United States: First Circuit Issues Decision Concerning Pension Plan Amendments Taking Away Retroactive Benefit Enhancements; Distinguishes Between Retroactive Amendments Benefiting Current vs Former Employees

Last Updated: November 19 2013
Article by Susan K. Hoffman

The First Circuit recently issued a decision in Bonneau v. Plumbers & Pipefitters Local 51 Pension Trust Fund,  No. 13-1515 (1st Cir. Nov. 15, 2013).  This interesting case addresses an open question – when a pension plan is amended to enhance benefits based on prior service, are those benefit enhancements protected accrued benefits that cannot be reduced by a future amendment, or are they gratuitous benefits that can be taken back?  The First Circuit decided that if the benefit enhancement is adopted while the employees are still employed, the resulting benefits are protected, but if they are adopted after retirement or termination of employment, they are not protected by ERISA.

In 1998, four multiemployer plans were merged into one.  The pre-merger plans all allowed for some form of "banked hours" that allowed participants with more hours in a plan year than the minimum required for a year of service to use those accumulated "extra" hours for additional pension or vesting credits in the future.  Each of the pre-merger plans had different rules for accrual of banked hours and for use of banked hours – the merged plan (the Plumbers Plan) selected the most generous of each of the pre-merger plan rules for each purpose, thereby enhancing the post-merger benefits that could be acquired by some participants on account of pre-merger banked hours, and also retroactively increasing the number of banked hours for some participants by reducing the minimum hours required for a year of service (for benefits accrued in their pre-merger plans). 

A bit of background – effective in 2008, the Pension Protection Act ("PPA") amended ERISA to establish new funding rules for multiemployer plans, including special rules for plans designated as endangered or critical (which allow those plans to eliminate certain "adjustable" benefits).  But these ERISA amendments did not change the otherwise-applicable anti-cutback rule of ERISA §204(g), which prohibits reduction of accrued benefits accrued prior to the date of an amendment.  The Bonneau case involves a critical status plan, but does not involve elimination of adjustable benefits, which would have been permitted by PPA.

When the Plumbers Plan entered critical status, the trustees voted to eliminate the increased benefits that resulted from the merged plan amendment (including increased benefits received by already-retired participants), relying on ERISA §204(g)'s reference protecting "benefits attributable to service before the amendment."  The trustees reasoned that because the Plumbers Plan increased benefits by reason of pre-merger service, the fact that the implementation of those provisions occurred after the merger did not change the fact that the Plumbers Plan provided a gratuitous benefit enhancement that was not a protected benefit. 

The court disagreed, holding that even though the benefits were conferred retroactively, they were based on service before the amendment (i.e., the Plumbers Plan enhanced the benefit attributable to pre-merger service).  The only limitation on that anti-cutback protection the court saw is the use of the term "employee" in ERISA §3(23),  which provides that an "employee's" accrued benefit will never be less than the employee's accumulated contributions plus interest.  Relying on cost-of-living-adjustment (COLA) cases, where COLAs promised before retirement are protected but those promised after retirement are not, the court decided that because the retroactive benefits were promised before the plaintiffs retired, those benefits were protected from cutback.  The court concluded, "ERISA's anti-cutback rule does not ask whether benefits were 'earned.'  Rather, it asks whether benefits have 'accrued.'"

What does this case mean for employers and multiemployer plan trustees?  Benefit improvements, once granted, cannot be taken away in almost every situation and in almost all circumstances.  While an amendment can always reduce future benefit accruals (except in certain public pension plan situations), if those future enhancements are based on already-accrued service, ERISA's anti-cutback rules may prevent the operation of the amendment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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