In Teufel v. Northern Trust Co. (April 11, 2018), the US Court of Appeals for the Seventh Circuit confirmed that a prospective change in the benefit formula for a defined benefit pension plan constituted neither an impermissible cutback in accrued benefits under the Employee Retirement Income Security Act of 1974 as amended (ERISA) nor age discrimination under the Age Discrimination in Employment Act (ADEA). For participants hired before 2002 like the plaintiff in this case, the amendment prospectively changed the plan to (i) determine benefits accrued through March 2012 under the existing formula, with high average salary deemed to increase by 1.5% for each year worked thereafter, and (ii) institute a new formula for service starting in April 2012. In affirming the District Court’s decision for the plan sponsor, the Seventh Circuit specifically addressed three contentions of the plaintiff:
- That the deemed salary increase was an impermissible cutback, because the plaintiff’s salary had historically increased by 5% annually or more. The court concluded that the plaintiff’s expectation of future salary increases, which was not a term of the plan, was not an entitlement that formed part of his “accrued benefit”;
- That the plan sponsor failed to communicate the amendment in a manner that would be understood by the average plan participant, as required by ERISA section 204(h)(2). The court found that the communication in question was clear, given the inescapable complexities of pension formulas. In support of this conclusion, the court noted also that the plan sponsor had provided an online tool that showed a participant-specific projection of his or her pension based on different assumptions about future salary and retirement dates, which alternatively satisfied section 204(h)(2); and
- That the change in formula was impermissible age discrimination under the ADEA, on the basis that the pre-2012 formula became more valuable with age and the reduction in that formula harmed older workers relative to younger workers. The court disagreed, finding that both before and after 2012 the pension formula took into account years of service and salary rather than age, and that the correlation of those factors with age is not impermissible discrimination under US Supreme Court precedents.
Eversheds Sutherland Observations
- The plan participant was represented by the Schlichter firm from St. Louis, which has been one of the principal plaintiffs’ firms bringing 401(k) fee litigations.
- The anti-cutback rule is ordinarily conceived as a tax qualification requirement primarily administered and enforced by the Internal Revenue Service (IRS). Tax qualification issues, as such, are rarely litigated, and only in a Tax Court declaratory judgment action after the IRS has disqualified the plan. For such a case, holding that a 1995 plan amendment eliminating for pre-1991 retirees a cost-of-living adjustment effective in 1991 was not a disqualifying cutback in accrued benefits, see Sheet Metal Workers National Pension Fund v. Commissioner, 117 T.C. 220 (2001), aff’d, 318 F.3d 599 (4th Cir. 2003), in which Eversheds Sutherland represented the plan.
- The anti-cutback rule, like many other tax qualification requirements (other than, notably, the non-discrimination and required minimum distribution rules), was also enacted as a provision of Title I of ERISA, which confers on participants the right to sue to enforce the statute in cases like Teufel.
- Since the Department of Labor continues to lag industry practice in its endorsement of electronic communications as a means to provide required participant communications, it is helpful to see the Seventh Circuit so comfortable with a digital tool under section 204(h)(2).