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A Cutback's a Cutback -- Pension Reduction Violated ERISA

By Casey C. Sullivan, Esq. | Last updated on

Can an ERISA retirement plan, after having paid out a consistent pension to early retirees, later reduce those pensions based on the age at which the pensioners retired? Not without violating ERISA's anti-cutback rule, the Third Circuit ruled last Wednesday.

The case, Cottillion v. United Refining Company, involved pensioned retirees who began collecting before they were 65. After several years of pension payouts, United amended the plan to reduce, based on an actuary assessment, payments for early retirees. The court found this not only an impermissible interpretation of the plan's terms, but a violation of ERISA, the law governing employee retirement plans.

After 16 Years, Get Ready to Pay Back Your Pension?

Cottillion worked for United Refining Company for 29 years, retiring at age 54. He was informed that he could take a deferred retirement benefit starting in 1995, when he would be 60 years old. Sixteen years later, after Cottillion had collected retirement for ten years, United contacted pensioners who began collecting before 65 and told them their pensions must be reduced. Cotillion was told that, in addition to a pension reduction, he must repay $14,475.

Employees sued, arguing that United's actions deprived them of a benefit they were entitled to under the plan and violated ERISA's "anti-cutback" rule. The anti-cutback rule prohibits employers from changing a defined-benefit plan so as to reduce benefits accrued under it. The district court sided with the pensioners and United appealed.

Actuarial Reductions Were Unambiguously Cutbacks

According to United's retirement plan, the plan's administrator is given discretion in interpreting its terms. After originally stating that the retirement plan would provide benefits to TVPs regardless of retirement age, United had subsequently reversed its interpretation of the plan, deciding that only actuarially adjusted benefits were provided. No amount of deference to administrator could rescue the second interpretation, the court found, as it was in "flat contradiction" with the terms of the plan, which provided for no actuarial reductions.

Not only was United's later interpretation of the plan arbitrary, it violated ERISA's anti-cutback rule, which prevents accrued benefits from being eliminated or reduced by a plan amendment. An early retirement benefit is such a benefit that cannot be cutback under the rule.

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