Double Jeopardy for Pension Plan Sponsors Selling Businesses: Have You Provided Spinoff Notices?


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

There are many benefits issues that must be dealt with when businesses are sold, including the potential involvement of the Pension Benefit Guaranty Corporation (“PBGC”)    See, e.g,  my prior blog post.  Not all of these issues are resolved at the time of sale.

It is becoming increasingly common for plan sponsors who have sold businesses to hear from former participants who were spun off to a buyer’s plan, but who claim to still have benefits owing under the seller’s plan. Sometimes this is because the buyer has gone into bankruptcy or attempted to pass its plan on to the PBGC, but one very frustrating aspect of these former employee requests is that they arrive almost always many years after the sale. Sellers typically respond that no benefits are owed because the buyer assumed full responsibility for their pensions. But is this sufficient?  Maybe not, as a federal district court in Utah has ruled that former participants are entitled to benefits under both their original plan and their new plan for the same period of service because they were not notified of the transfer of their benefits.  Here is the decision. This is clearly a result that the parties never intended.  This award could also create unanticipated funding problems for the seller’s plan, since these benefits were assumed by a new plan and thus were not being pre-funded. How can plan sponsors avoid it?

Defendants’ Mistakes. Plaintiffs requested pension benefits from a successor to their original plan sponsor, even though they were currently receiving or entitled to receive benefits from their new plan for the same service. The original plan sponsor responded that the successor company indicated that it had assumed liabilities for the claimed benefits, but did not cite any plan provision. The original plan failed to produce evidence for the court that participants had received notice of their transfer from one plan to the other.

The Violation. The court cited ERISA’s rules for providing summaries of material plan modifications within 210 days following the end of the plan year in which the change occurred. Since defendants couldn’t show they had provided the notice, the court found that the spinoff amendment was ineffective and defendants abused their discretion in denying benefits.

Did the Court Go Too Far? The Utah decision seems an overreaction to this compliance failure, as ERISA already contains a specific dollar penalty for failure to provide the required notice.   The decision does not discuss another requirement that could have applied if the transfer were done today.  There is a current requirement that participants be given advance notice of amendments that result in a reduction of future accruals. (This requirement might apply in spinoffs, depending on the plan text.)   ERISA specifically authorizes ignoring a plan amendment that would reduce benefits if this new notice was not given and there was an “egregious violation”.   If Congress had intended a similar remedy for failure to provide notice of material plan changes, it presumably would have provided for it.

What Could Defendants Have Done? We don’t know whether other courts will follow this decision, but the following practices put sponsors in a position to respond effectively to double-dipping claimants:

  1. Keep accurate records of former participants whose benefits have been transferred. Do not transfer all copies to the buyer.
  2. Put language in both the plan and the SPD stating that participants will cease to accrue benefits when they terminate employment and, in the case of a spinoff, will have no right to past service benefits under the plan.
  3. Send all affected participants a written notice of the spinoff, specifically stating that they will cease to accrue benefits under the original plan , and identifying the new plan under which they will be covered.
  4. Keep copies of the notices that were sent and evidence of the manner of distribution as part of permanent plan records.
  5. Include offset provisions in the plan document to prevent double accruals for the same period of service.

Photo by Juli via Flickr CC License

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