Anti-cutback rules and early retirement benefits.

Cir. 1991); Edwards v. State Farm Mutual Automobile Insurance Co., 851 F2d 134 (6th Cir. 1988); Mcknight v. Southern Life & Health Insurance Co., 758 F2d 1566 (11th Cir. 1985); and Fuller v. CBT Corp., 905 F2d 1055, 1060 (7th Cir. 1990) ("In the event of a conflict between the handbook and plan, the former may trump--clearly so, when it is the employee relying on the handbook, for it is hardly realistic to expect him to read further.").

The appeals court dismissed the lower court's ruling that even if the SPD did control, the employee must show he had relied on the SPD and suffered prejudice as a result of that reliance. The Court of Appeals said the district court must try the case, and if it found either that the employee relied on the SPD or was prejudiced by the SPD, the court must rule for him.

The court did not discuss how the plan was to distribute money in violation of the plan document. Presumably, the plan would have to be amended to comply with the SPD.

At least three recent cases in three different Federal circuits have spoken to the interpretation of Section 204(g) of the Employee Retirement Income Security Act of 1974 (ERISA) regarding the prohibition on plan amendments reducing accrued benefits (the anti-cutback rule) and its application to early retirement benefits. Unfortunately, these cases do not appear to take a consistent view; indeed, one appears simply to ignore the law as it applies to early retirement benefits.

Background

ERISA Section 204(g) reads (in relevant part) as follows:

(1) 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 section 302(c)(8) [certain amendments made shortly after the close of the plan year] or section 4281 [certain amendments made on termination of a multiemployer plan].

(2) For purposes of paragraph (1), a plan amendment which has the effect of--

(A) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or

(B) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy....

Before July 31, 1984, this section did not protect early retirement benefits; the quoted language was added by the Retirement Equity Act of 1984. As with many ERISA provisions, ERISA Section 204(g) has a counterpart in the Code--Sec. 411(d)(6).

Gillis v. Hoechst Celanese Corp.

In Gillis v. Hoechst Celanese Corp., 4 F3d 1137 (3d Cir. 1993), rev'g DC Pa., cert. denied, the Third Circuit held that employees of a successor employer would be entitled to earn early retirement benefits even though they were not eligible for these benefits at the time their division was sold to the successor employer. The employees had worked in Hoechst Celanese Corp.'s PVC division, which, along with the retirement plan, was sold to American Mirrex. The early retirement benefit issue arose when the employees argued that Hoechst did not adequately fund the pension plan covering the PVC division because Hoechst failed to transfer sufficient assets to fund their early retirement benefits under the plan. Hoechst argued that ERISA did not protect such benefits for these employees.

The Third Circuit conceded that the statutory language might support either reading, but it looked at the IRS's interpretation of and positions on Sec. 411(d)(6). The court cited Rev. Rul. 85-6, which held that an employer terminating an early retirement benefit must set aside funds for those employees not eligible for early retirement benefits at the time the early retirement benefit was terminated, but who could "grow into" the early retirement benefit with subsequent service. In that ruling, the Service took the position that an employee could satisfy the eligibility requirements for an early retirement benefit after the early retirement plan was terminated.

Based on that interpretation, the court of appeals found that if the employees had remained with Hoechst and Hoechst had terminated the early retirement benefits, the employees would still have been able to earn such benefits. The court then concluded, "We conceive of no obvious reason why this same result should not obtain when the employees continue in their same jobs for a successor employer."

The court rejected Hoechst's argument that the legislative history stated that employees cannot earn such benefits after separating from service, citing IRS interpretations that no separation from service occurs when an employee remains in the same job for a successor employer after the transfer of assets in any form (see Rev. Ruls. 79-336 and 80-129; IRS Letter Ruling 8614048; GCM 39384 (1985)).

In reaching its decision, the court distinguished on the facts two other cases: Berger v. Edgewater Steel Co., 911 F2d 911 (3d Cir. 1990), cert. denied; and Hlinka v. Bethlehem Steel Corp., 863 F2d 279 (3d Cir. 1988). It also simply rejected the reasoning on this issue in two other cases decided by district courts outside the Third Circuit.

Hunger v. AB

In Hunger v. AB, 12 F3d 118 (8th Cir. 1993), the Eighth Circuit found that employment with a successor employer would not qualify for service counting toward an early retirement benefit.

Hunger and other individuals were employed by the Engine Parts Division of Clevite Industries, Inc., which sold the assets of that division--but not the plan covering the division--to JPI Merger, Inc. The former Clevite employees were offered jobs with JPI; Hunger and several others accepted that offer and continued their same jobs with JPI. The Clevite plan was then amended to provide that service with JPI would count solely for the purpose of vesting, and not for any other purpose. A few months later, the Pullman Company purchased Clevite's stock and the plan. Pullman refused to give Hunger and others the early retirement subsidy, since they were not eligible for early retirement benefits at the time Clevite sold the division to JPI. The employees claimed they were entitled to early retirement benefits by virtue of their service with JPI, and that the amendment to the plan violated the anti-cutback rules under ERISA Section 204(g).

The Eighth Circuit found that the original Clevite plan did not allow participants to earn eligibility for early retirement benefits through service with a successor employer; therefore, the amendment was not a cutback in accrued benefits. The Eighth Circuit specifically addressed the finding in Gillis v. Hoechst, finding it "unpersuasive" on two grounds:

* The Eighth Circuit refused to examine legislative history, finding the statute to be clear on its face. Because the Clevite plan expressly provided that service could be earned only with Clevite, the transfer to JPI prevented the employees from ever satisfying the original plan's eligibility requirements.

* The Eighth Circuit found the facts distinguishable from Hoechst. According to the court, the sale in Hoechst required the new employer to "provide substantially the same employee benefits as those Hoechst had provided." Therefore, the purchaser assumed both the obligations and the assets of the plan transferred by Hoechst in that situation. By contrast, in Hunger, JPI received neither the assets nor the obligations of the plan.

Meredith v. Allsteel, Inc.

In Meredith v. Allsteel, Inc., 11 F3d 1354 (7th Cir. 1993), Meredith argued that a 1991 collective bargaining agreement limited the early retirement benefits that had been granted in a 1988 agreement by restricting the early retirement supplement to those employees who retired "prior to 3/31/91." Because the 1988 agreement conferred the same benefit but did not include the "prior to 3/31/91" restrictive language, Meredith claimed that the 1991 agreement was an impermissible amendment to the pension plan reducing an accrued benefit.

The Seventh Circuit acknowledged that this theory raised several legal questions:

* Did the 1991 agreement actually reduce what was granted by the 1988 agreement?

* Do provisions for early retirement benefits negotiated through the collective bargaining process amount to amendments to a pension plan?

* Are early retirement benefits "accrued benefits"?

The court declined to answer the first two questions, saying that by answering "no" to the third question, the issue was resolved: ERISA Section 204(g) prohibits amendments to a pension plan which have the effect of reducing "accrued benefits." The definition section of ERISA defines an accrued benefit as one "commencing at normal retirement age...." ERISA Section 3(23). The statute defines normal retirement age as "the time a plan participant attains normal retirement age under the plan" or the later of "the time a plan participant attains age sixty-five, or...the tenth anniversary of the time a plan participant commenced participation in the plan." Taken together, these provisions indicate that early retirement benefits are not accrued benefits under ERISA.

To support this interpretation, the court cited two cases, both decided before ERISA Section 204(g) was amended in 1984: Bencivenga v. Western Pennsylvania Teamsters and Employers Pension Fund, 763 F2d 574, 577-578 (3d Cir. 1985) ("early retirement benefits are not considered 'accrued benefits' under ERISA"); and Sutton v. Weirton Steel Division of National Steel Corp., 724 F2d 406, 410 (4th Cir. 1983) ("accrued benefits secured by ERISA do not encompass unfunded, contingent early retirement benefits...."). And the court concluded, "Therefore, even if the 1991 agreement had the effect of reducing the early retirement benefits given in the 1988 agreement, there was no impermissible reduction of an accrued benefit." The court did not mention either Hoechst or Hunger, or the cases cited in those decisions.

Apparently, the Seventh Circuit totally ignored the full ERISA Section 204(g)(1) and (2). The court's language here presumably could be law in the Seventh Circuit, but it is so clearly contrary to the statute, it is difficult to conceive that the Seventh Circuit will not be forced to reexamine the issue.

Conclusion

On balance, confusion continues to reign on the real effect of ERISA Section 204(g)(2) for early retirement benefits. The outcomes are most likely to be determined by the facts and circumstances of each case. Apparently, only a ruling from the Supreme Court or further legislative clarification will eliminate this inconsistency.