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Contract Clause and Governmental Plans


ERISA25
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I am finding it difficult to locate consistent rulings on the Contract Clause and its application to governmental pension plans.

Specifically, I have seen some discussion on this board that many states protect from impairment of future benefit accruals. I am wondering whether a government who has reserved the right to amend and terminate the plan may reduce or eliminate benefits to be accrued in the future? (See Southeastern Pennsylvania Transportation Authority, 145 F.3d 619.) It appears to me that they can in the state of Maryland, for example, regardless of whether the employee is vested or not. The Maryland cases that I have seen say that pension plans create a contractual relationship with vested participants, and they say further that there is no issue with any plan amendment that does not reduce or diminish accrued benefits (i.e., a prospective amendment). I am over-generalizing a complex issue, but I am wondering if anyone has any thoughts on whether the government can reduce or eliminate future accruals in a governmental pension plan? Citations are appreciated.

I think this may other issues under IRC Section 401(a)(7).... do the partial termination rules apply to governmental plans?

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I am finding it difficult to locate consistent rulings on the Contract Clause and its application to governmental pension plans.

Specifically, I have seen some discussion on this board that many states protect from impairment of future benefit accruals. I am wondering whether a government who has reserved the right to amend and terminate the plan may reduce or eliminate benefits to be accrued in the future? (See Southeastern Pennsylvania Transportation Authority, 145 F.3d 619.) It appears to me that they can in the state of Maryland, for example, regardless of whether the employee is vested or not. The Maryland cases that I have seen say that pension plans create a contractual relationship with vested participants, and they say further that there is no issue with any plan amendment that does not reduce or diminish accrued benefits (i.e., a prospective amendment). I am over-generalizing a complex issue, but I am wondering if anyone has any thoughts on whether the government can reduce or eliminate future accruals in a governmental pension plan? Citations are appreciated.

I think this may other issues under IRC Section 401(a)(7).... do the partial termination rules apply to governmental plans?

If permitted under state law and the sponsoring employer has reserved the right to terminate the plan at any time then future benefit accrual can be eliminated after the plan is terminated. You will have to check the state consitution or case law for the state in question to see if there are any restrictions on eliminating benefits. For example, the NY state constitution prohibits the reduction of benefit accrual after an employee becomes eligible to participate in a public employer retirement plan. This has been applied to prohibit a reduction in future benefit accrual by a state employee.

You can google "Public Pension Plan Refom: The Legal Framework" by Amy B. Monahan for a good survey of the retirement plans for public employees in all 50 states. According the article only about 24 states have any case law or state constitution provisions that answer the question of whether public employee retirement benefits can be eliminated or reduced prospectively or retroactively.

However there are lawsuits pending in MN and CO on recent state legislation which will reduce the cost of liviing increases paid under the state pension plan in future years to state retirees receiving benefits, even though there will be no reduction in the current benefits paid to the retirees. The retirees claim that the state constitutions prohibt a change in state retirement laws which will reduce future cola increases even if the increases have not accrued. Thats like taxpayers claiming that a state could never increase income tax rates after the state legislature reduced the tax rates in a prior year.

mjb

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