The Board of Trustees of the Sheet Metal Workers' National Pension Fund v. Commissioner , 117 T.C. No. 19 ( 2001 )

117 T.C. No. 19UNITED STATES TAX COURT
THE BOARD OF TRUSTEES OF THE SHEET METAL WORKERS’
NATIONAL PENSION FUND, IN ITS CAPACITY AS PLAN
ADMINISTRATOR, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 6157-00R. Filed December 4, 2001.
PP is a multiemployer pension plan established in
1966 to benefit employees in the sheet metal industry.
A second, separate fund (C) was established in 1985 to
provide 3-percent cost of living adjustments (COLAs) to
most of PP’s participants. For 1985 through 1990, C’s
assets were insufficient to pay the 3-percent benefit,
and PP made “ad hoc” payments to each of its
participants who was eligible that year to receive a
benefit from C. The ad hoc payment equaled the amount
that, in combination with the benefit payable from C,
equaled the 3-percent COLA. PP’s plan was amended in
March 1992 to add a COLA as of Jan. 1, 1991, equal to
the difference between the 3-percent COLA and the
portion of that amount paid by C. In October 1992,
PP’s plan was restated as of Jan. 1, 1991, to provide
for a flat 2-percent COLA that was not dependent on the
amount paid by C and that was payable to all eligible
employees without regard to whether the provision was
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in effect when the employees retired or separated from
service. PP paid a COLA for 1992 through 1994. In
October 1995, PP’s plan was amended to eliminate the
COLAs paid under the plan to pre-1991 retirees.
Held: The 1995 amendment, although it removed
COLAs that had been provided to pre-1991 retirees, did
not violate the anticutback provision of sec.
411(d)(6), I.R.C.
Stephen M. Rosenblatt and W. Mark Smith, for petitioner.
Sandra M. Jefferson and Elizabeth S. Henn, for respondent.
OPINION
LARO, Judge: Petitioner petitioned the Court for a
declaratory judgment under section 7476. The case is before the
Court for decision on the basis of the stipulated administrative
record. Rule 217(b)(1).1
We must decide whether petitioner’s pension plan, the Sheet
Metal Workers’ National Pension Fund, Plan A and Plan B (the
Plan),2 failed to qualify under section 401 for its plan year
ended December 31, 1995, and thereafter. We hold that it did
qualify under section 401 and, hence, that its trust was exempt
from Federal income taxation under section 501.
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue.
2
Although the terms of Plan A and Plan B are set forth in
two separate documents, those terms are substantially identical.
We treat the plans as a single plan for purposes of this opinion.
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Background
The parties have stipulated the administrative record. That
record is incorporated herein by this reference. Petitioner’s
address was in Alexandria, Virginia, when its petition was filed.
The Plan is a multiemployer defined benefit pension plan.
It was established in 1966 by the Sheet Metal Workers’
International Association (SMWIA) and by employers in the sheet
metal industry. Its sponsor and administrator is petitioner.
Petitioner, which comprises an equal number of employer and
employee trustees, has the sole authority to amend the Plan.
The Plan primarily provides retirement benefits to employees
in the sheet metal industry. Under the Plan, a participant is
entitled to receive a pension ascertained from the Plan’s terms
in effect when he or she separates from covered employment. The
amount of the pension is ascertained from the pension credit
accrued and the contribution rates at which the participant had
worked before separation.
In 1985, the SMWIA and the various employers who maintained
the Plan established a separate fund (COLA Fund) to provide for
cost of living adjustments (COLAs). The COLA Fund was not part
of the Plan, and the COLA Fund and the Plan had separate trusts,
were governed by separate plan documents, and had separate boards
of trustees. The COLA Fund’s plan document gave the trustees the
discretion to ascertain each year whether a COLA would be paid
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and, if so, the amount of the payment not to exceed the amount of
available assets. It was always intended that the annual benefit
under the COLA Fund would equal approximately 3 percent of the
pensioner’s annual retirement benefit from the Plan, multiplied
by the number of years, up to 15, that he or she had received a
pension from the Plan (the 3-percent COLA).
The COLA Fund was set up as a supplemental payment plan
under the Employee Retirement Income Security Act of 1974
(ERISA), Pub. L. 93-406, sec. 3(2)(B)(ii), 88 Stat. 829,
(currently codified at 29 U.S.C. sec. 1002(B) (ii) (1994)), as
amended by the Multi Employer Pension Act of 1980, Pub. L.
96-364, sec. 409, 94 Stat. 1307. The employers who maintained
the COLA Fund initially contributed to the fund 5 cents per every
hour worked by an employee of theirs. Each employer who
maintained the COLA Fund also maintained the fund (NPF Fund)
underlying the Plan, but not all employers who maintained the NPF
Fund also maintained the COLA Fund. Thus, not all Plan
participants participated in the COLA Fund.
In 1985, the COLA Fund’s assets were insufficient to pay the
full 3-percent COLA. Accordingly, the NPF Fund made an “ad hoc”
payment to each retiree and beneficiary under the Plan who was
eligible that year to receive a benefit from the COLA Fund. (The
minutes of the meeting authorizing the ad hoc payment in 1985,
like those for subsequent years, contained the recital: “Noting
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that it was permissible for a pension fund to provide ad hoc
benefit increases to pensioners and beneficiaries it was agreed
that the National Pension Fund should provide the amount
necessary to reach the desired formula.”) The ad hoc payment
equaled the amount that, in combination with the benefit payable
from the COLA Fund, equaled the 3-percent COLA.
The COLA Fund’s assets were again insufficient to pay the
3-percent COLA for 1986, 1987, and 1988. In each of these years,
petitioner approved the NPF Fund’s payment of an ad hoc amount
that, in combination with the benefit payable under the COLA
Fund, equaled the 3-percent COLA. The percentages of those ad
hoc payments for 1985 through 1988 were 1.7, 1.8, 1.5, and 2.4,
respectively.
On July 11, 1988, respondent prescribed a new set of
regulations that included section 1.411(d)-4, Q&A-1(c), Income
Tax Regs. That section mandates that, if an employer establishes
a pattern of repeated plan amendments providing for similar
benefits in similar situations for substantially consecutive,
limited periods of time, those benefits will be treated as
provided under the terms of the plan. That section further
mandates that patterns of repeated plan amendments adopted and
effective before July 11, 1988, are disregarded in determining
whether the amendments constitute a pattern that is deemed part
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of the plan. Petitioner’s minutes of its meeting in October 1988
recite that its legal counsel reported that
recent Internal Revenue Service regulations which
provide that a pattern of repeated plan amendments
providing for similar benefits, in similar situations
paid to participants for substantially consecutive
limited periods of time will be considered by the
Internal Revenue Service as a permanent benefit and the
Internal Revenue Service would require that such
benefits be funded. [Counsel] * * * stated that the
regulations make a presumption that any such benefit
paid for three consecutive years will be considered a
permanent benefit.
In 1989, the employers’ contribution to the COLA Fund was
raised from 5 to 10 cents per hour worked. The COLA Fund’s
assets were again insufficient to pay the 3-percent COLA for 1989
and 1990. To make up for the shortfall, petitioner authorized ad
hoc payments from the NPF Fund of 2.3 percent and 2.1 percent for
the respective years.
In a session held on November 15 and 16, 1990, petitioner
agreed to amend the Plan to provide a 2-percent annual
cost-of-living benefit (the NPF COLA) as an integral part of the
Plan itself beginning in December 1991. A March 1991 newsletter
sent to plan participants stated in an article entitled “NOW!
COLA COVERAGE FOR ALL NPF RETIREES”:
The Trustees of the Sheet Metal National Pension Fund
have unanimously voted to extend COLA (Cost of Living
Allowance) protection to all qualified retired SMWIA
members and their surviving spouses who receive NPF
pensions.
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As a result, in October 1991, the original COLA Fund was amended
to provide for a 1-percent cost-of-living benefit. In December
1991, the COLA Fund paid .96 percent as a COLA benefit, and the
NPF Fund paid 2.04 percent.
In March 1992, petitioner adopted a new article 8 that
formally added the NPF COLA to the Plan, effective retroactively
to January 1, 1991. Initially, the March 1992 amendment provided
that the NPF COLA would equal the difference between 3 percent
and the amount paid from the COLA Fund. In October 1992, the
Plan was restated retroactively to January 1, 1991, to provide
for a 2-percent benefit (subject to minor adjustments) that was
not dependent on the amount paid from the COLA Fund; it was
anticipated that the COLA Fund would pay a 1-percent benefit if
it had sufficient assets. The new article 8 provided NPF COLAs
to all eligible employees without regard to whether the NPF COLA
provision was in effect when the eligible employee retired or
separated from service. Thus, plan participants who retired or
separated from service before January 1, 1991 (pre-1991
retirees), were provided with the NPF COLAs.
Pursuant to the Plan’s amendments, the NPF Fund paid for the
respective years from 1992 through 1994 a COLA of 2 percent, 2.2
percent, and 2 percent, multiplied by the number of years (up to
15) that the pensioner had received a pension from the Plan. NPF
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COLA payments were made in lump sum distributions in December in
the form of a “13th check”.
By the end of 1993, petitioner concluded that the COLA Fund
could no longer provide the anticipated 1-percent payment. In a
letter dated December 1993, which enclosed the 13th check,
eligible retirees and beneficiaries were informed that future
COLA checks would be based on a 2- rather than 3-percent rate.
As of 1994, the COLA Fund stopped paying COLAs. In September
1994, the COLA Fund’s trustee voted to end employer contributions
to the COLA Fund, effective July 1, 1995. In December 1994,
petitioner adopted an amended and restated plan that included
minor amendments to article 8, none of which are relevant herein.
In March 1995, petitioner proposed an amendment to article 8
which would eliminate the NPF COLAs paid to pre-1991 retirees.
Later in March 1995, the Plan filed a Form 5303, Application
for Determination for Collectively Bargained Plan, with
respondent’s Baltimore Key District Office (District Office).
The application was filed in response to a technical advice
memorandum dated November 9, 1994 (regarding provisions not at
issue in this case), as well as to comply with amendments to the
Code. The application contained the amended and restated plan
that petitioner adopted on December 22, 1994. It also contained
a copy of a proposed amendment to article 8 which would eliminate
NPF COLAs for pre-1991 retirees.
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On October 30, 1995, petitioner amended and restated
article 8 (1995 article 8). The 1995 article 8 provides that,
effective January 1, 1995, a participant had to have separated
from covered employment on or after January 1, 1991, in order to
be eligible to receive an NPF COLA. The 1995 article 8 also
provides that petitioner may amend the Plan in any year to
provide an ad hoc payment to pre-1991 retirees. The 1995 article
8 limits the amount of any single year’s ad hoc payment to 5
percent of the retiree’s annual pension benefit and does not take
into account years of service.
By unanimous written concurrence on December 30, 1996,
petitioner amended and restated article 8 (1996 article 8), again
providing that a plan participant had to be separated from
covered employment on or after January 1, 1991, to receive an NPF
COLA. The 1996 article 8 also incorporates specifically the
provision permitting the Plan to be amended so that ad hoc
payments might be made to pre-1991 retirees in 1995 and again in
1996. For 1996, petitioner paid a flat 8-percent ad hoc payment
to the pre-1991 retirees.
On April 30, 1997, petitioner submitted the final adopted
article 8 to the District Office as a supplement to the
application for determination. By letter dated June 12, 1997,
the District Office notified the Plan that it was requesting a
technical advice memorandum (TAM) from respondent’s national
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office on the answers to the following questions: (1) Whether
the benefit provided under article 8 is an accrued benefit under
section 411(a)(7)(A)(i) for pre-1991 retirees; and (2) whether
the amendment that discontinued NPF COLAs for pre-1991 retirees
reduced those participants’ accrued benefits in violation of
section 411(d)(6)(A).
By letter dated September 8, 1999, the District Office sent
a copy of the TAM to the Plan’s counsel. The TAM concludes that
the amendment to article 8 violates section 411(d)(6). The
letter asked the Plan to submit a corrective amendment. By
letter dated October 4, 1999, the Plan’s counsel notified the
District Office that petitioner did not intend to make any
corrective amendment to the Plan.
On March 6, 2000, respondent issued to the Plan a final
adverse determination letter that stated that the Plan failed to
qualify under section 401(a) for 1995 and thereafter. It also
stated that the trust underlying the Plan was not exempt from
Federal income taxation under section 501(a) for the related
years. The adverse determination was generally based upon the
reasons stated in the TAM.
Discussion
We must decide whether the NPF COLA is an accrued benefit of
the pre-1991 retirees, the elimination of which violated the
anticutback rule of section 411(d)(6). Petitioner maintains that
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the NPF COLA is not an accrued benefit as to pre-1991 retirees
because the NPF COLA only became effective on January 1, 1991.
Petitioner concludes that the pre-1991 retirees could not have
accrued an NPF COLA while they were employees and, hence, that
the 1995 amendment eliminating that benefit as to them did not
violate section 411(d)(6). Respondent argues that the NPF COLA
is an accrued benefit as to pre-1991 retirees and that its
elimination violates the anticutback rule. Respondent contends
that the level of benefits provided by a plan is set by the
parties thereto in the plan’s terms and that nothing in ERISA
prevents a plan from being amended after a participant’s
retirement to provide, retroactively, more generous accrued
benefits to that participant.
We agree with petitioner. For the reasons stated below, we
believe that a COLA that is added to a plan after the retirement
of some of its participants, although made available to them, is
not an accrued benefit as to those participants under section
411(d)(6).
Congress enacted ERISA to ensure 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.” Nachman Corp. v. Pension
Ben. Guar. Corporation, 446 U.S. 359, 375 (1980). Congress
included in Title I of ERISA provisions for the “Protection of
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Employee Benefit Rights”. Congress included in Title II of ERISA
“Amendments to the Internal Revenue Code Relating to Retirement
Plans.” Through ERISA, qualified pension plans and their
participants are granted favorable tax treatment in that: (1) An
employer may deduct its contributions to the trust which holds
the pension fund in the year in which the contributions are made,
(2) the earnings on the trust’s principal are not taxed, and (3)
the employee is not taxed until the benefits are distributed to
him or her.
We concern ourselves with the anticutback rule of section
411(d)(6). That section, which parallels the requirements of
29 U.S.C. sec. 1054(g), provides in relevant part:
(6) Accrued benefit not to be decreased by
amendment.--
(A) In general.--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, other than an amendment
described in Section 412(c)(8), or Section 4281 of the
Employee Retirement Income Security Act of 1974.
(B) Treatment of certain plan amendments.--For
purposes of subparagraph (A), a plan amendment which
has the effect of--
(i) eliminating or reducing an early
retirement benefit or a retirement-type
subsidy (as defined in regulations)[3], or
3
There is no definition of "retirement-type subsidy" in
the regulations.
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(ii) 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. The Secretary
may by regulations provide that this
subparagraph shall not apply to a plan
amendment described in clause (ii) (other
than a plan amendment having an effect
described in clause (i)).
For this purpose, the term “accrued benefit” is defined by
section 411(a)(7) as follows:
(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 commencing at
normal retirement age * * *
An accrued benefit generally represents the progressively
increasing interest in a retirement benefit that an employee
earns each year, under a formula that is provided in the plan.
Ashenbaugh v. Crucible, Inc., 1975 Salaried Ret. Plan, 854 F.2d
1516, 1524 (3d Cir. 1988); see Hoover v. Cumberland, MD Area
Teamsters Pension Fund, 756 F.2d 977, 981-982 (3d Cir. 1985).
ERISA does not specify any particular amount of an accrued
benefit. It does, however, generally require that a qualified
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pension plan participant’s right to his or her normal retirement
benefit must become fully vested within specified time limits.
Sec. 411(a); see also 29 U.S.C. sec. 1053(a). When an employee’s
accrued retirement benefit is vested, it is nonforfeitable.
Thus, a participant in a defined benefit plan (such as the Plan)
is fully vested when he or she has a nonforfeitable right to 100
percent of the accrued benefit. An employee’s accrued benefit at
any given time is what a fully vested employee would be entitled
to receive under the plan’s formula if the employee ceased
employment at that time. In order to prevent circumvention of
the vesting provisions, the anticutback rule provides that, in
order to remain qualified, a plan must not decrease an accrued
benefit or reduce a retirement-type subsidy.
The statutory language defining “accrued benefit” for
purposes of the Code supports our conclusion that the NPF COLA is
not an “accrued benefit” as to pre-1991 retirees. Section
411(a)(7) defines “accrued benefit” as “the employee’s accrued
benefit determined under the plan and, except as provided in
subsection (c)(3), [which is not relevant here] expressed in the
form of an annual benefit commencing at normal retirement age”.
(Emphasis added.) Section 411(d)(6), by contrast, protects the
“accrued benefit of a participant” from being “decreased by an
amendment of the plan”. (Emphasis added.) The statutory
construction thus indicates that a retirement benefit may be
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“accrued” only by an “employee”, but, once accrued, the benefit
is protected from diminution as long as the individual who
accrued the benefit is a “participant” in the plan, whether as an
employee or as a retiree.4 It follows that, while a retiree may
enjoy COLAs added after retirement, such COLAs are not “accrued
benefits” as to that retiree, because the COLAs were not accrued
while he was an employee. Accordingly, the later-added COLAs are
not protected from being diminished by operation of section
411(d)(6).
The pertinent legislative history reinforces the
understanding that ERISA was meant to protect only retirement
benefits “stockpiled” during an employee’s tenure on the job:
Unless an employee’s rights to his accrued pension
benefits are nonforfeitable, he has no assurance that
he will ultimately receive a pension. Thus, pension
rights which have slowly been stockpiled over many
years may suddenly be lost if the employee leaves or
loses his job prior to retirement. Quite apart from
the resulting hardships * * * such losses of pension
rights are inequitable, since the pension contributions
previously made on behalf of the employee may have been
made in lieu of additional compensation or some other
4
While 29 U.S.C. sec. 1002(6) (1994) defines “employee” as
“any individual employed by an employer”, 29 U.S.C. sec. 1002(7)
(1994) defines “participant” more expansively to include “any
employee or former employee”. (Emphasis added.) The terms
“employee” and “former employee” are not interchangeable.
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117-118
(1989). Additionally, while the definition of the term “accrued
benefit” under 29 U.S.C. sec. 1002 (23) is “an individual’s
accrued benefit”, we find no indication that this term has a
different meaning for purposes of sec. 411(d)(6).
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benefits which he would have received. [S. Rept.
93-383, at 45 (1974), 1974-3 C.B. (Supp.) 80, 124.5]
There appears to be only one case that has addressed the
issue of whether a retirement supplement is an accrued benefit
for participants who retired before the supplement was added to a
plan. The case of Scardelletti v. Bobo, 1997 U.S. Dist. LEXIS
14498 (D. Md. Sept. 8, 1997), addressed the Transportation
Communication International Union (TCU) Staff Retirement Plan
(TCU plan). In 1991, the TCU plan’s former trustees recommended
an automatic COLA on the basis of the advice of the plan’s former
actuary. By 1993, a new actuary had concluded that the former
actuary’s calculations were erroneous and that the plan could not
afford an automatic COLA. The TCU Executive Council froze the
automatic COLA for future service accruals for active employees,
and the TCU plan’s current trustees sued the former trustees
under ERISA for breach of fiduciary duty. The current trustees
alleged that, by following the earlier actuary’s advice, the
former trustees had significantly increased the plan’s funding
requirements. The former trustees defended by arguing that the
5
Other portions of the legislative history are not
particularly helpful in this case. They describe accrued
benefits in terms of what they are not: “In the case of a
defined benefit plan * * * The term “accrued benefit” refers to
pension or retirement benefits and is not intended to apply to
certain ancillary benefits, such as medical insurance or life
insurance”. H. Rept. 93-807, at 60 (1974), 1974-3 C.B. 236, 295.
The parties agree that the NPF COLA is a retirement benefit and
not an ancillary benefit.
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current trustees could have mitigated plan losses by eliminating
the automatic COLA for participants who retired before its
effective date in 1991.
In its opinion, the District Court explained the purpose of
section 411(d)(6) by observing that “if an employee works with
the expectation that she is earning, and will receive, a pension
benefit, an employer may not later decide not to give her the
benefit that it has promised and she has earned.” Id. Citing
Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 511 (1981),
the District Court noted that “The purpose of the requirement [in
section 411(d)(6)] is to protect that which an employee has been
promised and has earned over time.” Scardelletti v. Bobo, supra.
The court explained that “The question in our case is purely
whether a later-added benefit may be considered an accrued
benefit.” Id. at n.7. The court concluded that the COLA “was
not an accrued benefit” as to participants who retired before the
COLA was adopted in 1991, because those participants “did not
work with the expectation that they would receive a COLA.” Id.
Other courts have stressed the principle that an accrued
benefit is one that is promised to the employee, accrued by the
employee during his or her tenure as an employee, and expected by
the employee to be available upon retirement. In Hickey v.
Chicago Truck Drivers Union, 980 F.2d 465 (7th Cir. 1992), for
example, a union’s defined benefit pension plan was amended to
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add a COLA to all retirement benefits. In 1987, the plan was
terminated without provision for the funding of future COLAs.
Ms. Hickey and other plan participants brought an action to
preserve the COLA. They contended that the COLA was part of
their monthly accrued retirement benefit and could not be
eliminated without violating 29 U.S.C. sec. 1054(g), the
equivalent provision to section 411(d)(6). The Court of Appeals
for the Seventh Circuit agreed with Ms. Hickey, finding that the
COLA benefit could not be reduced by amendment. The Court of
Appeals observed that
A participant’s right to have his basic benefit
adjusted for changes in the cost-of-living accrued each
year along with the right to the basic benefit. A
participant’s entitlement to his or her normal
retirement benefit included, as one component, the
right to have the benefits adjusted pursuant to the
COLA provision. [Id. at 469.]
Similarly, in Shaw v. Intl. Association of Machinists &
Aerospace Workers Pension Plan, 750 F.2d 1458 (9th Cir. 1985),
the plan included a “living pension” feature. The living pension
was analogous to a COLA benefit, because it provided for
adjustment of the benefit after retirement by substituting in the
benefit formula the current monthly salary of the retiree’s old
job in place of the retiree’s final monthly salary. The plan in
Shaw was amended in 1976 to decrease the living pension feature
and suit was brought by a participant who had retired in 1975.
Id. at 1460. The court in Shaw emphasized that the entire
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pension benefit-–including the living pension feature-–was
“promised, anticipated and accrued.” Id. at 1466. It explained:
Congress determined “that despite the enormous
growth in * * * [pension] plans many employees with
long years of employment are losing anticipated
retirement benefits owing to the lack of vesting
provisions in such plans.” 29 U.S.C. § 1001(a). The
Supreme Court has held, “Congress through ERISA wanted
to ensure 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 receives it.’”
[Citations omitted.] Thus, the material available for
interpreting ERISA’s definition of “accrual” always
refers to the terms of the pension plan itself. It is
those terms that raise the anticipa[tion of] of
retirement benefits that Congress sought to protect and
the “promised * * * defined pension benefit” that the
Supreme Court has sought to protect. [Id. at
1465-1466.]
The courts in Hickey and Shaw ruled that the COLA adjustment
and the living pension feature, respectively, formed part of the
participants’ accrued benefit and could not be eliminated. In so
holding, both courts reasoned that the benefit supplement
involved had been promised to and relied on by affected employees
while they were employed. Respondent points out, however, that
neither court made a distinction between those retirees who had
left employment before the retirement benefit was adopted and
those who retired after the COLA was adopted. (In Hickey, the
COLA was adopted in 1973, and terminated in 1987. In Shaw, no
mention is made of when the “living pension” provision was
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adopted, although it was eliminated in 1976.6) Respondent
submits that this Court should adopt the rationale of Hickey v.
Chicago Truck Drivers Union, supra, and decline to distinguish
between the case of participants who retire before a COLA is
adopted and those who retire afterwards. Respondent cites
language in Hickey to the effect that--
viewing the Plan as a whole, the COLA is an essential
element of the normal retirement benefit. The COLA
ensures that the retirement benefits will not diminish
in real value over time. It provides the additional
retirement income each month that is necessary to
maintain the value of the retirement benefits. [Id. at
468.]
Respondent’s argument would have some force if the opinion
in Hickey had made an affirmative holding that the COLA was an
accrued benefit for pre-1974 retirees. It did not. We instead
accept the conclusion of the court in Scardelletti v. Bobo,
supra, which found Hickey to be distinguishable. In the case
before it, the court in Scardelletti observed that “Here,
beneficiaries who retired before 1991 did not accrue any COLA
benefit.” Id. The court stated:
Although * * * the Hickey court did not
distinguish between pre-1973 and post-1973 retirees, it
does not necessarily follow that that distinction is
irrelevant for determining whether the benefits were
6
In Shaw v. Intl. Association of Machinists & Aerospace
Workers Pension Plan, 563 F. Supp. 653, 655 (C.D. Cal. 1983),
the District Court’s opinion is silent on this fact as well,
although it does quote from a description of the “living trust”
dated 1969, some 6 years before the plaintiff retired and some 7
years before the “living pension” was terminated.
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accrued. It is most likely that there were few pre-
1973 retirees still receiving benefits under that plan,
and that the issue was not even raised in that case.
There is certainly no indication from the court’s
opinion that it was raised by the parties. [Id.]
We conclude that the provisions of ERISA are meant to
preserve only those retirement benefits accrued by an employee
during his tenure as an employee. This conclusion follows from
the language of section 411(a)(7) that defines an accrued benefit
as one of an “employee” “commencing at normal retirement age”.
The same conclusion follows from the legislative history
emphasizing ERISA protection of pension rights which have been
“slowly stockpiled” and from the cases which maintain that ERISA
benefits were those which were “promised, anticipated, and
accrued.”
Respondent argues, in the alternative, that “if the NPF COLA
benefit is not considered to be an accrued benefit, it appears to
fit within the definition of a retirement-type subsidy” within
the meaning of section 411(d)(6)(B)(i).7 We disagree. The
concept of a retirement-type subsidy has an accepted meaning as
it is used in section 411(d)(6)(B)(i). It does not refer to
postretirement COLAs. It refers to amounts paid to early
retirees above their normal pension benefits.
7
Petitioner maintains that respondent’s alternate arguments
were not made in a timely fashion and that respondent thus bears
the burden of proof as to these arguments under Rule 217. In
view of our disposition of these issues, we need not decide where
the burden of proof lies.
- 22 -
Pension plans frequently provide for early retirement
benefits. Such early retirements often commence at age 55 and
require the fulfilment of a minimum period of service. The value
of the early retirement benefit is calculated by first
determining the amount that would be payable to the participant
at normal retirement age, given the participant’s service and
compensation as of the date of early retirement. This value is
then reduced by a factor reflecting that benefit payments will
begin earlier than was contemplated and, therefore, are likely to
continue for a longer period of time. Often, however,
early-retiring employees are provided benefits which are not so
reduced. “The provision of an early retirement benefit greater
than the actuarial equivalent of the normal retirement benefit is
referred to as a subsidized early retirement.” Bellas v. CBS,
Inc., 221 F.3d 517, 525 (3d Cir. 2000) (citing McGill & Grubbs,
Fundamental of Private Pensions 131-135 (6th ed. 1989)); see,
e.g., Rybarczyk v. TWR, Inc., 235 F.3d 975, 978 (6th Cir. 2000)
(“The benefit received by early retirees was called, in the
jargon of the cognoscenti, a ‘subsidized’ benefit.”).8
8
See also Dade v. N. Am. Phillips Corp., 68 F.3d 1558, 1562
n.1 (3d Cir. 1995) (citing Bruce, Pension Claims Rights and
Obligations 285 (1993)) (benefits paid under an early retirement
program, in light of sec. 411(d)(6)(B)(i), “are considered early
retirement subsidies because ‘more is provided * * * than any
reasonable actuarial equivalent of the plan’s normal retirement
benefits.’”); Ashenbaugh v. Crucible, Inc., Ret., 854 F.2d 1516,
1521 n.6, 1528 n.12 (3d Cir. 1988) (benefits to an employee
(continued...)
- 23 -
Section 411(d)(6)(B)(i) was added to the Code in 1984, as
part of the Retirement Equity Act (REA), Pub. L. 98-397, 98 Stat.
1426 (1984). Before the REA, the anticutback rules did not
explicitly preclude plan amendments that reduced or eliminated
early retirement benefits or retirement-type subsidies. Because
many early retirement programs provided a benefit commencing
before normal retirement age, such a benefit was found not to
fall within the definition of an “accrued benefit”. Bellas v.
CBS, Inc., supra at 523 n.2. The REA provided that an employee
would be protected from a plan amendment reducing his or her
early retirement benefit or retirement-type subsidy.9 It did
not, however, affect the type of COLAs that are at issue here.
Moreover, even if we assume for the sake of argument that
the NPF COLAs were “retirement-type subsidies”, they would not be
nonforfeitable under section 411(d)(6)(B)(i) as to those who
retired before the NPF COLA amendments became effective. By
treating retirement subsidies as if they were accrued benefits,
the REA broadens the scope of benefits protected under the
8
(...continued)
retiring before normal retirement age “still have value in excess
of the amount that would be available to a retiring employee
under the comparable actuarially-reduced normal retirement
benefit provisions. We agree * * * that this excess value is a
subsidy.”).
9
Congress contemplated that the Treasury Department would
promulgate regulations defining the term “retirement-type
subsidy”. See sec. 411(d)(6)(B)(ii); see also 29 U.S.C. sec.
1054(g)(2)(A). The Treasury Department has yet to do so.
- 24 -
anticutback rule. It does not, however, expand the category of
persons who may accrue such benefits. Even after passage of the
REA, section 411(a)(7) still provides that the benefits protected
by the anticutback rule may be accrued only by employees. We
conclude that the “retirement-subsidy” provisions of section
411(d)(6)(B)(i) do not serve as a basis for disqualifying the
Plan.
The fact that the NPF COLA did not come into effect until
1991 presents the question of whether, in providing the ad hoc
payment from the NPF Fund for 1986 through 1990, the Trustees are
deemed to have provided the NPF COLA benefits under the Plan
before 1991, pursuant to section 1.411(d)-4, Q&A-1(c)(1), Income
Tax Regs.10 Respondent maintains that the pre-1991 series of ad
10
Sec. 1.411(d)-4, Q&A-1(c)(1), Income Tax Regs., provides:
(c) Plan terms. (1) General rule.
Generally, benefits described in section
411(d)(6)(A), early retirement benefits,
retirement-type subsidies, and optional forms
of benefit are section 411(d)(6) protected
benefits only if they are provided under the
terms of a plan. However, if an employer
establishes a pattern of repeated plan
amendments providing for similar benefits in
similar situations for substantially
consecutive, limited periods of time, such
benefits will be treated as provided under
the terms of the plan, without regard to the
limited periods of time, to the extent
necessary to carry out the purposes of
section 411(d)(6) * * * .
(2) Effective date. The provisions of
(continued...)
- 25 -
hoc payments from the NPF Fund established a pattern of repeated
plan amendments providing for similar benefits in similar
situations for substantially consecutive, limited periods of
time. Hence, respondent argues, the ad hoc payments are treated
under section 1.411(d)-4, Q&A-1(c)(1), Income Tax Regs., as
permanent, nonforfeitable features of the Plan, without regard to
the 1-year period of time actually provided in the amendments.
Respondent published Rev. Rul. 92-66, 1992-2 C.B. 93,
describing operation of rules regarding a pattern of repeated
plan amendments. That ruling provides:
Whether the recurrence of plan amendments
constitutes a pattern of amendments within the meaning
of section 1.411(d)-4 of the regulations is determined
on the basis of the facts and circumstances. Although
no one particular fact is determinative, relevant
factors include: (i) whether the amendments are made on
account of a specific business event or condition; (ii)
the degree to which the amendment relates to the event
or condition; and (iii) whether the event or condition
is temporary or discrete or whether it is a permanent
aspect of the employer’s business. [Id.]
The ruling addressed an employer’s decision to offer an
early retirement “window” to its employees during each of 3
consecutive years of adverse business conditions. In the fourth
10
(...continued)
paragraph (c)(1) of this Q&A-1 are effective
as of July 11, 1988. Thus, patterns or [sic]
repeated plan amendments adopted and
effective before July 11, 1988 will be
disregarded in determining whether such
amendments have created an ongoing optional
form of benefit under the plan.
- 26 -
year, business improved, but the employer’s costs did not
decrease to the extent projected. The employer accordingly
offered an early retirement window for the fourth year as well.
Respondent ruled that the employer’s offering 4 consecutive years
of an “early retirement window” was made on account of specific
business conditions and was not designed to create a permanent
benefit. Accordingly, the early retirement window provisions
were not deemed to be part of the plan and could be discontinued
without disqualifying the plan.
Rev. Rul. 92-66, supra, was found to be convincing in
DeCarlo v. Rochester Carpenters Pension, Annuity, Welfare &
S.U.B. Funds, 823 F. Supp. 115 (W.D.N.Y. 1993). There, the
plaintiffs were retired union members. Their pension fund was
“overfunded” for 1988, 1989, 1991, and 1992, and they were given
an extra yearend payment (called, like the NPF COLAs, a “13th
check”). Id. at 118. Because the plan’s actuary warned that
issuing a third consecutive 13th check in 1990 would violate the
pattern of amendment provisions of section 1.411(d)-4, Income Tax
Regs., the plaintiffs were not given a 13th check for 1990. The
plaintiffs argued before the District Court that the plan’s
trustees had established a pattern of amendments that gave rise
to a nonforfeitable right to a 13th check. The court disagreed.
Relying on the provision of Rev. Rul. 92-66, supra, that made the
existence of a pattern of amendments dependent upon whether the
- 27 -
amendments resulted from a “business event or condition”, the
court held that the payment of a 13th check depended upon the
business event or condition of the Plan’s being overfunded for
the year in which the checks were issued. The court concluded
that the payment of the 13th check did not confer a
nonforfeitable benefit under section 1.411(d)-4, Income Tax Regs.
Here, in his reply brief, respondent concedes that the
“effective date” provisions of section 1.411(d)-4, Q&A-1(c)(1),
Income Tax Regs., require that only the 1989 and 1990 amendments
to the Plan may be considered for purposes of section 1.411(d)-4,
Income Tax Regs. Respondent continues to assert, however, that
the ad hoc payments made in 1989 and 1990 should be considered to
be part of the Plan, although the NPF COLA did not come into
effect until 1991.
We disagree. Here, as in DeCarlo, petitioner’s counsel
warned in 1988 that, as a result of the new regulations, three
consecutive plan amendments inserting an ad hoc COLA could be
construed to be a permanent amendment providing COLAs. Having
been alerted to the effects of repeated ad hoc payments,
petitioner in 1989 doubled the funding required for the COLAs.
Nevertheless, two ad hoc payments were still needed to meet the
intended 3-percent COLA for 1989 and 1990. Thus, here, as in
DeCarlo, the NPF Fund’s two ad hoc payments were necessary
because of adverse “business events or conditions”. Moreover, in
- 28 -
1990, petitioner decided to change the COLA payments from a
series of ad hoc payments into a permanent part of the plan. On
these facts, we cannot say that, under section 1.411(d)-4, Income
Tax Regs., the two ad hoc payments made to supplement the COLA
for 1989 and 1990 represented a pattern of amendments that
requires us to deem those two ad hoc payments as part of the NFC
Plan before 1991. We recognize that, absent the required
prospective application of the 1988 regulation, the chronic
shortfall of the COLA funding from 1985 through 1991 might
suffice to show that the persistent shortfalls were not really
separate or transitory business events, but were rather
indications of a continuous feature of the plan. As noted,
however, section 1.411(d)-4, Q&A-1(c)(2), Income Tax Regs.,
precludes us from considering events before July 11, 1988.
We conclude that the 1995 plan amendments, although they
removed COLA benefits which had been provided to the pre-1991
retirees, did not violate the anticutback provisions of section
411(d)(6). In so concluding, we find without merit all arguments
not discussed herein. Accordingly,
Decision will be entered
for petitioner.