ERISA-First Circuit Rules That Elimination Of An Option To Transfer A Profit-Sharing Plan Account Balance To A Defined Benefit Plan Does Not Violate The Anti-Cutback Rule

In Tasker v. DHL Retirement Savings Plan, No. 09-2661 (1st Cir. 2010), the Court faced the question of whether the elimination of a plan participant’s unexercised option to transfer funds from his profit-sharing plan account to his retirement plan violated the anti-cutback rule of ERISA, contained in 29 U.S.C. § 1054(g), and implemented under Treasury Department regulation, 26 C.F.R. § 1.411(d)-4 (the “anti-cutback rule”). The Court ruled that, due to unambiguous language in the regulation, the elimination of this option did not violate the anti-cutback rule.

In this case, the plaintiff was a participant in his employer’s profit-sharing plan and defined benefit retirement plan. Under the terms of the retirement plan, the benefit payable by the retirement plan to a participant was offset by the participant’s account balance under the profit-sharing plan. At the time he retired, the retirement plan permitted a participant, prior to his election to begin receiving benefits, to transfer the balance from his profit-sharing plan account into the retirement plan. The profit-sharing plan likewise permitted this transfer. Such a transfer, when effected, would reduce the participant’s profit-sharing plan account balance to zero and would therefore avoid any offset. Initially, the plaintiff did not request the transfer. Later, the retirement plan and profit-sharing plan were amended to eliminate the transfer feature. Several years after the amendments were adopted, the plaintiff attempted to exercise the transfer option, but this attempt was rejected. Plaintiff then brought suit under ERISA, and the case found its way to the First Circuit Court of Appeals.

In analyzing the case, the Court noted that, under the anti-cutback rule: (1) the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan (with nonapplicable exceptions) and (2) for purposes of (1), a plan amendment which has the effect of eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, is treated as reducing accrued benefits. The Treasury Department regulation states that:

Q-2. To what extent may section 411(d)(6) protected benefits under a plan be reduced or eliminated?

A-2. Provisions for transfer of benefits between and among defined contribution plans and defined benefit plans. A plan may be amended to eliminate provisions permitting the transfer of benefits between and among defined contribution plans and defined benefit plans.

26 C.F.R. § 1.411(d)-4, Q&A-2(b)(2)(viii). At first glance, the elimination of the transfer option is expressly excepted from the anti-alienation rule by this provision in the regulation. The issue is that the elimination of the option in this case decreases the participant’s benefit under the retirement plan, since the participant cannot make the transfer and eliminate the offset for the profit-sharing plan account balance. The Court ruled that the decrease in the participant’s benefit did not invalidate the exception from the anti-cutback rule in the above provision, so that the transfer option could be eliminated. Other provisions in the Treasury Department regulations (such as Section 1.411(d)-4, Q&A-2(b)(1)) do not change the result.

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