Amendments to Defined Benefit Plans

Because Hughes Aircraft Company’s contributory defined benefits plan had a substantial surplus, the company amended the plan in 1991 to establish a non-contributory benefits structure for new participants and provide an early retirement benefits. Hughes transferred the $1 billion plan surplus to the new non-contributory structure, and suspended its own contributions to the amended plan, based upon the surplus. A class representing 10,000 retired beneficiaries filed suit under the Employment Retirement Income Security Act (ERISA), claiming the surplus assets were their vested benefits.

The U.S. Court of Appeals for the Ninth Circuit determined Hughes violated ERISA because the new structure was so different from the original plan that it was a separate plan. Hughes terminated the original plan, using surplus assets for its own benefit without distributing the residual assets to the plan beneficiaries.

Upon appeal, the U.S. Supreme Court unanimously held Hughes’ actions did not violate ERISA because members of a defined benefits plan have no claim to the plan’s general asset surplus, and these beneficiaries were never deprived of their accrued benefits as provided by the plan. Hughes Aircraft Co. vs. Jacobson, U.S. Sup. Ct., 97-1287, 01/25/99.

Impact:
An employer may amend a defined benefits plan as long as the beneficiaries receive their originally designated accrued benefits.

Source: D. Diane Hatch, Ph. D., a human resources consultant based in San Francisco, and James E. Hall, an attorney with the law firm of Barlow, Kobata & Denis, with offices in Los Angeles and Chicago.