Plan sponsors may be rethinking provisions of early retirement windows following an appeals court ruling against Lockheed Corp., Calabasas, Calif.
In Spink vs. Lockheed Corp., the 9th Circuit U.S. Court of Appeals, San Francisco, said Lockheed violated the Employee Retirement Income Security Act by increasing pension benefits for early retirees who waived all potential employment claims against the company.
The court also said Lockheed violated ERISA and the Age Discrimination in Employment Act when it excluded an employee's pre-1988 years of service when calculating benefits.
The appeals court denied a petition to reconsider the decision. Lockheed's attorney, Gordon Krischer of O'Melveny & Myers, Los Angeles, said he hopes the Supreme Court will consider the case.
Experts say companies may want to reconsider early retirement windows that include increased benefits for employees who waive claims.
"I don't think this is going to deter employers from offering (early) retirement windows," said Fred Rumack, director of tax at Buck Consultants, Inc., New York. "But they will design waivers a little differently."
Instead of using surplus pension assets - as in the Lockheed case - companies may want to use other assets to encourage employees to sign claims waivers.
"Employers, even though they may disagree with the (court's) holding, are not going to risk having another court agree with it," said Tom Butterworth, a legal consultant with Hewitt Associates L.L.C., Rowayton, Conn.
"This (decision) could well have a major effect" on sponsors, said Susan Hoffman, partner at Pepper, Hamilton & Sheetz, Philadelphia.
Experts said that data on waivers used in early retirement windows are mostly anecdotal, but according to a 1992 Hewitt Associates survey, about 27% of 700 surveyed companies offered at least one early retirement window between 1992 and 1987. Companies offered an early retirement window to an average 900 employees per company, of which an average of 266, or 30%, accepted. The survey did not ask companies whether they used waivers in the retirement package. The latest Hewitt survey on early retirement windows was not available.
In a friend-of-the-court brief filed by the ERISA Industry Committee and the Association of Private Pension and Welfare Plans, the two contend the court's decision jeopardizes many widely used plans that use assets as incentives for early retirement.
"Employers negotiating with trade unions frequently reach agreements in which the quid pro quo for enhanced retirement benefits is lesser wage increases.... or other changes in the conditions of employment that benefit the employer," the brief said. "Although such agreements obviously benefit the employer .... no court or government agency has ever suggested .... that a negotiated exchange of enhanced retirement benefits for reduced wage costs violates ERISA."
The brief noted that as part of salary and benefit negotiations, some employers stipulate employees can only participate in a pension plan if they agree to reduce their annual pay.
What's more, the Older Workers Benefit Protection Act of 1990 says a release or waiver may be given in connection with an exit incentive, the brief said.
In the Lockheed case, Paul Spink had worked for Lockheed from 1939 to 1950. In 1979, he was rehired at age 61. In 1984, Lockheed notified Mr. Spink he could not participate in the plan because he was past age 60; Lockheed had a provision in its plan statement - in accordance with ERISA rules at the time - that said employees had to be younger than 60 to join the plan.
Two years later, Congress passed the Omnibus Budget Reconciliation Act, which banned plan sponsors from excluding employees from pension plans based on their age. The new law stipulated that plan sponsors had to allow older employees to join pension plans after Jan. 1, 1988.
The following year, Lockheed told Mr. Spink it would not credit him for his service prior to Dec. 25, 1988.
In 1990, Lockheed established two special retirement plans that increased employee benefits as an incentive to retire; the increased benefits were paid out of the plan's surplus assets. But employees could only get the increased benefit if they agreed to drop all potential employment claims against Lockheed.
Mr. Spink, who retired the same year the special retirement plans were established, did not join either plan because he didn't want to waive his claims against the company. He said he should be credited for service not only after 1988, but also for his prior service.
The court agreed.
"Pre-enactment service years must be included in benefit accrual calculation," wrote Judge Melvin Brunetti for the court. "Therefore, denying credited service years that an older employee would otherwise have accumulated is unlawful under OBRA."
But observers said that while Congress may have been unclear on OBRA's boundaries, Internal Revenue Code regulations that implemented the 1986 pension law were not.
"The IRS agrees with what Lockheed did, but the statute is not clear," Hewitt's Mr. Butterworth said.
The court accepted Mr. Spink's argument that the 1990 plans were prohibited transactions because they used plan assets to benefit the company.
"ERISA prohibits use of plan assets by or for the benefit of sponsoring parties in interest," Judge Brunetti wrote. "This prohibition would clearly forbid Lockheed from writing checks drawn on pension funds to buy the releases in question."
Pension fund assets cannot be considered employer assets, the court said, adding this ERISA provision ensures plan administrators do not mismanage plan assets.