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"Benefit-Stripping" Amendment to ERISA Plan Is Permissible in Context of Welfare Benefits

"Benefit-Stripping" Amendment to ERISA Plan Is Permissible in Context of Welfare Benefits

ERISA and Life Insurance News
(August 29, 2014)

A prime objective of ERISA is to protect the rights of employees to receive retirement benefits which have become vested, based on the attainment of retirement age, or years of service, or other criteria established by an employer’s plan.  To accomplish that objective, pension plans are required by Section 203 of ERISA, 29 U.S.C. § 1053, to include provisions that prevent the forfeiture of accrued benefits.

In the context of pension plans, the protection of vested benefits is explicit in the statute and is enforced in the case law.  But what about benefits that have accrued under welfare benefit plans, such as disability benefits that an employee has been receiving for years?  Can a welfare plan change the rules and terminate benefits that have already been awarded, based on a “benefit-stripping” amendment to the plan?

No Vesting for Welfare Benefits

As long as the plan provides a process for amendment, and if that process is followed, the answer is yes – such benefits can be terminated.  Just as ERISA does not require an employer to provide any welfare benefits, the statute also does not impose vesting requirements for welfare benefits.

That result was reached in Price v. Board of Trustees of the Indiana Laborer’s Pension Fund, 707 F.3d 647 (6th Cir. 2013), which involved a multi-employer plan providing both pension and welfare benefits.  The plan document granted discretionary authority to a Board of Trustees to administer benefits, including the right to amend the plan.

The plan document provided, however, that “no amendment shall be made which results in reduced benefits for any Participant whose rights have already become vested under the provisions of the Plan on the date the amendment is made, except upon the advice and counsel of an enrolled actuary.”

The plaintiff, Price, began receiving disability benefits under the plan in 1990 as the result of work-related injuries.  Eleven years later, in 2001, Price was informed that he no longer qualified for benefits under the plan’s “Total and Permanent Disability Benefit” category, but that his benefits would continue under the “Occupational Disability Benefit” category, which provided that benefits could continue until he reached Early Retirement Age.

Plan Amendment

Three years later, in 2004, the Board of Trustees amended the plan, providing that disability benefits that became payable before January 1, 2005, under the “Occupational Disability Benefit” category, would be discontinued effective December 31, 2006.

Price appealed the termination of his benefits, but his appeal was denied by the Board, relying on its authority to amend the plan.  Price then sued, alleging that the 2004 amendment violated ERISA because it deprived him of a vested benefit.

Applying a de novo standard of review, the district court granted summary judgment to Price.  2009 WL 799639 (S.D. Ohio Mar. 24, 2009).  The Sixth Circuit reversed, holding that because the Board of Trustees had discretion to interpret the plan, the arbitrary and capricious standard should have been applied.  632 F.3d 288 (6th Cir. 2011).

On remand, the district court again ruled in favor of Price.  The case was appealed again, and again the Sixth Circuit reversed.  The appellate court began its analysis with this familiar statement:

ERISA does not create a substantive right to welfare benefits – such as occupational disability benefits – nor does ERISA establish a vesting requirement for welfare benefits. Indeed, a welfare benefit may be terminated at any time so long as the termination is consistent with the terms of the plan.

707 F.3d at 651 (internal citations omitted).

Price relied on the plan’s provision that no amendment could be made which resulted in reduced benefits for any plan participant “whose rights have already become vested.”  The court concluded that this provision was ambiguous, but it held that the Board of Trustees reasonably exercised its discretion to interpret the provision.

“[T]he term ‘vesting’ in the Plan plainly refers to retirement-related, not disability-related benefits,” the court said.  “For these reasons, the Board’s interpretation was reasonable, and as a result, the decision was not arbitrary and capricious.”  Id. at 652.  The Sixth Circuit held that the amendment was valid and that the Board of Trustees was entitled to judgment as a matter of law, as a result of which Price was not entitled to additional benefits, although he would not reach Early Retirement Age for several years.

Dissenting Opinion

In a dissenting opinion, a district judge, sitting by designation, wrote that Price’s rights should be governed by the plan document that was in effect when his benefits were awarded, not by the amendment that retroactively terminated those benefits.

“Certainly the Plan has the power to change prospectively the terms on which it offers benefits to Plan participants who have not qualified to receive those benefits,” the dissent said.  “But it is, in my view arbitrary and capricious for the Plan to terminate benefits that have already been awarded based on a retroactive benefit-stripping amendment.”

This decision illustrates several important ERISA principles.  First, the plan document controls the rights of plan participants.  Second, so long as vested pension benefits are not forfeited, a plan is not cast in stone, but can be amended, provided the plan document provides the right to amend and the procedure for amending the plan is followed.  Third, decisions made by plan fiduciaries exercising discretionary authority should be upheld, provided the decision – in this case, one of plan interpretation – did not result from an abuse of discretion.

Click here to view the full August 2014 Edition of the ERISA and Life Insurance News.

H. Sanders Carter
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Kenton J. Coppage
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