Under the anti-cutback rule of ERISA Section 204(g), and the parallel anti-cutback rule under the Internal Revenue Code Section 411(d)(6), an employer generally cannot amend it’s pension plan to eliminate or reduce:
— an accrued benefit earned prior to the amendment;
–an optional form of payment, as to benefits earned prior to the amendment; or
— a retirement-type subsidy or early retirement benefit, as to benefits earned before the amendment and, in the case of a retirement-type subsidy, for which the service requirements are met either before or after the amendment.
But is a death benefit, or a plan feature which pays out a lump sum actuarial equivalent of the death benefit at retirement, protected from elimination by the anti-cutback rule? The Tenth Circuit Court of Appeals says “no” in Kerber v. Qwest Pension Plan, No. 08-1387 (10th Cir. 2009).
In Kerber, the pension plan in question had a feature called the “Pensioner Death Benefit.” This feature provided a death benefit, for certain qualified beneficiaries of retired employees receiving a service or disability pension. If no qualified beneficiary survived the retiree, then no Pensioner Death Benefit was paid on his or her behalf, except for a discretionary burial expense of up to $500. The amount of the Pensioner Death Benefit was generally equivalent to the retiree’s wages for the year preceding March 1, 1993, and the Pensioner Death Benefit was payable only with respect to individuals hired before March 1, 1993. The pension plan allowed certain management employees to elect, upon retirement, a lump sum payout of their retirement benefits, and to include in that lump sum payout a discounted version of the Pensioner Death Benefit (the “DLS Equivalent”), which assumed the retiree would be survived by a beneficiary. During 2003, the employer amended the pension plan to eliminate the DLS Equivalent and the Pensioner Death Benefit for employees retiring after 2003. The plaintiffs, former employees, challenged this amendment on a number of grounds.
In dealing with the plaintiffs’ claims, the Court indicated that the Pensioner Death Benefit was not an accrued benefit, citing the Third Circuit’s decision in In re Lucent, 541 F. 3d 250 (3rd Cir. 2008) for this conclusion, and noting that the pension plan’s definition of accrued benefit expressly excluded any death benefit and the Pensioner Death Benefit did not accrue on a year to year basis. Therefore, the Pensioner Death Benefit was not protected from elimination by the anti-cutback rule. The Court implied that the DLS Equivalent was likewise not an accrued benefit or an optional form of payment. Further, the Court concluded that the DLS Equivalent was not a retirement-type subsidy or an early retirement benefit. It said that the term “subsidy,” as employed in the phrase “retirement-type subsidy,” refers to a benefit which continues after retirement, and thus does not include a lump sum payment made to an employee upon retirement such as the DLS Equivalent. Also, to be a retirement-type subsidy, under the definition found in IRS regulations, the DLS Equivalent would have to be a retirement-type benefit, and the DLS Equivalent does not qualify as such because it does not relate to an accrued benefit-it relates to the Pensioner Death Benefit which is not an accrued benefit- and the DLS Equivalent itself is not a benefit which accrues year by year. Similarly, to be an early retirement benefit, under the definition found in IRS regulations, the benefit must be a retirement-type benefit, and again the DLS Equivalent does not qualify as such. Thus, the anti-cutback rule did not protect the DLS Equivalent from elimination.