Dropped COLA Didn't Violate ERISA: Appeals Court

February 4, 2003 (PLANSPONSOR.com) - A multiemployer defined benefit pension plan did not illegally cut back on retiree benefits when it dropped a cost-of-living-adjustment (COLA) after the retirement of some of its participants, a federal appeals court ruled.

The US 4 th Circuit Court of Appeals ruled that the COLA was not an “accrued benefit” for the retired participants who were only entitled to benefits that vested before the person began retirement, Washington-based legal publisher BNA reported.

The appeals court rejected the argument of the Internal Revenue Service (IRS) that ERISA was violated when the plan terminated the COLA benefits of employees who had retired before the COLAs had been approved. “[I]f 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,” Circuit Judge Paul Niemeyer wrote.

Case Background

In 1985, the Sheet Metal Workers’ National Pension Fund, a multiemployer defined benefit pension plan, established a separate fund to provide COLAs to participants. The COLA fund was not part of the pension plan and was governed by separate plan documents. The COLA fund was established to provide the pension plan participants with a COLA equaling approximately 3% of each pensioner’s annual pension benefits.

From 1985 through 1990, the COLA fund’s assets were too low to pay the full 3% COLA to the pensioners and, as a result, the pension plan began making “ad hoc” payments to each eligible pensioner. The COLA benefit was changed in 1991 and by amendment became part of the pension fund, providing a 2% COLA instead of a 3% COLA. The pension fund was further amended to make the COLAs available to all eligible employees who had retired before 1991.

Then, in 1995, the pension fund was amended again to eliminate COLAs paid to pre-1991 retirees. In 1997, the IRS issued a technical advice memorandum notifying the fund that the amendment eliminating COLAs for pre-1991 retirees violated the anticutback rule of ERISA Section 411(d)(6). The fund refused to amend the plan to provide pre-1991 retirees with COLA benefits and instead turned to US Tax Court for a ruling.

In December 2001, the tax court ruled for the fund, finding that the COLAs were not “accrued benefits” for pre-1991 retirees.

In upholding the tax court, the appeals court noted that ERISA Section 411(a)(7)(i) defines an “accrued benefit” under a defined benefit pension plan as an “employee’s accrued benefit determined under the plan.”

In this case, the plan defined accrued benefit to mean the annual pension benefit commencing at normal retirement age and thus the plan stated “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,” the appeals judges said.

The case is Board of Trustees of the Sheet Metal Workers’ National Pension Fund v. Commissioner of Internal Revenue, 4th Cir., No. 02-1273, 1/31/03.