We have long assumed that early retirement supplements – i.e., fixed dollar amounts payable from the date of early retirement to the date Social Security begins – are considered “ancillary benefits” rather than part of the “accrued benefit” under the anti-cutback rule contained in section 411(d)(b) of the Internal Revenue Code (“Code”) and section 204(g) of ERISA.  Careless drafting led to a contrary result in Savani v. Washington Safety Management Solutions L.L.C., No. 11-1206 (4th Cir., Mar. 20, 2012).  In an unpublished 2-1 opinion, the majority held that a $700 monthly early retirement supplement was part of the retiree’s accrued benefit (and not an ancillary benefit) only because it was included in the definition of “accrued benefit” contained in the plan. Therefore, it could not be eliminated without violating ERISA.

The anti-cutback rule protects an “accrued benefit,” which is defined in Code section 411(a)(7)(A)(i) as “the employee’s accrued benefit determined under the plan and . . . expressed in the form of an annual benefit commencing at normal retirement age.”  The majority focused on the “determined under the plan” part of this definition and decided that the supplement was part of the accrued benefit because the plan said so, despite the fact that the supplement is not part of the benefit that commences at normal retirement age (but rather terminates before that date).  In a footnote, the majority obliquely addressed that part of the definition by stating that the drafters “may choose to define any benefits as accrued or vested, and thereby trigger ERISA’s protections.” 

In the Savani case, the accrued benefit was defined by cross references to the relevant sections of the plan as the normal retirement formula reduced by a prior plan offset, plus any “applicable supplements.”  Including the supplements in the definition of “accrued benefit” proved fatal to the ability of the employer to subsequently eliminate the supplements.  The court rejected the employer’s argument that the term “applicable” modified the word “supplement” in a way that allowed elimination of the early retirement supplement contained in the referenced plan section, because, in the court’s view, the plural “supplements” meant that both supplements – the early retirement supplement and the normal retirement supplement – were part of the accrued benefit and there was no ambiguity for the plan administrator to resolve.

Lessons Learned . . .

The takeaway from this case is to be careful in drafting the “accrued benefit” and similar protected definitions in pension plans.  The decision supports an approach to plan drafting that does not repeat or expand upon ERISA definitions, lest the drafter create a plan benefit right that is greater than ERISA rights.