The “anti-cutback” rule of Internal Revenue Code section 411(d)(6) prohibits reductions in protected benefits of an ERISA pension plan. This rule typically applies to reductions caused by a formal amendment to the terms of a pension plan. A recent court decision illustrates how this rule may also apply to a less formal change in the interpretation of the meaning of pension plan terms.
Cottillion v. United Refining (W.D. Pa. 4/8/13) involved a dispute over calculation of early retirement pensions. The employer interpreted ambiguous pension plan amendments to cause an increase in the calculation of early retirement benefits. Later, the employer concluded this interpretation was wrong. The employer received IRS approval to correct the error and recoup past overpayments of benefits from participants. The affected participants sued, claiming the “correction” in plan interpretation was a benefit cutback prohibited by Internal Revenue Code section 411(d)(6). The court agreed with the participants.
This court decision means that ERISA pension plan sponsors may not avoid the “anti-cutback” rule of Internal Revenue Code section 411(d)(6) by writing ambiguous pension plan terms that are open to varying interpretations. An interpretation of ambiguous plan terms may create benefit rights that are protected from cutback under Internal Revenue Code section 411(d)(6).
(Note: Internal Revenue Code section 411(d)(6) does not apply to governmental pension plans.)
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