Sheet Metal Workers' v. IRS ( 2003 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BOARD OF TRUSTEES OF THE SHEET 
METAL WORKERS’ NATIONAL PENSION
FUND, in its Capacity as Plan
Administrator,
Petitioner-Appellee,  No. 02-1273
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant.

Appeal from the United States Tax Court.
(Tax Ct. No. 00-6157)
Argued: October 29, 2002
Decided: January 31, 2003
Before NIEMEYER, WILLIAMS, and GREGORY, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Williams and Judge Gregory joined.
COUNSEL
ARGUED: Thomas James Sawyer, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. Ste-
phen Mark Rosenblatt, Chief Counsel, SHEET METAL WORKERS’
NATIONAL PENSION FUND, Alexandria, Virginia, for Appellee.
ON BRIEF: Eileen J. O’Connor, Assistant Attorney General, Ken-
neth L. Greene, Tax Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellant.
2 BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE
OPINION
NIEMEYER, Circuit Judge:
To remain qualified for tax-exempt status under 26 U.S.C.
§§ 401(a) and 501(a), a pension plan regulated by the Employee
Retirement Income Security Act of 1974 ("ERISA") may not elimi-
nate or reduce "the accrued benefit of a participant . . . by an amend-
ment of the plan." 26 U.S.C. § 411(d)(6); 29 U.S.C. § 1054(g) (the
ERISA counterpart to § 411(d)(6)). In this case, the Tax Court deter-
mined that the trustees of the relevant plan did not violate this "anti-
cutback" rule when, in 1995, they amended the plan’s terms to elimi-
nate a cost-of-living adjustment ("COLA") for employees who had
retired before the January 1, 1991 amendment that first included the
COLA.
Contending that the COLA added by the 1991 amendment became
"an accrued benefit" even for employees who had retired before Janu-
ary 1, 1991, the Internal Revenue Service ("IRS") argues in this
appeal that the elimination of the COLA for these employees violated
the anti-cutback rule and that therefore the plan as amended in 1995
does not qualify for tax-exempt status. For the reasons that follow, we
reject the IRS’ argument and affirm the decision of the Tax Court.
I
The Sheet Metal Workers’ National Pension Fund (the "Plan") was
established in 1966 by the Sheet Metal Workers’ International Asso-
ciation and employers in the sheet metal industry. It is a multi-
employer defined benefit pension plan for the benefit of employees
in the sheet metal industry.1 The terms of the Plan before 1991 did not
include a COLA among the Plan’s benefits.
1
This case actually involves two plans: plan "A" covers employees
involved in sheet metal construction, and plan "B" covers employees
involved in sheet metal production. Because the two plans have virtually
identical provisions, we follow the practice of the parties and denominate
the two plans as the "Plan."
BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE 3
In November 1990, the trustees of the Plan voted to amend the Plan
to provide a 2% annual COLA as part of the Plan, advising the Plan’s
participants that "[t]his financial arrangement . . . will make certain
that every qualified NPF pensioner will get a COLA payment each
December." In December 1991 they paid the participants a 2.04%
COLA. Then, by formal amendments made in March and October
1992, a new Article 8 was added to the Plan and made retroactive to
January 1, 1991, providing a 2% COLA benefit for all employees,
current and former, as an "annual supplement to the monthly pension
benefits." Thus, even retirees who separated from service before Janu-
ary 1, 1991, began receiving COLA benefits under the Plan for the
first time. These benefits were paid each December in 1992, 1993,
and 1994 in the form of "a 13th check."
After adding the COLA benefit to the Plan, the trustees learned that
the cost of the COLA had been underestimated and that continuing to
pay it would have an adverse financial impact on the Plan. Accord-
ingly, in October 1995, they amended the Plan, effective January 1,
1995, to eliminate the COLA for Plan participants who retired before
January 1, 1991, the date when the inclusion of the COLA was origi-
nally made effective.
The trustees also submitted the 1995 COLA amendment to the IRS,
seeking a determination that the Plan remained qualified under 26
U.S.C. § 401(a). The IRS’ district office requested advice from the
IRS’ national office on whether the COLA, which had been included
in the Plan effective 1991 by the addition of Article 8, had become
an "accrued benefit" within the meaning of 26 U.S.C.
§ 411(a)(7)(A)(i) and, if so, whether the 1995 Plan amendment dis-
continuing the COLA for pre-1991 retirees violated the "anti-cutback"
rule of 26 U.S.C. § 411(d)(6). The IRS’ national office issued a tech-
nical advice memorandum concluding that the COLA added by new
Article 8 effective 1991 had become an accrued benefit and that its
elimination in 1995 for pre-1991 retirees violated the anti-cutback
rule. When the Plan declined to modify its documents, the IRS issued
a final determination letter stating that the Plan failed to qualify under
§ 401(a) for 1995 and the years following and that the Plan was not
tax exempt under § 501(a).
The Plan’s trustees commenced this declaratory judgment action in
the Tax Court to determine that the Plan remained qualified under
4 BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE
§ 401(a) on the ground that the COLA added by Article 8 did not
create an "accrued benefit" for pre-1991 retirees and that its elimina-
tion therefore did not violate the anti-cutback rule. The Tax Court
agreed with the trustees and held that the Plan’s Article 8 COLA was
not an "accrued benefit" for pre-1991 retirees because the benefit did
not accrue while the pre-1991 retirees were still "employees." 117
T.C. 220 (2001). Emphasizing Congress’ use of the word "employee"
in defining "accrued benefit" in § 411(a)(7), the Tax Court concluded
that "ERISA was meant to protect only retirement benefits ‘stock-
piled’ during an employe[e]’s tenure on the job."
From the Tax Court’s decision, the IRS filed this appeal.
II
Under ERISA and the Tax Code, a qualified pension plan is
exempt from taxation, and to remain qualified for tax-exempt status,
a plan may not violate the anti-cutback rule which prohibits a plan’s
elimination or reduction of an accrued benefit. The anti-cutback rule
provides: "A plan shall be treated as not satisfying the requirements
of this section if the accrued benefit of a participant is decreased by
an amendment of the plan." 26 U.S.C. § 411(d)(6) (emphasis added).
The question presented is whether the Plan’s creation of a COLA ben-
efit in 1991 for employees already retired resulted in an "accrued ben-
efit" for those Plan participants and therefore could not later be
eliminated. The resolution of this question turns on the Tax Code’s
definition of "accrued benefit" and the terms of the Plan.
Section 411 of Title 26 defines "accrued benefit" as follows:
(a)(7) Accrued benefit. —
(A) In general. — For purposes of this section, the
term "accrued benefit" means —
(i) in the case of a defined benefit plan, the
employee’s accrued benefit determined under the
plan and, except as provided in subsection (c)(3),
expressed in the form of an annual benefit com-
mencing at normal retirement age, or
BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE 5
(ii) in the case of a plan which is not a defined
benefit plan, the balance of the employee’s
account.
26 U.S.C. § 411(a)(7)(A). Although this definition limits the common
understanding of an "accrued benefit" — i.e., any benefit that accu-
mulated over time — it does not specifically describe how to deter-
mine whether a given benefit for a plan participant is an "accrued
benefit." We thus turn to a more extended consideration of the statu-
tory definition’s text and immediate context.
Because the Plan in this case is a defined benefit plan, we focus our
textual analysis on § 411(a)(7)(A)(i) (defining "accrued benefit" for a
"defined benefit plan"). According to this provision, "‘accrued bene-
fit’ means . . . the employee’s accrued benefit determined under the
plan and . . . expressed in the form of an annual benefit commencing
at normal retirement age" (emphasis added). It should be apparent that
this definition does not purport to describe what counts as an "accrued
benefit" for all participants in all qualifying plans. Rather, the statu-
tory definition is a signpost directing us to look to the terms of the
plan at issue. The only apparent textual limit in § 411(a)(7)(A)(i) is
that the accrued benefit must be "expressed in the form of an annual
benefit commencing at normal retirement age."
A reading of the statutory definition’s immediate context — Sub-
chapter D, Part I, which includes 26 U.S.C. §§ 401-420 — provides
further insight into the meaning of "accrued benefit." Section 401
begins by establishing that a pension trust, formed by an employer
"for the exclusive benefit of his employees or their beneficiaries" with
contributions made by the employer, the employees, or both, is quali-
fied for tax-exempt status, subject to the conditions imposed by the
statute. 26 U.S.C. § 401(a); see also 26 U.S.C. § 501(a). One of the
relevant conditions is that the accrual of benefits created by employer
and employee contributions to the plan trust become nonforfeitable,
as set forth in § 411, which provides for "minimum vesting stan-
dards." Section 411 ensures the eventual payout of (1) a retirement
benefit (2) created by contributions made by the employer, by the
employees, or by both (3) in accordance with the plan in effect while
the employee works in the service of the employer. See, e.g., 26
U.S.C. § 411(a)(1)-(2) (providing when the various contributions
6 BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE
vest); § 411(a)(4) (addressing what "service [is] included in determi-
nation of nonforfeitable percentage"); § 411(a)(5) (defining "year of
service"); § 411(a)(6) (addressing the effects of "breaks in service").
Thus, when § 411(a)(7)(i) refers to "accrued benefit," it refers to a
benefit created by the accumulation of contributions and limited in its
form of payment as "determined under the plan" and "expressed in
the form of an annual benefit commencing at normal retirement age"
(emphasis added), but it does not describe what a given plan partici-
pant’s accrued benefit would be. The statute leaves this level of detail
to plan drafters who, of course, remain bound by other provisions of
ERISA and the Tax Code. Sections 411(b) and (c) reinforce this
understanding of "accrued benefit." Section 411(b) recognizes an
accumulation of benefits that grows during service, and section 411(c)
recognizes an allocation of "accrued benefits" between contributions
made by an employer and contributions made by employees. 26
U.S.C. § 411(b), (c).
In sum, while the statute gives a plan contractual latitude to define
the nature and amount of benefits to be paid under a qualified pension
plan, it requires that a participant’s "accrued benefit" not be elimi-
nated or reduced, referring to the participant’s retirement benefit that
is: (1) expressed by the plan as an annual benefit commencing at nor-
mal retirement age and (2) paid from a trust funded by the accumula-
tion of contributions made by the employer, the employees, or both
(3) in accordance with plan terms.
The wide latitude given to plans in defining what counts as an "ac-
crued benefit" does not undermine the promises of ERISA. Employ-
ees accruing benefits through plans that qualify under ERISA and the
Tax Code are promised benefits upon retirement and, subject to satis-
faction of conditions precedent, rightfully expect annual payments of
their accrued benefit. See Alessi v. Raybestos-Manhattan, Inc., 451
U.S. 504, 510-11 (1981) (noting that "ERISA prescribes vesting and
accrual schedules, assuring that employees obtain rights to at least
portions of their normal pension benefits . . . [and r]etirees rely on this
sweeping assurance"); Nachman Corp. v. Pension Benefit Guaranty
Corp., 446 U.S. 359, 375 (1980) (stating that Congress wanted to
"mak[e] sure that if a worker has been promised a defined pension
benefit upon retirement — and if he has fulfilled whatever conditions
are required to obtain a vested benefit — he actually will receive it").
BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE 7
The anti-cutback rule forms part of ERISA’s assurance that benefits
promised will be benefits paid. But the security provided by the anti-
cutback rule is bounded by the terms of the plan in that the plan
defines the benefits promised. "[T]he material available for interpret-
ing ERISA’s definition of ‘accrual’ always refers to the terms of the
pension plan itself. It is those terms that raise the ‘anticipat[ion of]
retirement benefits’ that Congress sought to protect and the ‘promised
. . . defined pension benefit’ that the Supreme Court has sought to
protect." Shaw v. Int’l Ass’n of Machinists and Aerospace Workers
Pension Plan, 750 F.2d 1458, 1465-66 (9th Cir. 1985).
The language of the Plan in this case is consistent with the statutory
definition of "accrued benefit," and this Plan language, together with
its consistency with the statute, is dispositive of the issue before us.
The Plan begins by defining accrued benefit to mean "generally the
annual pension benefit provided under the Plan commencing at Nor-
mal Retirement Age." The language becomes more specific when
stating in its description of eligibility conditions and benefit amounts
in § 5.01 that "[e]ntitlement of an eligible Participant to receive pen-
sion benefits is subject to his retirement and application for benefits,
as provided in Article 9." In the same vein, § 5.12 of the Plan pro-
vides that "[t]he pension to which a Participant is entitled shall be
determined under the terms of the Plan as in effect at the time the
Participant separates from Covered Employment, based on the actual
Pension Credit he had accrued and the Contribution Rates at which
he had worked prior to such separation, as determined under the
applicable provision of the Plan" (emphasis added). The Plan thus
states quite clearly that retirement benefits are determined by the
terms in effect "at the time the Participant separates" from service,
and benefits added after the employee has retired therefore cannot be
part of the "accrued benefit" for that employee under the terms of this
Plan. Thus, if an employee separated from covered employment by
retirement at a time when the Plan did not make any provision for a
COLA benefit, then the COLA benefit did not become part of that
employee’s "accrued benefit" under the Plan.
Applying our interpretation of the statute and the Plan to the spe-
cific circumstances before us in this appeal, we observe that employ-
ees who retired before 1991 were never promised a COLA benefit by
the Plan in existence during their service, and they had no reason to
8 BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE
expect that the Plan would provide a COLA during retirement. They
retired with the fulfillment of the promise for an "annual benefit com-
mencing at normal retirement age" but without a COLA. When, after
they were separated from employment by retirement, they were given
a COLA benefit, the benefit could not have been an "accrued benefit"
because it did not accumulate during their service so as to become
part of their legitimate expectations at retirement under the terms of
the Plan then in effect. It was a gratuitous benefit provided to them
after retirement which could therefore be withdrawn without impair-
ing the promised benefit that had accrued at their retirement. Accord-
ingly, we agree with the Tax Court, which held that the withdrawal
of the COLA benefit from the participants who retired before 1991
was not inconsistent with the anti-cutback rule set forth in 26 U.S.C.
§ 411(d)(6). Accord Scardelletti v. Bobo, 1997 WL 33446689, at *10
& n.7 (D. Md. Sept. 8, 1997).
The IRS concedes that ERISA and the Tax Code do not require that
a qualified plan contain a COLA. The IRS argues, however, that once
a plan includes a COLA, it is consistent with the intent and purpose
of ERISA that this benefit be protected by the anti-cutback rule. But
the IRS cites to no provision of ERISA, the Tax Code, or the Plan to
support a notion that this benefit conferred for the first time on a
retiree must be considered "vested" or "accrued."
Additionally, the IRS maintains that because such COLA provi-
sions are commonplace, it would only be reasonable to assume that
during active service, employees would have had a reasonable expec-
tation that they would receive benefits protected by a COLA after
retirement. This argument also fails fundamentally because it is not
grounded on any statutory or Plan language. Whether the expectation
of a post-retirement COLA benefit is a reasonable expectation can
only turn on the provisions of the applicable statute and the terms of
the Plan. Indeed, it would be unreasonable to expect a benefit that the
Plan does not provide and that ERISA and the Tax Code themselves
do not require.
Finally, the IRS argues that its "construction" of the term "accrued
benefit" should be favored because ERISA is a "remedial statute" that
must be broadly construed to favor Plan participants. See, e.g., Team-
sters Joint Council No. 83 v. Centra, Inc., 947 F.2d 115, 123 (4th Cir.
1991); Brink v. DaLesio, 667 F.2d 420, 427 (4th Cir. 1981). But this
BOARD OF TRUSTEES v. COMMISSIONER OF INTERNAL REVENUE 9
argument too fails for the same reason that it lacks any connection
with the language of the statute or the Plan. Moreover, if trustees of
ERISA plans knew that providing an additional benefit to already-
retired employees for a given year would lock that benefit in as a
floor for all future years, they would be less likely to increase benefits
gratuitously in years when the plans were particularly flush. Although
adopting the IRS’ proposed construction would, on the facts of this
case, protect the pre-1991 retirees, it could also lead the Plan trustees
to avoid providing gratuitous benefits in the future for fear of being
locked in perpetually. The creation of this type of harmful incentive
is precisely the sort of danger that excessive reliance on the amor-
phous admonition to construe remedial statutes broadly poses. See
Antonin Scalia, Assorted Canards of Contemporary Legal Analysis,
40 Case W. Res. L. Rev. 581, 581-86 (1989/1990).2
Accordingly, we conclude that the COLA benefit granted by the
Plan’s 1991 amendment was not an "accrued benefit" for pre-1991
retirees. As to those retirees, the COLA was never anticipated as a
retirement benefit before their retirement through the promise of
either the statute or the Plan in its then-existing form. Because the
COLA was not an accrued benefit for these pre-1991 retirees, the
trustees did not violate the anti-cutback rule of 26 U.S.C. § 411(d)(6)
when they amended the Plan in 1995 to exclude the pre-1991 retirees
from the COLA.
AFFIRMED
2
The IRS’ reliance on Hickey v. Chicago Truck Drivers Union, 980
F.2d 465 (7th Cir. 1992), and Shaw v. International Ass’n of Machinists
and Aerospace Workers Pension Plan, 750 F.2d 1458 (9th Cir. 1985), is
misplaced, as both are distinguishable. In Hickey, the court held that a
COLA, which had long been included in a plan, was an accrued benefit
for participants denied that COLA when the plan was terminated without
any provision for funding future COLA obligations. And in Shaw, the
court held simply that a provision for a "living pension" adjustment,
which made benefits competitive with existing employee-compensation
rates, was an accrued benefit. In neither case did the court address
whether the benefit would have become an accrued benefit for retirees
who were first given the benefit after separation from service by retire-
ment.