Does ERISA’s Plain Language Exclude Cost-of-Living Adjustments From Accrued Benefits?

The Employee Retirement Income Security Act (“ERISA”) explicitly excludes cost-of-living adjustments (“COLA”) from the definition of “accrued benefit,” however the Seventh Circuit held that these adjustments should be included, meaning that those who receive their payments in lump sum or as monthly annuities would receive this adjusted sum. Rohm and Haas, petitioners negotiated employment packages with their employees on the understanding, which they expressly communicated to their employees, that lump sum withdrawals would not be adjusted for cost of living. This upset of long term plans will have far reaching consequences for employers who may not be able to afford this additional liability, while retirees will now be incentivized to withdrawal their retirement fund plans before they are able to mature.

Issue Areas:

Free Enterprise, Limited Government

Question(s) Presented:

Are COLA’s excluded from “accrued benefits” under ERISA?


ALF’s Amicus Brief:

In an amicus brief ALF argues that the Seventh Circuit holding will destabilize retirement plans by creating an unforeseen liability ex post, and incentivize retirees to withdrawal their funds in lump sum payments exacerbating the potential for these programs to be underfunded. 29 U.S.C.A § 1054(g), the anti-cutback rule, prevents employers from adjusting the payments after the fact to offset the judges expansion of them. From a public policy perspective, monthly annuities are preferable to lump sums, as it mitigates the risk of retirees spending too much money over a given period, while allowing the remaining funds to grow over time, giving the retirees long term security. Despite this, retirees often choose lump sum payments, increasing the likelihood that they will wind up on public assistance down the line as they will be unable to work to pay for any unforeseen financial difficulties.

The Seventh Circuit not only contradicts sound public policy towards incentivizing annuitization, but disrupts the long term plans that were negotiated by the the employers and employees and contradicts ERISA and the precedents of the Supreme Court. See Cent. Laborer’s Pension Fund v. Heinz, 541 U.S. 739, 743 (2004) (ERISA ensures that retirees received benefits promised under a plan’s terms). “Private parties, not the government, control the level of benefits” provided by a pension plan through their control over the terms of the plan. Alessi v. Ray bestow-Manhattan, Inc., 451 U.S. 504, (1981).

Status:

On March 17, 2007 the Supreme Court denied certiorari.

Date Originally Posted: January 28, 2008

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