Violation of Exclusive Benefit Rule?

[AHPension]

Previously, the Pension Plan Document (governmental plan) provided for a 5% COLA benefit, which, on an annual basis, was factored into the Plan's Normal Cost. Employee contributions (5-6% of their pre-tax gross wages) were deducted from that Normal Cost, and the employer paid the balance in the form of Annual Required Contributions (ARC). This process had went on for 15 years when the employer successfully reduced the COLA benefit from 5% to 2.5%, retroactively.

As a result, Plan assets that were reserved for a potion of the 5% COLA were now used to offset the employers future ARC. This description may be over simplified, but did this offset violate the Exclusive Benefit Rule?

I should add, because this Plan is situated in the State of Michigan, there are statutory requirements that require Plan assets to be held for the exclusive benefit of Participant's and Beneficiaries (PA 314).

[My 2 cents]

The following is my understanding of the situation described:

In a defined benefit plan, recognizing a reduction in plan liabilities by a reduction in future contributions would not, in my opinion, have any relationship to the Exclusive Benefit Rule. The Exclusive Benefit Rule would prohibit using plan assets to cover the cost of non-plan expenses. For example, charging costs for unrelated employee benefits or other sponsor costs to the plan would violate the Exclusive Benefit Rule, but amending the plan to cut future benefit liabilites and consequently reducing future contributions (or retroactively adding a new employee group to coverage by the plan, impairing the plan's funded status) would involve using plan assets for plan purposes. Remember - the assets of a defined benefit plan are not alllocated by individual until they are used to actually pay benefits.

If there is any possible issue, it would whether the retroactive reduction in COLA benefits is permissible. For a plan subject to IRC Section 411, such a plan change might not be allowable, but in any event, this is not a matter involving violation of the Exclusive Benefit Rule as I understand it.