On November 15, 2013, in Bonneau v. Plumbers and Pipefitters Local Union 51 Pension Trust Fund, the US Court of Appeals for the First Circuit held, in a case of first impression, that the trustees of a pension plan violated the anti-cutback rule by trying to eliminate a retroactively conferred benefit following a plan merger. In its decision, the First Circuit explained that the benefit was attributable to service and constituted an accrued benefit for purposes of the anti-cutback rule.

The Plumbers and Pipefitters Local Union #51 was formed in 1997 through the merger of four former local unions. The four unions' pension plans (pre-merger plans) were also merged, and a new plan, the Plumbers and Pipefitters Local Union #51 Pension Plan (post-merger plan), was formed in 1998.

Both the pre-merger plans and the post-merger plan included "banked hour" benefits. Banked hours are hours of service worked in covered employment or otherwise accrued by plan participants 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. These excess hours are "banked" and can be:

The banked hour provisions differed in each of the four pre-merger plans, but the post-merger plan provided the most generous banked hour provisions from the pre-merger plans. These provisions applied prospectively and retrospectively, which meant that certain participants in the post-merger plan, including the plaintiffs in the case, received retrospectively increased levels of "banked hour" pension credits and increased pension benefit levels immediately after the plan merger under the more generous provisions.

The post-merger plan experienced funding issues after the merger, and the plan's trustees adopted Amendment Nine to the post-merger plan to try to reduce the plan's liabilities. Amendment Nine reduced the plan participants' banked hour pension benefits for hours accumulated before September 1, 1998 (the date of the post-merger plan) back to the lower levels promised under the participants' respective pre-merger plan document. The trustees then notified the participants of the reductions in their retroactive benefits under the post-merger plan.

The plan participants affected by Amendment Nine filed an action against the trustees under ERISA, alleging that the reductions under Amendment Nine violate the anti-cutback rule. Under the anti-cutback rule, an amendment to a pension plan that eliminates benefits "attributable to service" performed before the amendment is treated as reducing "accrued benefits." The anti-cutback rule is in ERISA Section 204(g) (29 U.S.C. 1054(g)), which contains parallel rules to Section 411(d)(6) of the Internal Revenue Code (IRC) (see Practice Note, Protected Benefits under IRC Section 411(d)(6)). Specifically, the plaintiffs argued that all of their pre-September 1, 1998 banked hour benefits had accrued for purposes of the anti-cutback rule. The trustees suspended implementation of Amendment Nine pending the outcome of this case.

On April 5, 2013, the US District Court for the District of Rhode Island orally granted the plaintiffs' motion for summary judgment and denied the trustees' cross-motion for summary judgment. The court held that the plaintiffs' pre-September 1, 1998 banked hours were accrued benefits under ERISA, because:

The court explained that Amendment Nine would decrease, by amendment, the plaintiffs' accrued benefits and therefore violate the anti-cutback rule. The trustees appealed to the First Circuit.

The First Circuit, in a case of first impression, affirmed the holding of the district court, holding that, for purposes of the anti-cutback rule, the retroactively granted banked hours were:

The trustees contended that the plaintiffs did not "earn" the retrospective banked hours by working for them, and that the hours were simply an unearned gratuity that should not be treated as accrued benefits for purposes of the anti-cutback rule.

In response, the First Circuit noted that the term "earned" does not appear in the statute and that ERISA requires the promise of a benefit to provide incentives to continue employment in order for the benefit to accrue. That requirement was satisfied here because the pre-September 1, 1998 banked hour benefits were attributable to the plaintiffs' pre-September 1, 1998 service. It does not matter that those benefits were retroactively conferred.

The First Circuit also discussed the meaning of an "accrued benefit" for purposes of the anti-cutback rule. Only an employee can accrue a retirement benefit, but once the benefit has been accrued it is protected from cutbacks as long as the employee remains a plan participant, regardless of whether he is still employed or retired. Relying on case law from the Fourth and Seventh Circuits, the First Circuit explained that a promise of a benefit accrues if it predates the employee's retirement or termination from employment. If an employee then continues employment in exchange for the promised benefit, he has a justified expectation of receiving the benefit and the anti-cutback rule protects that expectation.

Therefore, it does not matter whether a benefit has been "earned," but whether it has been accrued. The retrospective banked hours were accrued in this case, and were not a gratuity, because they predated the plaintiffs' retirement.

Pension plan sponsors and practitioners that are merging retirement plans should ensure that they work closely with their service providers and actuaries to determine:

A detailed protected benefits analysis should also be prepared in order to determine the benefits that are protected and that cannot be taken away from plan participants in violation of the anti-cutback rule.