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5500 Preparer's Manual for 2012 Plan Years
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A successor employer did not violate ERISA’s anti-cutback rule when it declined to provide to terminated employees the "permanent job separation" benefits that were included as part of the predecessor employer’s pension plan, the U.S. Court of Appeals in Philadelphia (CA-3) has ruled.
Asset purchase
The predecessor employer sold an operating unit to a successor via an asset purchase agreement (APA). Under the APA, the successor hired all 227 employees active as of the APA closing date. With respect to pension benefits, the APA required the successor to establish for the legacy employees a defined benefit plan that contained “substantially identical” terms and conditions to those of the predecessor’s plan.
The predecessor’s plan provided an additional pension benefit, the "permanent job separation" (PJS) benefit, to terminated employees who met certain conditions. The PJS benefit was not available if an employee was offered continued employment by a successor employer. In addition, the PJS benefit contained a sunset provision stating that no permanent job separation could take place after August 31, 1998.
While the general closing date for the APA was August 19, 1998, for purposes of pension and benefits, the closing date was September 1, 1998. In the APA, the predecessor agreed to amend its own pension plan to provide the legacy employees with credit for service and compensation for the 13-day period from August 19 through August 31. This was for purposes of benefit accrual. In other words, even though as of August 19 the legacy employees were employed by the successor, the predecessor continued to offer them service credit under its own pension plan.
In 1999, the successor employer closed certain facilities and thus terminated the employment of many legacy employees. Most of those employees signed severance agreements, in which they released the successor from liability for claims arising from their employment or termination, in exchange for severance pay.
The terminated employees filed a claim with the successor plan for the PJS benefit but were denied. They then filed a class action suit in district court.
District court ruling
Relying heavily on a magistrate judge’s opinion, the district court concluded that the successor was required to offer the PJS benefits on the basis of two separate theories. First, the successor had created an ERISA "transition" plan via the extension of the predecessor’s plan from August 19 through August 31. Adoption of the new successor plan essentially amended the "transition" plan, eliminating the PJS benefit in violation of the anti-cutback rules of ERISA §204(g).
Alternatively, the district court ruled that ERISA §208 required the successor plan to provide equal or greater benefits than those of the predecessor plan. The court also found that under the Third Circuit’s ruling in Bellas v. CBS, Inc, because PJS benefits under the predecessor plan are protected from cutback, the successor is also required to offer the benefit.
Under the district court’s ruling, the terminated employees were entitled to receive the PJS benefits only to the extent rights to those benefits had not been waived under the severance agreement. Thus, the lower court granted summary judgment with respect to the few employees who had not signed severance agreements. With respect to those who had signed severance agreements, the court denied the successor’s motion for summary judgment and ordered a further factual inquiry as to whether the former employees’ waiver of the PJS benefits was knowing and voluntary.
No separation benefits
The appellate court ruled that none of the legacy employees were entitled to the PJS benefits. As such, whether or not claims were waived as a result of signing the severance agreements was irrelevant.
The successor did not create a new ERISA "transition" plan when it agreed to the special arrangement under which the legacy employees received for a thirteen-day period credit for service under the predecessor’s plan. The plan in place at that time was the predecessor’s plan, which was sponsored and maintained by the predecessor. Thus, the subsequent adoption of the successor’s plan, which lacked the PJS benefits, was not an amendment of a "transition" plan in violation of ERISA §204(g), because the successor had not established a plan to amend.
The district court construed ERISA §208 too broadly when it concluded the section imposes a requirement that a successor adopt verbatim a predecessor’s plan. Instead, ERISA §208 protects the legacy employees’ accrued benefits, which must be determined as of a hypothetical termination date of the predecessor plan, just prior to the transfer of liabilities to the successor. The determination of this hypothetical termination date requires reference to ERISA §204(g).
ERISA §204(g) does not protect from cutback an early retirement benefit for a plan participant who has not satisfied and can never satisfy the conditions for receiving the benefits that are subject to the cutback. The legacy employees would never be eligible for the PJS benefit because they had been offered continued employment by the successor.
Source: Shaver v. Siemens Corp. (CA-3).
For more information, visit http://www.wolterskluwerlb.com/rbcs.
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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