Thousands of companies could lose the tax-favored status of their pension plans depending on how the U.S. Supreme Court settles a dispute over the meaning of a common noun early next year.
At issue is whether Curtiss-Wright Corp. violated federal law when it stated in plan documents that "the company" rather than company officials reserved the right to change its plan at any time.
If the Supreme Court upholds a lower court's decision that such language is not specific enough, employers also might have to restore full medical benefits once promised to retired workers.
The case, Curtiss-Wright Corp. vs. Frank C. Schoonejongen et al., is the first retiree health care case accepted by the high court.
A Supreme Court decision against Curtiss-Wright "certainly would wreak havoc on the employee benefits community," said Hollis T. Hurd, owner of The Benefits Department, a Pittsburgh-based law firm.
The U.S. 3rd Circuit Court of Appeals in December ruled Curtiss-Wright, Lyndhurst, N.J., owes more than $2 million in medical benefits to retired workers of its Wood-Ridge, N.J., plant even though it eliminated those benefits when it closed the plant in 1983.
The court ruled the defense contractor violated the law when it cut off medical benefits for hundreds of retired workers more than a decade ago because plan documents did not clearly spell out which officials could change or shut down its plan. The court also said the company's plan documents did not describe the procedure for making those changes, as required by the Employee Retirement Income Security Act.
The court ruled Curtiss-Wright would have satisfied federal law if its plan documents had stated the pension fund's trustees or the company's board of directors had the authority to change the plan or terminate it.
"Here, one is unable to tell what individuals or bodies within the company could promulgate an effective amendment," the court noted (Pensions & Investments, Jan. 10).
ERISA applies equally to retiree health care plans, pension plans and other employee benefits plans. However, the 3rd Circuit Court said its ruling only applied to plan amendments that could cause participants to lose benefits, not company amendments that would benefit them.
Two other appellate courts previously ruled in similar cases, but came to different conclusions. In Adams vs. Avondale Industries Inc., the 6th U.S. Circuit Court of Appeals did not overrule the employer's amendments canceling severance benefits to workers who were offered jobs by the company's acquirer.
In Biggers vs. Wittek Industries Inc., the 4th Circuit noted the company could amend its plan to reduce severance benefits even though it did not have proper procedures in place to amend its plan. The appellate court also noted employers have the inherent right to revoke or amend their employee benefits plans. sounds like the similar conclusions to me
Nonetheless, thousands of companies that relied on boilerplate similar to that in the Curtiss-Wright plan documents could now find their plan amendments invalidated and discover they have to pay hundreds of millions more than anticipated in medical benefits for retired workers if the Supreme Court upholds the ruling. Moreover, employers that amended their pension plans to comply with changes in tax laws could lose their tax-favored status if those amendments are invalid.
Furthermore, even if companies correct the language in their plan documents now, they still would not be in compliance with the law for all the preceding years.
"If the amendments are void, the plans have not complied" with tax law changes, said Mr. Hurd, who recently filed briefs with the high court for the U.S. Chamber of Commerce supporting Curtiss-Wright's position. The risk of disqualification for qualified plans is "mind-boggling," he noted.
But even the Internal Revenue Service has used such bland language in model plan documents, said Robert N. Eccles, partner at O'Melveny & Myers, a Washington law firm that filed papers with the Supreme Court representing Curtiss-Wright's insurer, the National Union Fire Insurance Co. of Pittsburgh, in support of the defense contractor.
Dozens of companies, and trade groups representing employers, including the Association of Private Pension and Welfare Plans and the ERISA Industry Committee, also have filed briefs supporting Curtiss-Wright.
And earlier this month, the Labor Department also filed a brief with the Supreme Court backing Curtiss-Wright.
Lawyers representing Curtiss-Wright declined to discuss the case.
Even if the Supreme Court decides Curtiss-Wright's amendment procedures did not comply with ERISA, the court could rule that its decision applies only to future amendments, said Henry Rose, partner at Epstein Becker & Green, Washington, and former assistant solicitor general at the Labor Department in the early 1970s.
Whatever the ruling, the Labor Department could issue a bulletin reminding companies they are required to have detailed amendment language in their plan documents, Mr. Rose said. Or, the IRS could make the more detailed language a requirement for tax-favored status. "If it were a condition of qualification, everybody would do it," he said.
Steven J. Sacher, partner at Kilpatrick & Cody, Washington, recently filed a brief supporting Curtiss-Wright on behalf of the APPWP, ERIC, Allied-Signal Inc., Del Monte Corp., Heublein Inc., Invesco Inc., Pepsico Inc. and RJR Nabisco Inc.
"One of our arguments is going to be if you disagree with us, please make the remedy prospective and make all the plans go out and fix the language, but don't open up the floodgates and create all those liabilities," he said.
The remedy imposed by the 3rd Circuit Court was "drastically disproportionate to the severity or effects of the violation and unwarranted," Mr. Sacher wrote in the brief.
But Nicholas F. Lewis, partner in the New York office of Cure, Lewis, Greenwald, Kennedy, Lewis, Clifton & Schwartz, who represents Curtiss-Wright's retired employees dismisses "the sky is falling" stories by lawyers representing employers.
For one thing, industry funds and plans representing union workers will not be affected by the Supreme Court ruling in this case because they generally are amended by their trustees through a predetermined procedure, Mr. Lewis noted.
"We don't think the implications of this are all that dire as they make them out to be," he said.
What's more, if the Supreme Court upholds Curtiss-Wright's "slap-dash" amendment procedure, Mr. Lewis said, it would penalize all the companies that have conscientiously applied the law. "Then that whole section (of ERISA) would become meaningless," he said.
The American Association of Retired Persons also is considering filing a brief supporting the participants, said Mary Ellen Signorille, legal project coordinator in the pension area..
"Some people have said if this decision stands it will result in the parade of horribles. We are going to try and show that is not the case," she said.