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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

An employer may, of course, retain the unfettered right to alter its promises, but to do so it must follow the formal procedures set forth in the plan. . . . The formal amendment process would be undermined if section 510 did not apply because employers could “informally” amend their plans one participant at a time.

Thus, the power to amend or abolish a welfare benefit plan does not include the power to “discharge, fine, suspend, expel, discipline, or discriminate against” the plan’s participants and beneficiaries “for the purpose of interfering with [their] attainment of . . . rights” . . . under the plan.

TRUTH OR CONSEQUENCES!

Employers sometimes have many masters and, in the atmosphere of potential financial collapse, they may feel pressure to frame their explanations for reducing benefits in a manner which they believe will be more palatable to the financial markets or to their shareholders.

Before falling prey to such an inclination, it is important to recognize that the Supreme Court made it clear in Varity Corporation v. Howe, that an employer may be subject to breach of fiduciary duty claims under ERISA when it makes misleading statements about employee benefit plans during business reorganizations.

In Varity the employer downsized by what football pundits would describe as a misdirection play – pretended to do one thing when it was actually doing something entirely different.

Here’s what happened:

Varity transferred all of its poorly performing businesses into a newly form subsidiary (Newco). One of the company’s primary objectives in forming the Newco was to rid itself of costly employee benefit obligations.

Varity persuaded employees to transfer to Newco by making overly optimistic observations about Newco’s business outlook, its likely financial liability, and the security of the employee benefit program. The thrust of Varity’s remarks was that the employees’ benefits would remain secure if they voluntarily transferred to the new subsidiary.

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Varity made these representations, even though it intended to reduce the employee benefits at Newco in the near future. Moreover, Varity knew that the representations it had made to the employees were untrue at the time they were made.

At the time the new subsidiary was formed, it was insolvent (it had a $46 million negative net worth). The new subsidiary ended its first year of operation with an $88 million loss. It ended its second year of operation in receivership.

After Newco fell into bankruptcy, Newco’s employees stopped receiving certain welfare benefits, including their rights to retiree medical benefits they would have had, had they remained employed at Varity.


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