Acquisitions and the offer of transition benefits for acquired employees under a seller’s plans can be tricky. If those benefits are not structured carefully, protracted litigation can result. A group of former employees, who were transferred to Siemens by Westinghouse as part of a 1998 business unit acquisition, sued Siemens and its retirement plans, alleging that those entities violated the Employee Retirement Income Security Act of 1974 (ERISA) by refusing to provide the employees with permanent job separation pension (PJS) benefits when Siemens terminated their employment.
Under the Westinghouse pension plan, participants who satisfied certain age and service requirements but did not qualify for normal retirement benefits, and who were terminated by the employer because of job movement or product line relocation or location closedown, were entitled to PJS benefits. For this purpose, the plan’s definition of employer did not include any future employer (e.g., Siemens) of Westinghouse employees. Notably, the Westinghouse plan did not provide PJS benefits to an employee offered employment by a successor to Westinghouse, or by reason of a separation after August 31, 1998.
Under the purchase agreement between Siemens and Westinghouse, Siemens hired all affected Westinghouse employees. The purchase agreement also required Siemens to establish a defined benefit pension plan for the acquired employees that contained terms and conditions that are “substantially identical” to those of the Westinghouse pension plan in effect as of the closing date, and to provide “compensation and benefit plans and arrangements, which in the aggregate are comparable” to those of the Westinghouse plan as of the closing date. Accordingly, effective September 1, 1998, Siemens adopted separate but virtually identical defined benefit pension plan program for the acquired employees. The Siemens pension plan program did not contain provisions for PJS benefits.
While the general closing date under the purchase agreement was August 19, 1998, the closing date was deemed to be September 1, 1998 for pension and benefits purposes. In the purchase agreement, even though Siemens would become their employer as of August 19, Westinghouse agreed to amend the Westinghouse pension plan to provide the acquired employees with transition benefits in the form of credit for service and compensation for the 13-day period from August 19 through August 31.
In 1999, Siemens closed certain facilities it acquired from Westinghouse and consequently terminated the employment of numerous acquired employees. Upon their termination, 207 of the 227 plaintiffs in this case signed severance agreements releasing Siemens from liability and promising not to sue it for any claims related to or arising out of their employment or termination. Notwithstanding having executed these releases, in March 2002, plaintiffs submitted claims to the Siemens plans for PJS benefits, but the Siemens plans’ administrative committees denied those claims on the ground that neither of the Siemens plans provided for PJS benefits. The plaintiffs then sued Siemens and the Siemens pension plans for violations of ERISA.
The federal trial court that heard the case concluded the successor was required to offer the PJS benefits on the basis of two independent theories. First, Siemens created an ERISA transition plan for the acquired employees through the extension of the Westinghouse plan from August 19 to August 31, 1998. The court also concluded that adoption of the Siemens plans pursuant to the terms of the purchase agreement functioned as an amendment of the ERISA transition plan, and that amendment eliminated the acquired employees’ PJS benefits in violation of ERISA’s anti-cutback provisions. Second, the court determined that Westinghouse transferred to Siemens through the purchase agreement a portion of the Westinghouse plan’s liabilities, thereby triggering ERISA’s provisions that require the Siemens plans to “provide equal or greater benefits” than those of the Westinghouse plan. The court also concluded that PJS benefits under the Westinghouse plan are protected from cutback under ERISA.
The U.S. Court of Appeals for the Third Circuit disagreed and ruled that none of the acquired employees were entitled to the PJS benefits. With regard to the federal trial court’s first theory, the Third Circuit concluded that Siemens did not establish an ERISA transition plan by virtue of the 13-day arrangement, because that arrangement did not require Siemens to perform the administrative undertaking that is the hallmark of an ERISA plan. The plan for the 13-day period was the Westinghouse plan, which Westinghouse sponsored, funded, operated, and administered. Thus, the later adoption of the Siemens plans, which lacked PJS benefits, could not constitute an “amendment” of a transition plan in violation of ERISA’s anti-cutback provisions, given that Siemens had not established any plan to amend.
With respect to the federal trial court’s second theory, the Third Circuit concluded that because the plaintiffs had not satisfied the conditions for PJS benefits upon a hypothetical termination just prior to Westinghouse’s transfer of liabilities to Siemens and could not satisfy in the future the conditions for those benefits, ERISA did not protect those benefits from cutback, and the plaintiffs’ benefits would not have included PJS benefits upon the Westinghouse plan’s hypothetical termination. Consequently, Siemens’ omission of PJS benefits from its plans and the plaintiffs’ resulting lack of entitlement to PJS benefits under the Siemens plans upon a hypothetical termination basis following the transfer of liabilities did not diminish the plaintiffs’ benefits in violation of ERISA. (Shaver v. Siemens Corporation, 3rd Cir. 2012)