In Board of Trustees of the Sheet Metal Workers' National Pension Fund v. Commissioner of Internal Revenue, the US Court of Appeals for the Fourth Circuit ruled that trustees of a pension fund acted legally when they amended the plan to eliminate a cost-of-living adjustment (COLA) for participants who were retired at the time the COLA provision was adopted. The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) prohibit amendments to qualified pension plans that eliminate or reduce participants’ accrued benefits (i.e., ERISA’s anti-cutback rule). The Internal Revenue Service had challenged the amendment to the Sheet Metal Workers National Pension Fund as an illegal cutback.

In reaching its decision, the appellate court noted that, "The anti-cutback rule forms part of ERISA’s assurance that benefits promised are benefits paid, but the security provided by the anti-cutback rule is bounded by the terms of the plan in that the plan defines the benefits promised." The court concluded that a retiree benefit increase is not part of the plan’s protected accrued benefit under ERISA and the Internal Revenue Code, if the plan does not include post-employment benefit increases in its definition of "accrued benefit." The court held that ERISA protects benefits promised to employees during their working careers — not benefits added to the plan after participants’ retired.

Accordingly, the benefit in question here could be eliminated because, in the court's words, "it did not accumulate during their service so as to become part of their legitimate expectations at retirement under the terms of the Plan then in effect." In its opinion, the court also pointed out that, while these retirees might lose future benefits because of the court's ruling that the law permits removal of the COLA in this case, holding otherwise might be worse for retirees generally. It remarked, “[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.”

The decision, which was handed down on January 31, 2003, is available, in PDF format, on the following Web page: http://pacer.ca4.uscourts.gov/opinion.pdf/021273.P.pdf.

Implications of the Decision for
Sponsors of Qualified Pension Plans

Unless it is reversed, this decision is binding law for plans located in the states within the Fourth Circuit. Those states are Maryland, North Carolina, South Carolina, Virginia and West Virginia.

In other states, sponsors of pension plans subject to ERISA should rely on their attorneys' advice in judging the relevance of this decision to their situations. The IRS could decide to continue challenging amendments reducing post-retirement benefit increases in plans located outside the Fourth Circuit.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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