Elimination of Transfer Option does not Violate Anti-Cutback Rule: Ninth Circuit | Practical Law

Elimination of Transfer Option does not Violate Anti-Cutback Rule: Ninth Circuit | Practical Law

In Andersen v. DHL Retirement Pension Plan, the US Court of Appeals for the Ninth Circuit held that an employer's decision to eliminate retirement plan participants' ability to transfer their account balances from a defined contribution plan to a defined benefit plan does not violate the anti-cutback rule under the Employee Retirement Income Security Act of 1974 (ERISA).

Elimination of Transfer Option does not Violate Anti-Cutback Rule: Ninth Circuit

Practical Law Legal Update 2-581-4407 (Approx. 5 pages)

Elimination of Transfer Option does not Violate Anti-Cutback Rule: Ninth Circuit

by Practical Law Employee Benefits & Executive Compensation
Published on 17 Sep 2014 • USA (National/Federal)
In Andersen v. DHL Retirement Pension Plan, the US Court of Appeals for the Ninth Circuit held that an employer's decision to eliminate retirement plan participants' ability to transfer their account balances from a defined contribution plan to a defined benefit plan does not violate the anti-cutback rule under the Employee Retirement Income Security Act of 1974 (ERISA).
On September 15, 2014, in Andersen v. DHL Retirement Pension Plan, the US Court of Appeals for the Ninth Circuit held that an employer's decision to eliminate retirement plan participants' option to transfer their account balances from a defined contribution plan to a defined benefit plan does not violate the anti-cutback rule under the Employee Retirement Income Security Act of 1974 (ERISA) (No. 12-36051, , at *1 (Sept. 15, 2014)). The anti-cutback rule prohibits plan amendments that would reduce protected accrued benefits, early retirement benefits, retirement-type subsidies and certain optional forms of benefit under qualified retirement plans (see Practice Note, Protected Benefits under IRC Section 411(d)(6)).

Background

The Plaintiffs, former employees of Airborne Express, Inc. (Airborne), were participants in both the defined benefit plan (Retirement Income Plan) and the defined contribution plan (Profit Sharing Plan) maintained by Airborne. The Retirement Income Plan had a floor-offset feature. A floor-offset feature establishes a guaranteed benefit level or a floor that is calculated using a participant's average compensation level and years at the company. The payout between the plans works as follows:
  • If the annuity value from the defined contribution plan is equal to or greater than the guaranteed benefit level, the participant's benefits are paid entirely from the defined contribution plan.
  • If the annuity value is less than the guaranteed benefit level, the participant's benefits are first paid from the defined contribution plan and the difference is made up by the defined benefit plan.
Before the amendment in question, the Retirement Income Plan had a provision which allowed participants to transfer funds from the Profit Sharing Plan to the Retirement Income Plan. In some cases, exercising the transfer option could maximize a participant's retirement benefits.
In 2003, DHL acquired Airborne and merged the companies' retirement plans. On December 31, 2004, DHL amended the Retirement Income Plan to eliminate the option to transfer account balances from the Profit Sharing Plan to the Retirement Income Plan. As a result, many participants, including Plaintiffs, received reduced benefits.
The Plaintiffs filed this lawsuit in response, which was dismissed by the district court. The Plaintiffs then filed a motion for reconsideration.

Outcome

The Ninth Circuit affirmed the district court's decision and held that the 2004 plan amendment did not violate the anti-cutback rule. Under IRC Section 411(d)(6), the anti-cutback rule is violated if a plan amendment:
The court recognized that the Internal Revenue Service has authority to make exceptions to the anti-cutback rule (29 U.S.C. §1054(g)(2)(B)) and 26 C.F.R. §1.411(d)-4, Q&A-2 provides that a plan can be amended to eliminate a transfer option without violating the anti-cutback rule.
In reaching its decision, the Ninth Circuit relied on the government's interpretation of Q&A-2, and found that:
  • The amendment did not decrease the Plaintiffs' accrued benefit.
  • Whether the amendment eliminated an optional form of benefit had no bearing on the case.
The court concluded that the amendment fell squarely within the bounds of 26 C.F.R. §1.411(d)-4, Q&A-2.

No Decrease in Accrued Benefit

The court explained that with regard to the decrease in accrued benefits:
  • The plaintiffs did not allege that the elimination of the transfer option reduced their account balance in their Profit Sharing Plan.
  • The definition of accrued benefit under ERISA as applied to the Retirement Income Plan is not clear.
Accordingly, the court must look to the Retirement Income Plan and determine whether the plan's definition of accrued benefit would be affected by the elimination of the transfer option. The court noted that the plan had a complete formula for calculating the accrued benefit that did not refer to the transfer option or contemplate an alteration to the formula should the transfer option be eliminated. The court determined that the accrued benefit formula in Retirement Income Plan was therefore unaffected by the elimination of the transfer option. As a result, the court concluded that there had been no decrease in the Plaintiffs' accrued benefit.
Additionally, the court rejected the Plaintiffs' argument that accrued benefit should be defined differently under a floor-offset plan in accordance with Rev. Rul. 76-259.

Optional Form of Benefit has no Bearing on Case

The court declined to decide whether the amendment was an elimination of an optional form of benefit, and thus a decrease in the accrued benefit, because it determined that the outcome would be the same under either conclusion. The court reasoned that:
  • If the transfer option was not an optional form of benefit, DHL could have eliminated it without violating the anti-cutback rule.
  • If the transfer option was an optional form of benefit, the IRS has authority to make an exception to the anti-cutback rule for amendments that eliminate an optional form of benefit, which it did in 26 C.F.R. §1.411(d)-4, Q&A-2.

Practical Impact

At the conclusion of the case, the court took issue with the outcome, explaining that because of the differing actuarial assumptions that were used to calculate the benefits in the Retirement Income Plan and the Profit Sharing Plan, the Plaintiffs lost roughly half of their expected benefits. Although Plaintiffs did not challenge this issue, the court indicated in dicta that the differing actuarial assumptions may be inconsistent with ERISA's goals and that the IRS may be able to correct this problem in the future.