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CCH® PENSION — 02/26/10

Welfare plan amendment that conditioned receipt of benefits on non-receipt of accrued pension benefits violated ERISA

An amendment to a union welfare benefit plan that conditioned the receipt of retiree health care benefits on the non-receipt of an accrued benefit (i.e., a lump-sum distribution option) under a union pension plan violated ERISA's anti-cutback rule by constructively amending the pension plan to decrease an accrued pension benefit, according to the U.S. Court of Appeals in Philadelphia (CA-3) in Battoni, Jr. v. IBEW Local Union No. 102 Employee Pension Plan.

After two union chapters merged, one chapter was dissolved and its members were transferred to a second surviving chapter. The chapters' pension and welfare plans were combined. The surviving chapter's pension plan was amended to allow the transferred members to retain a lump-sum distribution benefit option for benefits accrued under the dissolved chapter's pension plan. However, for benefits accrued in the surviving pension plan after the merger, the transferred members were required to take distributions in the form of periodic monthly payments --the plan's prevailing distribution option. In addition, the surviving chapter's welfare plan was amended after the merger to condition a retiree's receipt of health care benefits on the retiree not choosing the lump-sum distribution option offered in the surviving chapter's pension plan. Before the amendment, the dissolved chapter's participants could elect the lump-sum distribution option and receive health care benefits.

Current and retired members of the surviving union chapter who were former members of the dissolved union chapter brought suit against the pension and welfare plans and their former and current trustees in a U.S. district court, alleging, among other things, that the amendment to the welfare plan violated ERISA §204(g)'s anti-cutback requirements. The district court entered judgment in favor of the members/participants.

The surviving union appealed, arguing that the amendment lawfully amended a welfare plan, whose benefits are exempt from coverage under the anti-cutback rule by ERISA §201(1), without disturbing the members' rights to the lump-sum benefit offered under the pension plan. The union conceded that the lump-sum benefit offered in the pension plan was an "accrued benefit" under ERISA §3(23).

The appellate court explained that in order to state a claim for violation of the anti-cutback rule, a plaintiff must show that a plan was amended and that the amendment decreased an accrued benefit.

Pension plan was constructively amended

The appellate court decided that the first requirement of the anti-cutback claim was satisfied because the amendment constructively amended the pension plan. The court explained that it must evaluate the amendment's true benefit characteristics, "which are independent of the formal placement of the amendment." Using the definition of "pension plan" in ERISA §3(2)(A), the court reasoned that an amendment generally amends a pension plan "to the extent that by its express terms or as a result of surrounding circumstances ... [it] provide[s] retirement income to employers, or ... results in a deferral of income by employees for periods extending to the termination of covered employment or beyond." Citing prior case law, the court explained that "the words 'to the extent that' rather than 'solely' clearly indicate that Congress intended to allow any plan or part of a plan," to be considered a pension plan or a welfare plan. Thus, the current disputed amendment is part of the welfare plan "to the extent" that it pertains to welfare benefits and part of the pension plan "to the extent" that it concerns pension benefits. The court decided that the amendment constructively amended the pension plan by adding a condition to the receipt of an accrued benefit under that plan.

Amendment decreased accrued benefit

The union contended that the amendment merely restricted access to health care benefits and did not decrease any accrued benefit. The court concluded that because the amendment imposed a condition on the receipt of the lump-sum benefit, it decreased the value of an accrued benefit. The lump-sum pension benefits were accrued before the amendment was added to the post-merger welfare plan. But the amendment conditioned receipt of those accrued benefits on the participants' forfeiting health care benefits. When the new condition was added, the accrued benefit became less valuable.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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