Can an amendment to a welfare plan violate ERISA’s anti-cutback rule? A plain reading of the statute would suggest the answer is no, but the Third Circuit has concluded otherwise. The anti-cutback rule, Section 204(g) of ERISA, 29 U.S.C. § 1054(g), is housed in Part 2 (Participation and Vesting) of Title I of the statute, which explicitly excludes “welfare plans” from coverage. ERISA § 201(1), 29 U.S.C. § 1051(1). Nevertheless, the Third Circuit recently affirmed the district court’s ruling in Battoni v. IBEW Local Union 102 Employee Pension Plan, 2010 WL 395823 (3d Cir. Feb. 5, 2010), that a welfare plan amendment which conditioned receipt of health care benefits on the non-receipt of an accrued benefit as a lump sum under a pension plan violated Section 204(g).

In Battoni, an underfunded Taft-Hartley pension plan cosponsored by IBEW Local 675 merged with an overfunded pension plan cosponsored by IBEW Local 102. The two unions’ welfare plans also were merged. Prior to the merger, the Local 675 pension plan permitted participants to take their pension benefits in a lump sum, but Local 102 did not. After the merger, the Local 675 plan participants could still take a lump-sum pension with respect to the benefit accrued prior to the merger. However, as a result of an amendment to the welfare plans coinciding with their merger, participants electing a lump sum forfeited their right to retiree health benefits.

As reported in the September 2008 ERISA Litigation Newsletter, the district court concluded after a bench trial that the welfare plan amendment violated Section 204(g) and entered judgment in favor of the plaintiffs. See 2008 WL 3166697 (D.N.J. Aug. 8, 2008). The stipulated facts and testimony adduced at trial confirmed that the intent of this amendment was to accomplish indirectly what could not be done directly, i.e., to impose a financial penalty for exercising the accrued right to take a

lump-sum pension payment. The district court relied on Treas. Reg. Section 1.411(d)-4, A-4(a), which prohibits the denial of protected accrued benefits through the “direct or indirect” exercise of discretion, and concluded that the welfare plan amendment constituted a “constructive, indirect and/or de facto amendment” to the pension plan. The welfare plan amendment, according to the court, indirectly effectuated an impermissible cutback to the accrued right to take a lump-sum benefit under the pension plan.

The Third Circuit agreed with the district court and affirmed judgment in favor of the plaintiffs. The court first observed that it has broadly construed actions that constitute an amendment in order to protect pension recipients. Next, the court observed that under ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A), an amendment amends a pension plan “to the extent that by its express terms or as a result of surrounding circumstances [it] provide[s] retirement income to employees, or . . . results in a deferral of income by employees for periods extending to the termination of covered employment or beyond[.]” (Emphasis added.) The court determined that the words “to the extent that” indicate that Congress intended to allow any plan or part of a plan to be considered a pension plan or a welfare plan and thus the “meaning and function” of the amendment determined whether it modified a pension plan, a welfare plan, or both. Here, the court concluded that the amendment was part of the welfare plan “to the extent” that it pertained to welfare benefits, and part of the pension plan “to the extent” that it pertained to pension benefits.

Having concluded that the amendment amended the pension plan to the extent it impacted pension benefits, the Third Circuit then determined that the amendment constituted an unlawful cutback in violation of Section 204(g), insofar as it conditioned the receipt of a lump sum benefit — an accrued benefit — on surrendering the right to retiree health benefits. In so ruling, the court relied on the Supreme Court’s decision in Cent. Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004), which held that the imposition of a new condition on the receipt of an accrued benefit constitutes an impermissible cutback.

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At the moment, the decision in Battoni appears to be a single anomalous ruling. If other plaintiffs pursue the theory that a welfare plan may be used as a vehicle for indirectly cutting back pension benefits, however, there is a potential for this unprecedented expansion of the scope of Section 204(g) to proliferate. It is hoped that, in the face of such claims, the Third Circuit’s decision would be limited to its unique facts, so that the “genie” is put back in its bottle.