ("Bargaining Unit A") were covered under a welfare plan that provided retiree medical benefits, and a pension plan that allowed them to elect either a lump sum or annuity form of distribution. The bargaining unit's plans were merged with another bargaining unit's ("Bargaining Unit B") plans, which likewise provided its members with retiree medical and pension benefits -- but the pension plan only provided for distribution in the form of monthly payments.

After the plans were merged, the Bargaining Unit A pension plan was merged into the Bargaining Unit B pension plan. The Bargaining Unit B pension plan, as the surviving plan, continued to permit the Bargaining Unit A participants to elect a lump sum payment -- but only with respect to their accrued benefit as of the date of the merger. Post-merger accruals were payable only in monthly payments. The welfare plans were also combined and, shortly after that, the "surviving" plan was amended to condition the receipt of retiree medical coverage on the participant not electing a lump sum distribution from the pension plan. Before the amendment, Bargaining Unit A participants could still elect a lump sum under the combined pension plan and receive retiree medical benefits under the combined welfare plan.

Certain former members of Bargaining Unit A challenged the amendment, alleging that it violated the anti-cutback rule because it added a new condition to the receipt of a lump sum distribution from the pension plan: the surrender of retiree medical benefits under the welfare plan. The plan sponsor defended by arguing that it lawfully amended a welfare benefit plan, which is not subject to the anti-cutback rule of ERISA § 204(g).

"Amendment" Is Broadly Construed

The Third Circuit looked to the Treasury Regulations in deciding the case. IRC § 411(d)(6) contains the parallel provisions to ERISA § 204(g), and the Treasury Regulations there under explicitly state:

The addition of ... objective conditions with respect to a section 411(d)(6) protected benefit that has already accrued violates section 411(d)(6). Also, the addition of conditions (whether or not objective) or any change to existing conditions with respect to section 411(d)(6) protected benefits that results in any further restriction violates section 411(d)(6). Emphasis added.

Applying that analysis, the court reasoned that the welfare plan amendment added a condition to the receipt of benefits that had accrued under the pension plan. It functioned to condition the receipt of a lump sum payment on the non-receipt of retiree medical benefits under the welfare plan. As a result, the court held that the welfare plan amendment was a constructive amendment of the pension plan in violation of the anti-cutback rule of ERISA § 204(g).


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.


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