Welfare Plan Change Impacting Pension Benefits; Violates Anti-cutback Rule, Appeals Court Holds

The United States Court of Appeals for the Third Circuit has ruled that an amendment to a welfare plan that had the effect of reducing indirectly the value of an optional form of distribution from a pension plan violated the anti-cutback provisions of ERISA. The Court's precedential opinion in Clement Battoni, Jr. et al. v. IBEW Local No. 102 Employee Pension Plan, et al. was released Feb. 5, 2010.

The case arose out of the merger of two Unions and their respective pension and welfare plans. The employees in one of the plans were permitted to elect payment of their pension in a lump-sum. The Trustees amended the surviving welfare plan. The amendment to the welfare plan stipulated that any employee that took advantage of the pension provision allowing for a lump sum distribution would not qualify for benefits from the surviving welfare plan. Those same employees would be eligible to receive benefits from the surviving welfare plan benefits if they elected a different type of distribution from the merged pension plan, such as a joint and survivor benefit pension payment form.

The Court relied on existing case law and IRS regulations to rule that the amendment to the welfare plan was also an amendment to the pension plan because it had the effect of reducing the value of the protected lump-sum option. Having found that the welfare plan amendment also constituted an amendment to the pension plan, the Court applied the rule announced in Heinz v. Central Laborers Pension Plan that any amendment that diminishes the value of a protected optional form of benefit violates the anti-cutback rule and is prohibited by section 204(g) of ERISA (the ERISA equivalent of section 411(d)(6) of the Internal Revenue Code).

In reaching its decision the Court rejected the argument by the plans that, because the amendment was made only to the welfare plan, ERISA sec. 204(g), which applies only to pension plans, did not apply. The Court reasoned that the amendment to the welfare plan had the effect of reducing the value of the lump-sum option. Therefore, it was also to be treated as an amendment to the pension plan. The Court noted, in effect, that the protection of the anti-cutback rule would be frustrated if imposing conditions on the receipt of non-pension benefits based on an employee's choice of a protected optional form of distribution were exempt from the rule.

Cheiron comment: Because the case is marked "precedential" by the Court, it is binding on all cases that arise in the Third Circuit, which encompasses Pennsylvania, New Jersey and Delaware. Although this decision is precedent only in the Third Circuit, it is very possible that other Courts of Appeals would follow its reasoning and reach the same conclusion.

As a result of this opinion, Trustees should not link the qualification of any other employee benefit with an election under a pension plan, absent an opinion from counsel that the restriction would not violate the anti-cutback rule.

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