Every Reduction is Not a "Cutback"
Except in very limited circumstances, Section 204(g) of ERISA provides that the accrued benefit of a participant under a plan may not be decreased. This is generally referred to as ERISA's "anti-cutback" provision. I happened to be looking at this provision recently because of discussions I ma having with employers about eliminating certain benefits as a cost saving mechanism. Of course the question asked is what constitutes an improper cutback.
On July 17, 2009, the Tenth Circuit Court of Appeals issued a decision in Karber v. Qwest Pension Plan that considered the elimination of a Pensioner Death Benefit component of its Death Benefit Plan. Although not all employers have "death benefit plans," this decision did take the time to explain some of the issues facing employers when considering reduction of benefits.
The Court decided that a death benefit was not a "retirement type benefit" or retirement subsidy that would be part of a pension plan. This is significant because retirement-type benefits are subject to vesting requirements, giving rise to an argument that the benefit had "accrued." The benefit was not impacted by years of service and the participant did not earn portions of the benefit for each year of service. Generally non-retirement benefits, such as welfare plans, do not vest. This lack of vesting makes it difficult to argue that the benefit has "accrued," meaning that, generally, it is easier to reduce them. Notice I said generally.
The Court also had to consider the issue of "contract vesting" which was essentially an argument that the language of the plan itself precluded reduction of benefits. The Court also had to contend with an argument that some other contractual promise existed to preclude the reduction. While the Court ruled that contract vesting did not apply, the fact that the Court considered this component serves as a reminder that a simple reduction of benefits could give rise to a cause of action based on prior representations.
While the decision itself is not particularly remarkable, it should serve as a reminder of the considerations a plan sponsor should give PRIOR to making a decision to cut benefits. First, what type of benefits is being impacted? Is it retirement, welfare or some other thing? Second, is the benefit being reduced "accrued?" If it is, can it be cut back? Third, what representations have been made about the benefit prior to its reduction? Can participants argue some other attachment of the right to receive the benefit in question?
There are also issues regarding the notice of the reduction, administration of the reduction and the possible discriminatory effect the reduction can have on a particular group of employee (or retirees). All of these factors should be considered with competent benefit professionals BEFORE a reduction takes place. If it ends up being a cutback, the cost of curing the ERISA violation could far exceed the money saved by the reduction itself.
