Elimination of retroactive “banked hour” benefits would violate ERISA’s anti-cutback rule

A proposed pension plan amendment reducing “banked hour” benefits that were retroactively conferred upon participants during the course of their employment would violate ERISA’s anti-cutback rule, according to the U.S. Court of Appeals in Boston (CA-1).

Banked hour benefits

Four pension plans, merged together in 1998 to form one plan, each provided “banked hour” benefits to participants. “Banked hours” are hours of service worked within a given year in excess of the minimum number of hours required to earn a full year of service for pension credit under the plan. Participants could use these banked hours for a variety of purposes, including “cashing” them in as additional pension credits upon retirement.

The four pre-merger plans structured their banked hours provisions differently. The plan document for the merged plan resolved this discrepancy by creating one banked hours provision that was more generous than that of some of the pre-merger plans. As a result, a number of plan participants received retrospectively increased levels of banked hour pension credits.

Years later, plan trustees, faced with funding problems, sought to reduce plan liabilities and determined that the elimination of these retroactively increased benefits would be permissible under ERISA’s anti-cutback rules. After receiving notice of the proposed reduction, certain retirees filed suit. Plan trustees agreed not to impose the cuts pending the outcome of litigation.

“Unearned” benefits

The appellate court affirmed the district court’s grant of summary judgment in favor of the participants. The retroactive banked hours were accrued benefits protected by ERISA’s anti-cutback rule.

According to the court, the plan trustees essentially argued that the participants did not “earn” the retroactive benefits by working. Instead, the retroactive benefits were a gratuity resulting from the merger of the plans. While this is not an irrational policy argument, the court explained, it has no basis in the statutory text. The anti-cutback rule in ERISA Sec. 204(g) asks whether benefits have been “accrued,” not whether they have been “earned.” The banked hour benefits were clearly attributable to pre-amendment service. The fact that they were bestowed retroactively did not alter this fact.

The trustees cited cases from other circuits to support their position, but the appellate court distinguished those as only concerning benefits promised after retirement. The participants in this case all worked for a covered employer for some period of time following the merger.

Source: Bonneau v. Plumbers and Pipefitters Local Union 51 Pension Trust Fund, By and Through its Trustees (CA-1).

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