Attorney Says Plan to Eliminate Optional Benefits Must Be Consistent With Case Law

Ladies and Gentlemen:

[1] In connection with the Notice 2002-46, 2002-28 I.R.B. 96 (July 15, 2002), regarding elimination of optional forms of benefit from defined benefit plans, I submit the following comments, which respond in particular to the comments dated September 30, 2002, from The ERISA Industry Committee ("ERIC").

[2] I am an employee benefits lawyer, and I have spent 23 years representing union trust funds, plan participants, and classes of participants who have had their benefits unfairly reduced or eliminated. I was among the counsel who represented Plaintiffs in Bellas v. CBS, 73 F.Supp.2d 500 (W.D.Pa. 1999), related decision, 73 F.Supp.2d 493 (W.D.Pa. 1999), aff'd, 221 F.3d 517 (3d Cir. 2002), cert. denied, 531 U.S. 1104, 121 S. Ct. 843 (2001), on remand, 201 F.R.D. 411 (W.D.Pa. 2000).

[3] I believe I express the sentiments of not only myself but of other plan participant lawyers and their clients when I say that I strongly disagree with ERIC's request that the IRS incorporate into its regulation the position that the Third Circuit rejected in Bellas. In its Comment No. 13, ERIC asks that the IRS

[5] Section 204(g) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1054(g), generally prohibits plan amendments that decrease accrued benefits. In the Retirement Equity Act of 1984 (the "REA"), Congress amended § 204(g) to extend its protection to early retirement benefits and retirement- type subsidies. Specifically, § 204(g) as amended provides in relevant part:

[6] At issue in Bellas was whether a pension benefit payable for life could be denied the protection of § 204(g) because it was triggered by layoff rather than by voluntary retirement. Before amendment, the Plan in Bellas provided that employees meeting certain age and service requirements (such as age 50 with 25 years service) who were permanently laid off would receive a lifetime annuity based on years of service, equal to the normal pension benefit, without actuarial reduction for the earlier commencement and consequent longer duration of payments (hereinafter, the "Job Separation Pension"). Because it provided fixed periodic income through the retirement years, the pension was a subsidized early retirement benefit. It was "early," in that it commenced before the normal retirement age; and it was a "subsidy," in that the absence of actuarial reduction renders it more valuable over time than a normal pension. Accordingly, the Bellas Court correctly determined the Job Separation Pension to be a "subsidized early retirement benefit, protected [under § 204(g)] as an early retirement [benefit] to the extent of the actuarially reduced value of the normal retirement," with the balance protected as a retirement-type subsidy. 67 F.3d at 538 & n.18.

[7] The Plaintiff Harry Bellas plainly met the pre-amendment conditions for the Job Separation Pension: he was over age 50 and had more than 25 years of pre-amendment service when he was laid off. Under the express terms of § 204(g), it was immaterial the he met the final condition -- layoff -- after an amendment narrowed and then eliminated the benefit. See 29 U.S.C § 1054(g)(2) (stating that protection of retirement-type subsidy applies with respect to participant who satisfies pre-amendment conditions "either before or after the amendment").

[8] The decision of the Third Circuit in Bellas was thus a straightforward application of an unambiguous statute. Because the Job Separation Pension was a subsidized early retirement benefit for which Mr. Bellas satisfied the pre-amendment conditions, the portion attributable to pre-amendment service -- all of it, in Mr. Bellas's case -- was an accrued benefit that could not be reduced or eliminated by amendment.

[9] The Third Circuit's decision is strongly supported by the analysis of another Court of Appeals in a case squarely on point, as well as that of a third Court of Appeals in a well-reasoned opinion that was vacated on other grounds. See Harms v. Cavenham Forest Indust., Inc., 984 F.2d 686, 692 (5th Cir.), cert. denied, 510 U.S. 944 (1993); Richardson v. Pension Plan of Bethlehem Steel, 67 F.3d 1462, 1467-68 (9th Cir. 1995), rev'd on other grounds en banc, 112 F.3d 982 (1996). See also Wallace v. Cavenham Forest Indus., 707 F. Supp. 455, 459-60 (D.Or. 1989).

[10] The Defendants' principal argument in Bellas -- that the presence of a condition other than age and service made the Job Separation Pension an unprotected "ancillary" benefit -- was simply not grounded in the governing statute. Section 204(g) expressly prescribes the effect of conditions: a retirement benefit is protected only if the conditions are eventually met. See 29 U.S.C § 1054(g)(2). This provision clearly contemplates that protected benefits may be subject to conditions, and it does not limit the conditions to age and service. Moreover, regulations issued by the Internal Revenue Service include examples of protected benefits that encompass qualifying conditions other than age and service, such as "heavy and immediate financial need" or "permanent and total disability". 26 C.F.R. § 1.411(d)-4, Q&A-4(b).

[11] Any doubt as to whether the conditions for a protected benefit may include involuntary separation from employment is resolved by the legislative history:

[12] As a panel of the Ninth Circuit explained in the (subsequently vacated) Richardson opinion:

[13] ERIC, in asking the Service to "clarify" this issue, implies that there is a conflict in the authorities. However, neither the decisions outside the Third, Ninth or Fifth Circuits, nor the cited GCM, authorize amendments that cut back a lifetime job separation benefit with respect to a participant who satisfies all pre-amendment conditions for the benefit.

[14] First, in the Ross case (one of the cases discussed in Bellas), the plaintiffs did not meet the age and service conditions for the shutdown benefit. See Ross v. Pension Plan for Hourly Employees of SKF Industries, Inc., 847 F.2d 329, 330-31 (6th Cir. 1988).¹ As the Ross court explained, under "a plain reading of the Plan language":

[15] Second, the Roper case (mentioned in Bellas) was like Ross, in that the plaintiffs there too failed to meet age and service requirements and there was no plan amendment. See Roper v. Pullman Standard, 859 F.2d 1472, 1473 (11th Cir. 1988) (per curiam). Moreover, Roper did not even purport to address § 204(g) or the meaning of "retirement-type subsidy." And finally, the Roper court expressly acknowledged that "the analysis borrowed from Ross "was" not necessary to our decision to affirm". Id. at 1474. Roper thus cannot be considered substantial authority in conflict with Bellas.

[16] Third, the Rombach case (also mentioned in Bellas) involved disability benefits, rather than lifetime job separation benefits. See Rombach v. Nestle USA, Inc., 211 F. 3d 190, 192-94 (2d Cir. 2000). Unlike shutdown benefits, disability benefits are defined by ERISA as welfare benefits, and in the legislative history they are excluded from "retirement-type subsidies."⁵ Cases involving such different benefits do not create a conflict among the circuits.

[17] Finally, the historical position of the Internal Revenue Service is not insistent with Bellas. The GCM that ERIC cites (No. 39860 from April 6, 1992) simply does not support Petitioners' interpretation of § 204(g). ERIC (like Defendant in Bellas) is apparently contending that benefits contingent on layoff or shutdown are not retirement-type subsidies, but are ancillary benefits that are never protected under § 204(g). The GCM takes a flatly contrary position. First, it repeatedly states that shutdown benefits are retirement-type subsidies, so long as they continue after retirement age.⁶ Second, the GCM states that such benefits are protected under I.R.C. § 411 (d)(6), the Internal Revenue Code provision that parallels § 204(g): "if provided as retirement-type subsidies, shutdown benefits are accrued benefits and therefore protected."

[18] Petitioners read too much into the GCM's statement that retirement-type shutdown benefits "become an accrued benefit and therefore protected . . . upon the occurrence of the event that triggers the right to the benefits." This appears to be simply another way of stating the statutory limitation of protection to participants who eventually satisfy the conditions for a retirement- type subsidy. See 29 U.S.C. § 1054(g). Nowhere does the GCM indicate that an intervening amendment can prevent the benefit from becoming accrued and protected, or that the triggering event must occur before any such amendment. The GCM is simply silent on this, the ultimate issue in Bellas.⁷ The GCM is therefore not inconsistent with the result reached by the court in Bellas.

[19] Accordingly, the Service should not issue a regulation inconsistent with the Bellas decision.

²This observation was addressed to the claims of only some of the plaintiffs, but it is equally applicable to all.

³Indeed, Ross not only involved non-qualifying participants, but it also did not even involve an actual amendment to the plan. The district court rejected the plaintiffs' argument that the shutdown itself was equivalent to an amendment, and the Sixth Circuit declined to address the issue, as it affirmed on other grounds. See Ross, 847 F.2d at 332 & n.2.

⁴Moreover, the Ross court's conclusion that shutdown benefits are unprotected under § 204(g) does not appear to be based on careful analysis, but rather is supported only by a cursory misreading of the legislative history of REA. See Ross, 847 F.2d at 333-34 (concluding that the legislative history "specifically states" that a plant shutdown benefit does not fall within the category of a retirement-type subsidy, based solely on the statement quoted above which by its terms was limited to a benefit "that does not continue after retirement age").

⁵See 29 U.S.C. § 1002(1) (defining "welfare plan" to mean "any plan, fund or program. . . to the extent that [it provides, inter alia ] . . . benefits in the event of . . . disability"); S. Rep. No. 98-575 (1984), reprinted in 1984 U.S.C.C.A.N. 2547, 2576 ("a qualified disability benefit, a medical benefit, a social security supplement, a death benefit (including life insurance), or a plant shutdown benefit (that does not continue after retirement age) will not be considered a retirement-type subsidy").

⁶As an example of a shutdown benefit that continues beyond normal retirement age, and is thus a retirement-type benefit, the GCM cites "reduc[tion of] the age or service eligibility requirements for the normal retirement benefit." The example fits the Bellas case precisely: the benefit at issue in Bellas is simply a normal retirement benefit with reduced age/service requirements. The GCM found this result to be indicated by "the legislative history of REA." See also Richardson, 67 F.3d at 1468 n.4, 1469 (quoting legislative history and GCM in support of conclusion that shutdown benefits that continue after retirement age are retirement-type subsidies for purposes of § 204(g)).

⁷ERISA is not silent on the issue, however. Section 204(g) expressly states that a retirement-type subsidy is treated as accrued and is protected from cut-back if the conditions are satisfied "either before or after the amendment."