Cash balance plan may not reduce pre-conversion early retirement subsidy


Under ERISA’s anti-cutback rules, a converted cash balance plan may not reduce a participant’s early retirement subsidy as provided under a pre-conversion defined benefit plan, even though the participant did not satisfy the conditions for the subsidy until after the conversion, the U.S. Court of Appeals in Cincinnati (CA-6) has ruled. On remand, the district court must make a factual determination as to whether the plan did actually reduce the participant’s benefit.

Early retirement subsidy

Prior to its 1998 conversion to a cash balance plan, a defined benefit plan offered early retirement benefits to participants who were at least 55 years old and had completed five years of service. Nine participants retired in years subsequent to the conversion year, each taking his or her benefits in a single lump-sum payment. All eventually filed administrative claims disputing the payment, arguing that the plan had failed to credit their accounts with the pre-conversion early retirement subsidy amount. One participant filed his claim less than five years after receipt of payment; the other eight did not.

The district court dismissed as time-barred the claims of the eight participants who waited more than five years to file their administrative appeals. The remaining participant’s claim was timely, but the lower court dismissed his claim on the merits.

Statute of limitations

The appellate court agreed that the applicable limitations period was a Kentucky statute providing a five-year limitations period for an action upon a liability created by statute, when no other time period is fixed by the statute. Eight of the participants received payment of their lump sums more than five years before beginning their appeals process. Thus, their claims were time-barred.

Plan language

Regarding the participant whose claim was timely, the appellate court ruled the plan did not act arbitrarily or capriciously when it concluded that current plan language, independent of any ERISA requirements, did not entitle him to the value of his pre-amendment early-retirement subsidy. However, the appellate court concluded that not including the pre-amendment early retirement subsidy in the participant’s benefit would violate ERISA §204(g).

The participant achieved the requisite five years of service prior to the conversion, but did not meet the age requirement for the subsidy until after the conversion. While the district court concluded that he had not yet accrued the benefit at the time the plan was amended because he had not satisfied the age 55 requirement, the appellate court stated that ERISA §204(g) permitted the participant to fulfill the age requirement “either before or after the amendment.”

Remand instructions

Whether the plan had actually reduced the participant’s benefits remained factually unclear. Neither party had provided calculations that would prove or disprove that the benefits had in fact been reduced. Thus, the court remanded the case to the district court, ordering it to consider whether the benefits payable to the participant constituted an “early retirement benefit” or “retirement-type subsidy” which, under ERISA §204(g) would be protected from elimination or reduction, or an “optional form of benefit” which would only be protected from elimination.

Source: Falllin v. Commonwealth Industries, Inc. Cash Balance Plan (CA-6).

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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