A Publication of Pepper Hamilton LLP
Commercial Litigation Report
Employment Restrictions That Suspend Payment of Accrued Benefits Violate ERISA's Anti-Cutback Rule
Tuesday, July 27, 2004
If your company restricts former employees from certain types of post-termination employment, make sure those restrictions don’t affect the payment of already accrued retirement benefits. If they do, the U.S. Supreme Court recently ruled, the restrictions will violate ERISA’s anti-cutback provisions.
In Central Laborers’ Pension Fund v. Heinz, 2004 U.S. LEXIS 4028, *5 (Sup. Ct. June 7, 2004), two participants of the Central Laborers’ Pension Fund had accumulated sufficient pension credits to qualify for monthly early retirement payments. The payment of those early retirement benefits was conditioned on the retirees’ agreement to refrain from engaging in “disqualifying employment” as defined by the plan. At the time the retirees’ retired, “disqualifying employment” was defined as any job as “a union or non-union construction worker,” but excluded supervisory positions. Under the plan, engaging in “disqualifying employment” would result in the suspension of the early retirement payments for the duration of the “disqualifying employment.”
After retiring, the retirees took positions as construction supervisors and continued to receive their monthly early retirement payments. Two years later, the plan’s definition of “disqualifying employment” was enlarged to include any job “in any capacity in the construction industry (either as a union or non-union construction worker).” Based on that amendment, the plan determined that the retirees’ employment was “disqualifying” and suspended their monthly early retirement payments. The retirees sued the plan, arguing that the suspension of their benefits under the amended definition of “disqualifying employment” violated ERISA’s anti-cutback rule. A unanimous Supreme Court agreed with the retirees.
In an opinion written by Justice Souter, the Court noted that, while ERISA does not require employers to establish benefit plans, it protects plan participants and requires employers to follow certain guidelines. The Court explained that one of the primary objectives of ERISA is to ensure that benefits, including early retirement benefits, promised to an employee will not be taken away. By placing materially greater post-employment restrictions on a former employee’s ability to obtain already accrued retirement benefits, the Plan impermissibly took away the promised benefits.
Based on the holding in Heinz, plan administrators must recognize that amendments to plans that enlarge or increase the restrictions on payment of already accrued retirement benefits will likely violate ERISA’s anti-cutback provisions.
However, this does not mean that plan administrators are precluded from making plan amendments. The Supreme Court expressly recognized that its holding in Heinz should not be interpreted to prohibit plan administrators from increasing restrictions on payment of retirement benefits, so long as the amendment affects only benefits that will accrue in the future. See Heinz, 2004 U.S. LEXIS 4028, *15-16 (relying on the IRS regulations interpreting Internal Revenue Code’s identical anti-cutback rule (§411(d)(6)) to permit amendments that merely affect post-amendment accrual of benefits, but not benefits accrued before the amendment).
Other articles in this issue:
Stephanie L. Jonaitis and Larry R. Wood, Jr.
