I am an actuary terminating a DB plan of a county-owned hospital. The assets do not appear to be sufficient to pay the lump sum value on the definition of actuarial equivalent currently in the plan (pre-GATT, PBGC basis). In addition, the assets may not be sufficient even using the GATT basis (say about 6% interest rate).
It has been proposed that the plan be amended to adopt the GATT mortality table and whatever interest rate that will make the plan sufficient.
Anyone seen this? Do you believe that it is permissible under the IRC, since the plan is exempt from IRC 411 and 417? If so, might there be any concern that state laws could come into this gap (that is, the 411 and 417 exemption)?
My perspective is that the plan could be amended to do this. However, the terms of the document contain "vanilla" language about "no amendment will reduce the vested benefit of a participant determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective". This causes me to be concerned that the proposed action may be OK under the IRC but violate the plan itself.

Any other advice?
Thanks

I would think at least one employee would take this to court (union?). Part of promised compensation; the county should need to make employee whole.



------------------
Brent

You might consider whether the employer is obligated to fund the funding deficiency. The IRC does not required the employer to fund the deficiency. Most plan documents do not. A judge might interpret state law to require the employer to fund the deficiency. Collective bargaining agreements, the SPD, and representations to employees might be relevant to this. My starting assumption in analyzing this is that it would be better to take the position that the employer is not obligated to fund the deficiency than it would be to change the actuarial assumptions for the sole purpose of reducing the deficiency.

In our state there are a number of cases in which ees claimed that a plan benefit could not be reduced because of the contracts clause of the US constitution - the government can't adopt legislation that changes contract rights. You might have a problem with this and if there is doubt you ought to have a lawyer who is familiar with these issues in your state look it over.

Also, many plans used to have a provision that said that benefits would be provided to employees on termination of the plan "only to the extent funded." If your plan has this clause, your argument would be that the unfunded benefits weren't promised.

I would second Dowist's suggestion. In about two-thirds of the states, either federal or state Constitutional impairment of benefits clauses have been held to preclude any cut-back of benefits (and often even to preclude any cut-back of future benefit accruals for existing employees). In some instances, these provisions can for all practical purposes prevent the termination of a plan. You would want to make sure that they do not either preclude the termination, or preclude the change in interest rates.
---------------------------------
Employee benefits legal resource site

State law is the key to this issue. In California we have a Constitutional provision, impairment of contracts language, Labor law sections, etc. I would take a comprehensive look at all case law in your state, also.

Hate to be picky but suppose the question is narrowed to the adoption of GATT for lump sum determination. That is, would there be any (obvious or not-so-obvious) problem with the govt. employer amending the plan solely by adoption of the GATT, provisions (changing from the prior IRC 417 PBGC basis)?

I realize that the answer may be the same as above, "watch out for state law", but I am hoping for something more definitive.

Alas, I'm afraid that the answer is the same. Adopting the GATT provisions (particularly since governmental plans are not required to adopt them) would reduce participants' benefits. Thus, the question is whether such a reduction violates federal or state constitutional provisions, and/or state statutory or common law rules.
--------------------------------
Employee benefits legal resource site

I hate to appear lazy, but Carol you mention both here and in your excellent outline of major federal laws affecting governmental plans that about two thirds of the states have either interpreted the federal constitution's contract clause or similar state constitutional provisions to limit the ability of political subdivisions to reduce or eliminate prospectively future benefit accruals. I would appreciate sincerely your listing those states which come to mind easily or a Westlaw key number which could be researched. Thank you for your kind consideration.

[Note: This message has been edited by CVCalhoun]

The "two-thirds" number is derived from the number of states which have interpreted federal or state constitutional nonimpairment of benefits provisions as affecting pension benefits. It is taken from statistics in Protecting Retirees’ Money: Fiduciary Duties and Other Laws Applicable to State Retirement Systems, Third Edition, by Cynthia Moore of the National Council on Teacher Retirement. The book is a few years old, but it contains a state-by-state analysis of fiduciary standards applicable to governmental plans, with appropriate citations, and I've found it an excellent starting point for research in the governmental plans area.

Extensive support for the concept that if the nonimpairment of benefits provisions apply to pension plans, they would affect cutbacks in future benefit accruals, is found in California law. The vesting concept has been developed and firmly embedded in California law through a long line of cases starting with Kern v. City of Long Beach, 29 Cal.2d 848 (1947), with two of the more important of such cases being Allen v. City of Long Beach, 45 Cal.2d 128 (1955) and Betts v. Board of Administration, 21 Cal.3d 859 (1978).

In Kern, it was decided that a public employee's pension constitutes an element of compensation, that a vested contractual right to pension benefits accrues upon acceptance of employment and that such a pension right may not be destroyed once vested without impairing a contractual obligation of the employing public entity. Kern, supra, at 852-853.

In Allen v. City of Long Beach, which is considered to be the landmark case in this area, the vesting concept was described as follows:

"An employee's vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. [Citations.] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. To be sustainable as reasonable, alterations of employees' pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages. [Citations]. . ."

Allen, supra, at 131.

See also Carman v. Alvord, 31 Cal.3d 318 (1982) and Miller v. State of California, 18 Cal.3d 808 (1977).

In Betts, it was affirmed that vesting applies not only to benefits that are in effect when an employee's employment commences but also to improvements in benefits that occur during his or her service. Betts, supra, at 866. Betts also reaffirmed the holding in Abbott v. City of Los Angeles, 50 Cal.2d 438 (1958), that the comparative analysis of disadvantages and compensating advantages in any modifications to a plan must focus on the particular employee or employees whose vested pension rights are involved. Betts, supra at 864. See also Olson v. Cory, 27 Cal.3d 532 (1980).

Because the law is so well developed in California, many other states have cited it as to cases arising in their own states. Thus, I would suggest starting with those cases and checking out citations to them in whatever state you are interested in.
-------------------------------------
Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 09-24-1999).]

As usual, Carol is very thorough, although that answer is somewhat intimidating to us non-attornies.

But let me show my ignorance and ask if the case law (and the contract issue) would apply to all aspects of the pension plan operation. That is, my original question was about a plan termination, and the lump sum option that derived from that action.

This is not an issue of vesting or a question of a "cutback" of the accrued benefit under the plan (which is of course a monthly lifetime annuity). The plan termination actually gave 100% vesting to some EEs who were not already vested and did not impact the normal form or amount of the accrued benefit.

Actually, I think I'm trying to answer two different questions at once, and probably getting everyone totally muddled.

Pax, as to your question, you've got two potential problems. First, you are in fact cutting back not just on future benefit accruals, but on existing benefits, if the lump sum generated by the GATT interest rates is lower than the lump sum generated by the former interest rates. (Unlike I.R.C. §411, which distinguishes between the "accrued benefit" and other benefit options, the constitutional obligation normally relates to any form of benefits.) The only exception to this would be if the only employees who got lump sums were those who would never been entitled to lump sums at all before the termination, regardless of how long they had remained employed. Because the constitutional obligation is an employer obligation, the employer may be obligated to ensure that the employees get an amount at least equal to the lump sum based on the former interest rates, even if there is not enough money in the plan itself to pay for this.

Moreover, if the employees are continuing employment, terminating the plan at all would be a cutback of future benefit accruals, unless you are providing them with a new plan which gives each employee at least as favorable a benefit at retirement or other termination of employment as the old plan would have, if it had continued.

Danwitz, more information on your question: I mentioned that the book I referenced was a few years old. I have just learned that there is a newer book which provides similar, but more updated, information: PUBLIC PENSION PLANS: THE STATE REGULATORY FRAMEWORK, 3d ed., 1998. The newer book is also by Cynthia Moore of the National Council on Teacher Retirement.
----------------------------------------
Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 09-26-1999).]

Danwitz--

Further to our original discussion, the National Council on Teacher Retirement's program for its annual meeting, page 12, indicates that the National Retired Teachers Assocation has performed a study which showed the 31 out of the 50 states had constitutional pension protections. (The program requires the Adobe Acrobat reader, a free download, to view.) Is that close enough to 2/3 for you?
----------------------------------------
Employee benefits legal resource site

I would like to thank Ms. Calhoun for the reference to Public Pension Plans: The State Regulatory Framework. I have purchased the book and I recommend it strongly to all who work with retirement plans maintained by states and other political subdivisions. Having a summary of each state's benefit preservation laws with applicable citations is extremely helpful.

[This message has been edited by CVCalhoun (edited 10-20-1999).]