Union Retiree Health Benefits

I recently read the summary below about union retirees health benefits and thought it would be good information for our union contractor clients. The short story is that retiring union members can maintain their health insurance benefit even if they elect to take the lump sum retirement distribution. For more details read the following. Battoni v IBEW Local Union No. 102 Employee Pension Plan (2010, CA3) 2010 WL 395823 An amendment to a union welfare plan, which conditioned receipt of retiree health care benefits upon the retirees' not choosing the lump sum offered under the union pension plan, was a constructive amendment of the pension plan. And since the amendment decreased the value of the lump-sum benefit in violation of the anti-cutback rules, the amendment was prohibited. Facts. A merger of two International Brotherhood of Electrical Workers local unions effectively dissolved Local 675 and transferred its members to Local 102. The merger also combined the locals' two pension plans into a single Local 102 Pension Plan. To accommodate Local 675 members whose former plan had allowed them to choose between a lump-sum pension benefit or a periodic monthly pension benefit, the revised Local 102 plan allowed former Local 675 members to receive a lump-sum benefit for pre-merger accruals. As another result of the merger, two welfare plans were combined by moving Local 675 members to the Local 102 Welfare Plan, which, among other things, provided eligible retirees with health care benefits for themselves and their spouses. Shortly after the merger, the Local 102 plan was amended to add an additional condition regarding eligibility for retiree health care. Specifically, the amendment conditioned receipt of health benefits on the retirees' not choosing the lump-sum benefit offered under the pension plan. A group of current and retired Local 102 members who had been members of Local 675, challenged the amendment. They argued that the amendment violated ERISA § 204(g) 's anti-cutback rule which prohibits reducing a participant's accrued benefit (with certain exceptions not relevant here) by plan amendment. While acknowledging that the lump-sum pension benefit was an accrued benefit under ERISA, the union argued that the amendment was an amendment of a welfare plan and that welfare plans are exempt from coverage under the anti-cutback rule. However, the district court ruled in favor of the union members, finding that the amendment did violate the rule. The union appealed to the Third Circuit. Court finds an amendment to the pension plan. The Third Circuit first decided that the welfare plan amendment constructively constituted an amendment of the pension plan. While acknowledging a “certain superficial appeal” to the union's argument that the pension plan had not been amended, the view of what constitutes an “amendment” to a pension plan has been construed broadly to protect pension recipients, the court noted. Accordingly, even though welfare and pension plans serve different purposes under ERISA's scheme, it is the meaning and function of an amendment that determines whether the amendment modifies a pension plan, a welfare plan, or both. Here the court found that the amendment was part of the welfare plan to the extent that it pertained to welfare benefits, and part of the pension plan to the extent the amendment pertained to pension benefits. The amendment constructively amended the pension plan by adding a condition to the receipt of a benefit accrued under that plan, the court said. Assuming, hypothetically, that the pension plan did not exist, the amendment would have no meaning; however, if the amended provision were added to the pension plan, it would retain the exact same meaning and function. Thus, while the amendment was added to the welfare plan and dealt with health care benefits, the amendment also functioned to condition receipt of the lump-sum pension benefit, the court determined. Amendment decreased an accrued benefit. Having determined that there was an amendment of the pension plan, the Third Circuit had to address whether the amendment decreased an accrued benefit. The court noted that in Central Laborers' Pension Fund v. Thomas E. Heinz, et al, (S Ct 6/7/2004) 94 AFTR 2d 2004-5071 ( Weekly Alert ¶ 2 06/10/2004 ), the Supreme Court ruled, among other things, that at the moment a new condition is imposed, an accrued benefit becomes less valuable. The same reasoning applied to this case, the Third Circuit said. The Local 102 Pension Plan imposed a new condition on the receipt of an accrued benefit because previously, the lump-sum pension benefits accrued before the amendment was added to the welfare plan, but after the amendment, receipt of those same accrued benefits was conditioned on forfeiting health care benefits. Thus, this new condition in and of itself, decreased the value of the lump-sum pension benefit, the court held. Similarly, IRS regs supported the union members' position. Reg. § 1.411(d)-3(a)(2)(i) states that the anti-cutback rule is to be construed broadly to cover both direct and indirect amendments to pension plans, and Reg. § 1.411(d)-4, Q&A 7 provides that the imposition of conditions on accrued benefits violates the anti-cutback rule. Relying on both Supreme Court precedent and IRS regs, the Third Circuit concluded that by imposing a condition on the receipt of the lump-sump benefit, the amendment decreased an accrued benefit, and was thus prohibited. References: For the anti-cutback rules, see FTC 2d/FIN ¶ H-7300 ; United States Tax Reporter ¶ 4114.45 ; TaxDesk ¶ 286,018 ; TG ¶ 8093 .