Back in the “Ma Bell” era, AT&T established a policy of furnishing discounted telephone service to retired employees, largely in the hope that they would serve as “ambassadors” for the value of telephones at a time when the devices were far from universal. That purpose dwindled in importance over the years, but the “concession,” as it was called, remained, becoming a traditional element of those retirees’ remuneration.
After the fragmentation of the Bell System, a complication arose. There were now many Bell descendants, each with retirees who lived outside their unit’s service area. To continue the concession for them, the companies substituted reimbursements for discounts. Unlike the discounts, which qualify as a tax-free “no-additional-cost service” under I.R.C. §132(a)(1), the reimbursements were includible in taxable income.
In recent years, several lawsuits have alleged that, at least with respect to the “out-of-region retirees,” the concession is an ERISA-covered retirement plan; indeed, a defined benefit pension plan. The plaintiffs have demanded that it be reformed to comply with all ERISA requirements for DB plans. Exactly what they hope to accomplish is obscure, since the requested remedy is a patent impossibility. There is no way, for instance, to accrue concession benefits in accordance with ERISA’s rules or to distribute them in the form of a qualified joint-and-survivor annuity.
In one of the cases, a district court concluded that the concession was indeed a defined benefit plan, although the consequences were left to later proceedings. Stoffels v. SBC Communications, Inc., 555 F.Supp.2d 745 (W.D. Tex., 2008). Other courts reached the opposite result. The issue rose to the appellate level in Boos v. AT&T, Inc., 643 F.3d 127 (5th Cir. June 3, 2011).
The court’s analysis was complicated by one of its own previous decisions, Musmeci v. Schwegmann Giant Super Markets, Inc., 332 F.3d 339 (5th Cir., 2003), cert. denied, 540 U.S. 1110 (2004), where it held that a somewhat comparable program that gave retirees discounts on grocery store purchases was a pension plan governed by ERISA. Distinguishing Musmeci was a three-step process.
First, the court noted that in-region retirees received the concession tax free as a no-additional-cost fringe benefit. Since a pension plan must provide retirement income or deferred compensation, and since Musmeci (where the discounts at issue were taxable income) held that “income” has the same meaning under ERISA and the I.R.C., that element of the concession was not income and could not be part of a pension plan, a point that the plaintiffs conceded. Second, the court held, the programs for in-region and out-of-region retirees constituted a single plan, which must be either entirely subject to ERISA or entirely exempt. Third, the “primary thrust” of the plan was to provide a nontaxable benefit to in-region retirees. As a consequence, no ERISA-covered plan existed. The out-of-region, taxable benefits were merely “incidental” to a non-ERISA program.
The difficult step is the second one. ERISA § 3(2) defines a plan as a pension plan “to the extent that” it provides retirement income or deferred compensation. The court’s opinion brushes that language aside. To be fair, the Supreme Court did the same in Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004), when it held that ERISA applies to partners who participate in a plan that also covers common law employees.
While few employers face issues like those raised in Boos, the case is a reminder that ERISA can crop up in unexpected places and that its attempted application to arrangements that the drafters didn’t contemplate can have potentially absurd results.