Blogging Employee Benefits

January 14, 2006

Alito on Transferred Early Retirement Subsidies

Filed under: Amendments, Litigation, Pensions — Fuguerre @ 3:09 pm

“I join the opinion of the court, but I write separately to highlight my understanding of the question concerning early retirement benefits that is before us and the reasons why the district court’s decision with respect to this question was incorrect.”

Pension plan participants retain the right to grow into eligiblity for subsidized early retirement through further employment with a successor firm, according to a 1993 appellate court decision that includes an opinion written by Judge Samuel Alito. [Gillis v. Hoechst Celanese Corp. No. 92-1879 (9/7/93)]

Following the sale of a unit, plaintiff employees in that unit continued working in their same jobs. Had the unit remained with the original employer, the employees would have been entitled to subsidized early retirement benefits. The plaintiffs alleged that the seller had transferred insufficient assets to the unit’s new owner. The district court granted summary judgment to the defendant company, ruling that plaintiffs were ineligible for early retirement benefits at the time of the sale of the unit.

Although finding no clear explicit¬†rule under ERISA itself regarding elimination of rights to early retirement subsidies for employees not yet eligible for those subsidies, the Third Circuit appellate court reversed, looking to the Rev.Rul. 85-6 protection of future early retirement subsidies upon plan termination. “Because the employees continued to work in their same positions after the sale of the division, the court found that the employees had not been separated from service and continued to accumulate service for purposes of the subsidized early retirement with respect to their transferred benefits while working for the buyer.” [ERISA: A Comprehensive Guide; Schneider, Freedman, eds.; Aspen Publishers; 2002; p13.09.] The Third Circuit accordingly held that the subsidies were to be fully funded upon transfer of assets.

Alito wrote a separate opinion connecting the dots, first focusing on plaintiff’s reliance on the preservation rule of IRC 414(l), which requires benefits after a transfer to be at least as valuable as those present prior to the transfer, as judged in the context of the asset allocation rules of ERISA 4044. The effect, wrote Alito, was to require that allocation of plan assets to the plaintiff’s early retirement benefits if the plan had terminated immediately after the transfer could not be less than the allocation that would have been made upon plan termination immediately before the transfer. To make that determination, Alito pointed further to the IRC 411(d)(6) anti-cutback rule, notably the prohibition against reducing early retirement benefits for any participant who satisfies preamendment conditions either before or after a plan amendment. While recognizing that IRC 414(l) did not expressly characterize plan termination as a plan amendment for such purposes, Rev.Rul. 85-6 drew that conclusion. Alito thus agreed with the Third Circuit’s majority, concluding that the seller was required to transfer sufficient assets to ensure funding of early retirement subsidies that would be at least as great as had the plan been terminated.

The Gillis v. Hoechst Celanese ruling requiring funding of early retirement subsidies upon asset transfer implied “in dicta that such protection would have to be provided even if there had been no transfer of plan assets and liabilities.” [Employee Benefits Law; BNA Books; 2000; p226.] The Third Circuit subsequently rejected that position in cases where a buyer did not assume the pension plan, adopting an Eighth Circuit holding that in such instances “participants whose employment was terminated by reason of a sale of assets could not use postsale service with the buyer to earn early retirement subsidies from the seller’s pension plan.” [ibid] “Nothing in ERISA suggests that plans are required to give credit for future service with an unrelated employer for any purposes, including eligibility for early retirement benefits.” [Pension Plan Terminations; Veal, Mackiewicz; BNA Books; 1998; p133.]

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