There are many benefits issues that must be dealt with when
businesses are sold, including the potential involvement of the
Pension Benefit Guaranty Corporation
("PBGC") See, e.g,
my prior blog post. Not all of these issues are
resolved at the time of sale.
It is becoming increasingly common for plan sponsors who have
sold businesses to hear from former participants who were spun off
to a buyer's plan, but who claim to still have benefits owing
under the seller's plan. Sometimes this is because the buyer
has gone into bankruptcy or attempted to pass its plan on to the
PBGC, but one very frustrating aspect of these former employee
requests is that they arrive almost always many years after the
sale. Sellers typically respond that no benefits are owed because
the buyer assumed full responsibility for their pensions. But is
this sufficient? Maybe not, as a federal district court in
Utah has ruled that former participants are entitled to benefits
under both their original plan and their new plan for the same
period of service because they were not notified of the transfer of
their benefits. Here is the decision. This is clearly a result that the parties
never intended. This award could also create unanticipated
funding problems for the seller's plan, since these benefits
were assumed by a new plan and thus were not being pre-funded. How
can plan sponsors avoid it?
Defendants' Mistakes. Plaintiffs requested
pension benefits from a successor to their original plan sponsor,
even though they were currently receiving or entitled to receive
benefits from their new plan for the same service. The original
plan sponsor responded that the successor company indicated that it
had assumed liabilities for the claimed benefits, but did not cite
any plan provision. The original plan failed to produce evidence
for the court that participants had received notice of their
transfer from one plan to the other.
The Violation. The court cited ERISA's
rules for providing summaries of material plan modifications within
210 days following the end of the plan year in which the change
occurred. Since defendants couldn't show they had provided the
notice, the court found that the spinoff amendment was ineffective
and defendants abused their discretion in denying benefits.
Did the Court Go Too Far? The Utah decision
seems an overreaction to this compliance failure, as ERISA already
contains a specific dollar penalty for failure to provide the
required notice. The decision does not discuss another
requirement that could have applied if the transfer were done
today. There is a current requirement that participants be
given advance notice of amendments that result in a reduction of
future accruals. (This requirement might apply in spinoffs,
depending on the plan text.) ERISA specifically
authorizes ignoring a plan amendment that would reduce benefits if
this new notice was not given and there was an "egregious
violation". If Congress had intended a similar
remedy for failure to provide notice of material plan changes, it
presumably would have provided for it.
What Could Defendants Have Done? We don't
know whether other courts will follow this decision, but the
following practices put sponsors in a position to respond
effectively to double-dipping claimants:
Keep accurate records of former participants whose benefits
have been transferred. Do not transfer all copies to the
Put language in both the plan and the SPD stating that
participants will cease to accrue benefits when they terminate
employment and, in the case of a spinoff, will have no right to
past service benefits under the plan.
Send all affected participants a written notice of the spinoff,
specifically stating that they will cease to accrue benefits under
the original plan , and identifying the new plan under which they
will be covered.
Keep copies of the notices that were sent and evidence of the
manner of distribution as part of permanent plan records.
Include offset provisions in the plan document to prevent
double accruals for the same period of service.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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