Publications: Are Plant-Shutdown Pension Benefits Protected?

Some employers provide subsidized pension benefits to employees who lose their jobs before they reach normal retirement age because of a plant shutdown i.e., a former employee who meets age and service requirements when the plant closes gets an unreduced pension even if the benefit begins before his or her normal retirement age. Thus, a plant shutdown benefit typically entitles an eligible participant to a greater pension than would be available from early retirement.

Can plant shutdown benefits be taken away? For service not yet rendered, yes. But as for benefits for past service, the answer depends on whether the benefits are protected by the Internal Revenue Code (the “Code”) or ERISA.

Code section 411(d)(6) and its ERISA counterpart, ERISA section 204(g), generally prohibit retirement plan amendments that decrease the “accrued benefit” of participants. A plan amendment that effectively eliminates or reduces an early retirement benefit or a “retirement type subsidy” for benefits attributable to service before the amendment is treated as reducing accrued benefits. IRC § 411(d)(6)(B), ERISA § 204(g)(2). Courts have differed as to whether plant shutdown benefits are “retirement-type subsidies.”

Courts holding that a plant-shutdown benefit is not a retirement subsidy

At least two federal appellate and one district court have supported the proposition that plant shutdown benefits are not protected.

In Ross v Pension Plan for Hourly Employees of SKF Industries, 847 F2d 329 (6th Cir 1988), the sixth circuit considered a plant shutdown benefit available to any participant whose active service ended because of a permanent plant shutdown if they met age and service criteria when the plant closed.

At the time of the shutdown, no participants met the applicable age and service requirements, and they were advised by the plan administrator that they were thus ineligible for benefits. They brought suit in the federal district court for the Northern District of Ohio and argued in their motion for summary judgment that they were nonetheless entitled to benefits under section 204(g) of ERISA. The plan argued that the plaintiffs could not establish the requisite elements of a successful claim under ERISA 204(g). The district court granted the plan’s motion for summary judgment and dismissed the action.

Interestingly, the sixth circuit framed the issue as whether the plaintiffs were entitled to shutdown benefits under ERISA section 204(g). The court could have avoided the ERISA question and affirmed the district court on the grounds that the plaintiffs had not met the age and service requirements for plant shutdown benefits, and thus the plan itself precluded them from receiving benefits.

In its dicta concluding that section 204(g) was not designed to protect plant shutdown benefits, the Ross court reviewed the legislative history of the Retirement Equity Act. According to the court, this history provides that plant shutdown benefits are not protected retirement type subsidies:

Retirement type Subsidy.

The bill provides that the term “retirement type subsidy” is to be defined by Treasury regulations. The committee intends that under these regulations, a subsidy that continues after retirement is generally to be considered a retirement type subsidy. The committee expects, however, that a qualified disability benefit, a medical benefit, a social security supplement, a death benefit (including life insurance), or a plant shutdown benefit (that does not continue after retirement age) will not be considered a retirement type subsidy.

Ross, 847 F2d at 33334 (citing S Rep No 575, 98th Cong, 2d Sess 30, reprinted in 1984 USCCAN, 2547, 2576 (emphasis in original)).

Unfortunately, the court provides no analysis other than simply declaring that this legislative history “specifically states” that plant shutdown benefits are not protected retirement type subsidies. Ross was followed without analysis in dicta in Roper v Pullman Standard, 859 F2d 1472, 1474 (11th Cir 1988) and Blank v Bethlehem Steel Corp., 758 F Supp 697, 700 n 3 (MD Fla 1990).

Cases holding that plant-shutdown benefits are protected

At least two federal appellate courts have concluded that plant shutdown benefits are protected under ERISA section 204(g).

Richardson. Richardson v Pension Plan of Bethlehem Steel Corp., 67 F3d 1462 (9th Cir 1995), modified on reh’g, 112 F3d 982 (9th Cir 1997), directly raises the issue, and the ninth circuit thoroughly analyzes it. At issue were benefits provided to employees who satisfied age and service requirements and whose continuous service was broken by a permanent plant shutdown. These shutdown benefits included an amount added to a participant’s pension equal to his or her normal retirement benefit, payable until death.

Essentially, the court found that the plan’s sponsor amended the plan prior to a plant shutdown and eliminated the shutdown benefits. The court posed this question: “Are the shutdown benefits at issue here ‘retirement type subsidies’ protected by [ERISA section 204(g)]?”

The court first noted that although Congress indicated that it expected the Treasury Department to promulgate regulations defining the term “retirement type subsidy,” that had yet to happen. It then observed that other courts have held that a retirement benefit is a retirement type subsidy if the sum of the monthly payments for the participant’s life exceeds what he or she would have received as normal retirement benefits. Specifically, it noted that the third circuit held that a plan paying normal retirement benefits at an earlier age provided a “retirement subsidy” - i.e., because the “benefits were received at an earlier age and not actuarially reduced, the sum of the payments over the participant’s lifetime would be greater than...had the participant retired at the normal...age.”

Relying on these decisions, the Richardson court concluded that the plant shutdown benefits were a “retirement type subsidy because the sum of the monthly payments for life” would exceed the benefits that the affected employees would have received as normal retirement benefits.

Next, the court reviewed the legislative history quoted above and used by the Ross court as a basis for its decision. In contrast to Ross, the Richardson court read the ERISA section 204(g) Senate report “to mean that shutdown benefits that do continue after retirement age are a retirement type subsidy.” The court stated that if Congress had wanted shutdown benefits never to be treated as retirement type subsidies, it would have said so.

However, “Congress said only that a shutdown benefit ‘that [ended] after normal retirement’ was not a retirement type subsidy.” That statement, according to the court, “in conjunction with Congress’ general assertion that a subsidy that continues after retirement is a retirement type subsidy strongly implies that shutdown benefits that do continue after retirement age are retirement type subsidies.”

The defendant plan apparently agreed with this view but argued that the shutdown benefit at issue did not continue after retirement age because at and after age 62 the affected participants received the same amount per month they would have had they retired before age 62. Accordingly, the subsidy ended at normal retirement age.

The court rejected this argument, stating that the shutdown benefits at issue were not “miraculously transformed into normal retirement benefits” when the recipient reached age 62. Rather, an employee received shutdown benefits from the time the plant closed until death. The court conceded that the amount of shutdown benefits a participant was entitled to receive “is calculated by reference to normal retirement benefits, but that [did] not transform the shutdown benefits into normal retirement benefits.” Accordingly, the court concluded that because the shutdown benefits were retirement type subsidies, ERISA section 204(g) prevented the employer from eliminating them.

On rehearing, the ninth circuit determined that the plan at issue was not “amended” so as to remove a protected benefit and, as a result, concluded that the former employees were not entitled to relief.

Nothing in the court’s opinion on rehearing, however, indicates that the court would view a plant shutdown benefit as not being protected, or that its analysis of the issue in the original opinion would differ in any respect.

Bellas. Another case that purports to hold that plant shutdown benefits are protected from retroactive elimination is Bellas v CBS, Inc., 221 F3d at 517 (3d Cir 2000). In Bellas, a plan provided that an enhanced pension would be available for a “permanent job separation,” defined as “the termination of the employment of an Employee...through no fault of his own through lack of work for reasons associated with the business for whom [the employer] determines there is no reasonable expectation of recall.” Id, 221 F3d at 520.

The plan was amended effective January 1, 1997, to narrow the definition of “permanent job separation” to apply after a job move, product line relocation, or location dose down. The plan was further amended effective September 1, 1998, to eliminate the permanent job separation benefit completely for terminations occurring on or after that date. The employer terminated the plaintiff’s employment on December 31, 1997.

Although there was no indication of a plant shutdown, the court crafted its holding to encompass plant shutdown benefits. The concurrence complains that the majority’s opinion is thus a “bizarre mischaracterization” of the facts and that the plant shutdown analysis is little more than “judicial dictum.” Bellas, 221 F3d at 540, 542 (Shadur, J., concurring).

Nevertheless, the court “held” that unpredictable contingent event benefits that provide a benefit greater than the actuarially reduced normal benefit are “retirement type subsidies” and therefore are accrued benefits under ERISA section 204(g) if the benefit continues beyond normal retirement age. Accordingly, the Bellas court’s reading of the legislative history is consistent with Richardson – i.e., rather than treating plant shutdown benefits as unprotected, Bellas (and Richardson) view benefits that continue beyond normal retirement age as ERISA section 204(g) accrued benefits.

The position of the Internal Revenue Service

In GCM 39869, 1992 WL 798073 (IRS GCM), the IRS considered whether shutdown benefits should be treated as accrued benefits protected under Code section 411(d)(6). The GCM concludes that shutdown benefits that are retirement type and not ancillary become accrued benefits and are thus protected under Code section 411(d)(6) upon the occurrence of the event that triggers the right to payment of benefits.

The GCM characterizes shutdown benefits as layoff/severance, ancillary, or retirement type benefits depending on the employer’s purpose. Shutdown benefits that continue beyond normal retirement age are retirement type benefits and thus become accrued benefits protected under Code section 411(d)(6). Unfortunately, the GCM does not specify when a shutdown benefit is considered to continue beyond normal retirement age.

In any event, such benefits are not protected until the occurrence of the event that triggers the right to them. According to the IRS, this conclusion is consistent with the treatment of shutdown benefits as “unpredictable contingent event benefits” for purposes of the funding requirements under Code section 412. As the GCM explains, in “determining a defined benefit plan’s current liability for purposes of the funding requirements under [Code] section 412[(1)(7)(B)], unpredictable contingent event benefits are not taken into account until the event on which the benefit is contingent occurs.”

Thus, treating a shutdown benefit as accrued and therefore protected under section 411(d)(6) at the time that the triggering event occurs is consistent with treating it as an unpredictable contingent event benefit for purposes of the additional funding requirements under Code sections 412(1) and 412(c)(7).

The positions compared

Based on the foregoing, there are three distinct positions as to the protected status of plant shutdown benefits. The first, as set forth in Ross, concludes that plant shutdown benefits are never protected. The second, as set forth in Richardson and Bellas, provides that they are always protected. Finally, the IRS takes a middle position, characterizing plant shutdown benefits that are retirement type subsidies as protected only upon a plant closure.

Each of these positions has logical appeal. The Ross position is supported by the following argument, made by the defendants in Bellas: because the participant receives nothing other than his or her normal retirement benefit at age 65, the plant shutdown benefits do not continue past normal retirement age, and therefore the legislative history supports a conclusion that such benefits are not protected.

The contrary view, set forth by the Richardson and Bellas courts, has equal logical validity. The unreduced pension provided by a plant shutdown benefit is not “miraculously transformed into [a] normal retirement benefit[]” when the recipient reaches retirement age. Rather, the unreduced payments begun at termination of employment continue for life.

Finally, although the GCM shies away from attempting to define a plant shutdown benefit that does not continue after retirement age, the GCM’s integrating plant shutdown benefits with the Code’s funding requirements and forming a bright line rule based on that integration has logical appeal.

It is difficult to choose between the Ross and Richardson positions. Interestingly, the House version of the Retirement Equity Act provided for the protection of all “subsidies.” At conference, the word “retirement type” was added.

Thus, the Retirement Equity Act did not intend to protect all pension subsidies, all of which can arguably be classified as “retirement type.” Unfortunately, other than an understanding that Congress intended to set some limits, the legislative history provides no guidance beyond what has been set forth above.

However, when plant shutdown benefits of the kind discussed here are considered, the better view as set forth by the Richardson court is that they do indeed continue beyond normal retirement age. A nonactuarially reduced pension benefit payable as an annuity would properly be reduced at a participant’s normal retirement age to reflect its commencement prior to normal retirement age if it were not a benefit that continues beyond retirement age.

However, this is not the case with the plant shutdown benefits considered in this article. An example of a plant shutdown benefit that would not be protected is a Social Security type supplement benefit. Under this arrangement, in the event of a plant shutdown, a terminated employee would be provided with a benefit equal to the Social Security benefit that he or she would receive upon attaining Social Security eligibility age. This benefit would terminate when his or her Social Security benefits began. Both the legislative history under ERISA section 204(g) and the IRS support the position that such a benefit is not protected.

Despite its logical appeal, the IRS’ position has no support in the statutory language or legislative history of Code section 411(d)(6). Nothing indicates that plant shutdown benefits, if they are to be protected at all, are only protected upon a plant shutdown. Assuming that Congress intended to protect certain plant shutdown benefits, this position eliminates that protection by allowing an employer, knowing in advance that it intends to shut down a plant, to simply eliminate plant shutdown benefits beforehand (though a collective bargaining agreement could preclude an employer from taking such action).

If the IRS provides formal guidance on this issue, it should construe the Code’s funding requirements consistent with Congress’ intent to protect plant shutdown benefits. The guidance should assume that the Code’s funding provisions are intended to cover benefits treated as accrued benefits under the Code. In other words, the term “plant shutdown benefits” in the funding provisions’ legislative history can easily be construed as encompassing only nonprotected plant shutdown benefits.

Conclusion

When it enacted the Retirement Equity Act, Congress probably intended to protect plant shutdown benefits that supplement a participant’s regular pension benefit. However, Congress did not intend to protect all plant shutdown benefits. Employers should be sensitive to this distinction and consider drafting plant shutdown benefit provisions accordingly. Congress or the Supreme Court should eliminate the confusion that now exists.

In any event, as was contemplated by the Act, the IRS should prepare guidance on this issue. This guidance should follow the framework established by the 1992 GCM, except that it should not characterize a retirement type plant shutdown benefit as protected only upon a plant closure. Rather, it should establish that a retirement type benefit as discussed in this article is protected but should provide examples that plan sponsors could adopt if they wish to establish a plant shutdown benefit that is “ancillary” and thus does not have protected status.

Reprinted with permission of the Illinois Bar Journal, Vol. 90 #43 January 2002. Copyright by the
Illinois State Bar Association, on the Web at <isba.org>.

To contact the author, please click .