Erroneous interpretation of plan that reduced benefits was “amendment” under anti-cutback rule

Finding that a straightforward reading of an employer’s pension plans, which was consistent with the company’s earlier interpretation of those plans, led to the conclusion that terminated vested participants were entitled to pensions in an amount that did not include an actuarial adjustment for the years prior to age 65 in which they received benefits, the U.S. Court of Appeals in Philadelphia (CA-3) determined that the plan administrator’s second interpretation of the plans could be construed as an “amendment” to the plans that violated ERISA’s anti-cutback rule. The court also ruled that the second interpretation of the plans denied the participants’ benefits due them in violation of ERISA §502(a)(1)(B).

Background

The named plaintiff, who worked at United Refining Company for 29 years, quit when he was 54 years old and his benefits had vested under the “1980 Plan,” which applied to individuals whose benefits vested after 1980 but before 1987. Because his employment was long enough to vest benefits and he was too young when he left United to receive those benefits, he belonged to a subset of former United employees involved in this lawsuit: “terminated vested participants” or “TVPs” in United’s pension plan.

When he left the company, he received a letter informing him that “[a]s a terminated Pension Plan participant with a vested interest, you are eligible for a deferred retirement benefit from the United Refining Company Pension Plan for Salary [sic] Employees.” The letter further stated that he could elect to have his monthly retirement benefit begin at any time after October 1995, the month in which he would turn 60, and that his “monthly retirement benefit will be $573.70 at age 60.” The letter did not state that the amount of his benefit depended on whether he elected to receive it at age 60 or later. TVPs under the “1987 Plan” were likewise informed of their pension amounts and told they could receive them the month following their 59½ birthday without any reduction for early retirement.

On January 30, 2002, United amended and restated its 1995 Plan, backdated to January 1, 1995, to comply with amendments to ERISA. Its 1995 and 2002 Plans both included a Section 5.04(c), which was absent from the 1980 and 1987 Plans. This provision stated that the benefits of TVPs who receive pensions before age 65 would be “actuarially reduced to reflect the earlier starting date thereof.”

In 2005, plan actuaries informed the plan administrator that United had erroneously paid to TVPs vested under the 1980 and 1987 Plans pensions that were not “actuarially reduced.” In July and August 2005, United sent letters to TVPs who had not yet begun to receive benefits clarifying when they could receive their pension and under what terms, and stating that if a TVP elected to receive retirement benefits before turning 65, the benefit would be reduced to reflect the early election date in accordance with a provided table.

A year later, United sent letters to TVPs who were already receiving pensions stating that, “The Plan document requires that all pension benefits paid to terminated vested participants PRIOR to their Normal Retirement Age of 65 years MUST be actuarially reduced to the earlier payment date.” In addition, some retirees were told that in two weeks from the date of the letter their monthly pension would be lowered “until the excess payments have been recovered, after which you will begin receiving the amount that should have been provided to you based on the correct calculation.” Others were told that in two weeks “your monthly pension benefit payment will stop and you will not receive any future payments.” The named plaintiff was informed that his monthly pension payment was eliminated and he was required to repay the Plan $14,475.

The plaintiffs then sued, alleging that United’s actions violated ERISA §502(a)(1)(B) and ERISA’s anti-cutback rule. Granting the plaintiffs’ motion for summary judgment in part, and denying United’s motion, the district court held that United’s actions violated the anti-cutback rule.

Plan terms

The appellate court began by affirming the lower court’s conclusion that requiring the participants to have exhausted their administrative remedies in this situation would have been futile.

Next, after noting that the 1980 and 1987 Plans gave the plan administrator discretion in interpreting their terms, the appeals court found that no amount of deference could rescue the administrator’s second interpretation from its flat contradiction with the terms of the 1980 and 1987 Plans. Here, the court found that pursuant to Section 7.02 of the 1980 Plan, a TVP gets retirement income in accordance with Section 5.03, which states that a participant who retires is entitled to “Accrued Retirement Income,” which is calculated under Section 5.01 with respect to a participant’s average compensation and length of service with the company. Noting that the 1987 Plan is quite similar, the court found that a straightforward reading of the Plans, consistent with United’s early interpretations of them, “leads to the conclusion that TVPs were entitled to pensions in an amount that did not include an actuarial adjustment for the number of years younger than 65 that they were when they retired.”

None of these provisions treats TVPs differently from people who retire directly from United, and no provision requires actuarial adjustment for taking retirement benefits early, the court explained. Accordingly, the administrator’s second interpretation conflicted with the plain meaning of the plan terms and thus denied the plaintiffs benefits due them in violation of ERISA §502(a)(1)(B).

Anti-cutback rule

In addition, the second interpretation also violated the anti-cutback rule, the court determined. It rejected United’s argument that the early retirement benefits were not “accrued benefits” because Section 5.01 of both Plans provided calculations for “[t]he annual rate of Retirement Income payable to a Participant who retires on or after his Normal Retirement Date,” and anyone who retires before his normal retirement date has no accrued retirement benefits. What this argument ignores, the court pointed out, “is the combined effect of Sections 7.01, 5.03, 5.02, and 5.01. Section 7.01 vests retirement income in TVPs; Section 5.03 directs the administrator to calculate TVPs’ Accrued Retirement Income as of the date of early retirement, while Section 5.02 states that the amount of Accrued Retirement Income is computed ‘in accordance with Section 5.01.’” In other words, explained the court, Sections 5.01, 5.02, and 5.03 provide the method for computing TVPs’ benefits, while Section 7.01 actually confers the benefits, making them “accrued” within the meaning of ERISA.

Stating that the critical question in this case, in light of the absence of a formal plan amendment, was whether the plan administrator’s “interpretation of the Plan improperly denied accrued benefits to” the plaintiffs, the court found the answer was “yes.” The Third Circuit has construed “amendment” broadly “to protect pension recipients.”

Source: Cottillion v. United Refining Company (CA-3).

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