Plan amendment that diminished impact of raises did not violate anti-cutback rule
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Tuesday, July 24, 2018

Plan amendment that diminished impact of raises did not violate anti-cutback rule

By Pension and Benefits Editorial Staff

A defined benefit plan amendment that, for certain employees, calculated benefits accrued in years after the amendment by assuming a fixed annual salary increase, disregarding any higher raise a participant might receive, did not violate ERISA's anti-cutback rule, the U.S. Court of Appeals in Chicago (CA-7) has ruled. The court also determined that the amendment did not violate the Age Discrimination in Employment Act (ADEA).

A bank maintained a traditional defined benefit plan for its employees, under which the benefit in retirement depended on years worked, times an average of each employee's five highest-earning consecutive years, times a constant. In 2012 the plan was amended to substitute for the constant a formula that depends on the number of hours worked after 2012. All agreed that this new PEP formula reduced the pension accrual rate.

In conjunction with this change, the bank provided participants hired before 2002 a transitional benefit. Under the transition rule, participants hired before 2002 would be treated as if they were still under the original formula, except that their salaries would be deemed to increase 1.5% per year, regardless of the actual raise a given participant might receive.

A participant filed suit in district court alleging that the 2012 amendment, even with the transitional benefit, violated ERISA's anti-cutback rule and the ADEA. The district court dismissed the suit and the participant appealed.

Anti-cutback rule

In relevant part, ERISA Sec. 204(g)(1) provides that “the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan.” The participant argued that since he expected his salary to continue increasing at more than 5% a year, as it had done since his 1998 hire date, the deemed 1.5% increase in the 2012 amendment decreased his “accrued benefit.”

The court rejected this argument. While a participant might view the expectation of future salary increases as an “accrued benefit,” ERISA does not require employers to increase anyone's salary. Cases relied upon by the participant were inapposite because in those cases the language of the plan itself promised an increase in pension benefits.

The amended plan protects the accrued benefits of employees such as the participant, hired before 2002, by calculating the participant's accrued benefit as of the effective date of the amendment (March 2012) under the original formula. “ERISA protects all entitlements that make up the ‘accrued benefit’", the court explained, “but does not protect anyone's hope that the future will improve on the past.”

In addition, the court concluded that the creation of an online tool that showed each worker exactly what would happen to that worker's pension under the original formula and the amended plan satisfied the notice rules of ERISA Sec. 204(h)(2).

ADEA claim

The court also rejected the participant's claim under the ADEA. The bank's plan complies with §623(i) of the ADEA. The plan permits accruals past the normal retirement date, and accruals do not otherwise depend on age. The court noted that the Supreme Court has never held that the disparate impact of an age-neutral pension plan can violate the statute.

Source: Teufel v. The Northern Trust Company (CA-7).

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