IRS Issues Guidance on Anti-Cutback Case Enforcement

The guidance dealt with how the Internal Revenue Service (IRS) would enforce the dictates of Central Laborers’ Pension Fund v. Heinz.

In that case, the high court ruled unanimously that two Illinois construction workers were eligible for retirement benefits from a union pension fund when they retired early. Thomas Heinz and Richard Schmitt Jr. were told they could draw retirement benefits so long as they did not take on certain “disqualifying employment” after they retired.  At the time, “disqualifying employment” was defined as a job as a construction worker.  Both Heinz and Schmitt took new jobs as construction supervisors – jobs that, at the time, were not considered “disqualifying employment” and therefore the men still collected their pension benefits.

However, in 1998, the union fund expanded the definition and said the men could not draw a pension while working in any construction industry job.  As long as the men kept their supervisor jobs, the pension plan suspended their payments. Heinz sued the pension plan, claiming that the payment suspension violated the “anti-cutback” rule of the Employee Retirement Income Security Act of 1974 (ERISA), which protects against cutbacks in benefits that take effect after a worker has retired.  The high court agreed in a unanimous ruling in favor of two workers.

In the document released Monday, the IRS said that qualified plans that adopted amendments before the Supreme Court’s June 7, 2004 ruling will not be disqualified solely because of an amendment adding or expanding a suspension of benefit provisions as barred by the court. The IRS said this approach would be used only if the plan adopted a reforming amendment and that the plan complies with that amendment.

According to the IRS guidance, the reforming amendment has to provide that starting June 7, 2004, the original change that suspended benefits does not apply with respect to benefits accrued as of the applicable amendment date for the original amendment. The reforming amendment also has to give participants an option to start receiving payment of their benefits, the IRS document said.

Officials said plans can also fix the problem identified in the June court case by providing a greater benefit than the minimum provided under federal laws and rules. The reforming amendment has to be effective no later than June 7, 2004, official said.

According to Monday’s document, the US Treasury Department and the IRS will propose formal rules relating to the court decision.