The 9th U.S. Circuit Court of Appeals ruled that eliminating this type of transfer provision does not violate the Employee Retirement Income Security Act’s (ERISA) anti-cutback rules, which prohibits any amendment to an employee benefit plan that would reduce a participant’s “accrued benefit.” This matches up with an earlier 1st U.S. Circuit Court of Appeals ruling in Tasker v. DHL Retirement Savings Plan, also involving shipping company DHL Holdings, which permitted the elimination of related transfer provisions under ERISA.
The current case, Andersen v. DHL Retirement Pension Plan, comes on appeal from the U.S. District Court for the Western District of Washington, which also upheld the employer’s right to eliminate the DC to DB transfer provision. In a decision handed down in 2012, the district court noted that the Department of Treasury has ultimate authority in determining overlapping provisions of ERISA’s anti-cutback rule and the Internal Revenue Code, and has disseminated a regulation that directly addresses the transfer right at the center of the case. That regulation says plainly that “a plan may be amended to eliminate provisions permitting the transfer of benefits between and among defined contribution [DC] plans and defined benefit [DB] plans.”
Plaintiffs in Andersen v. DHL were former employees of Airborne Express Inc. who participated in both Airborne’s defined benefit (DB) pension plan and its defined contribution (DC) plan. Case documents show the defined benefit pension plan was a floor-offset plan. That is, its benefits were calculated on the basis of a participant’s final average compensation and years of service, with an offset for any account balance in the defined contribution plan. Before the challenged amendment, participants could transfer the funds from their DC plan accounts to the DB plan’s general pool before the participant’s benefits were calculated. When Airborne was purchased by DHL, executive management merged the two companies’ retirement plans, amending the Airborne benefit plan to eliminate participants’ right to transfer funds into the DB plan.
Participants’ motivation for transferring DC balances into the DB plan was to reduce an offset of the guaranteed benefit. If, for example, a participant was entitled to receive $5,000 in monthly benefits under the DB but had a balance in the DC plan that would equate to a $3,000 monthly annuity, he would receive a monthly benefit of $2,000 from the DB plan. If his balance in the DC plan would equate to a $6,000 monthly annuity, he would receive nothing from the DB plan.
The 9th Circuit agreed with precedent set by the 1st Circuit (as well as two district courts) that the amendment did not violate the anti-cutback rule. According to the text of the 9th Circuit decision, “the panel deferred to [the U.S. Treasury] insofar as it interpreted Treasury Regulation A–2, which provides that, without violating the anti-cutback rule, a plan may be amended to eliminate provisions permitting the transfer of benefits between and among defined contribution plans and defined benefit plans.”
The 9th Circuit also asked the Treasury to weigh in, via amicus brief, on whether DHL’s “elimination of Plaintiffs’ right to transfer their account balances from the defined contribution plan to the defined benefit plan violate[d] the anti-cutback rule . . . , where the result of the elimination of the transfer option was significantly to decrease the periodic benefits paid from the defined benefit plan and in total.” The government subsequently filed a brief answering that question in the negative and recommending that the panel affirm the district court.
The 9th Circuit goes on to note that “although the result reached here is disturbing given the negative impact on Plaintiffs’ periodic retirement benefits,” the actuarial assumptions used to calculate participants’ accrued benefits in the plans did not change with the plan amendment and have not been challenged.