Advisory Opinion 1975-138

Dear :

This is in reply to your letter dated March 6, 1975, requesting advice as to whether the Employee Retirement Income Security Act of 1974 (Act) permits negotiations with the union to reduce benefits of a defined benefit and defined contribution pension plan under which the benefits are based upon actuarial advice as to the amount that can be supported by the rate of contributions, stated in cents per hour worked, and the collective bargaining agreement provides that, in the event the rate of contributions for any reason fails to support the benefits, negotiation may be undertaken to adjust either benefits or contributions, or both, up or down.

I am advised by the Labor-Management Services Administration of this Department that the new Act does not require the establishment of private pension plans nor does it mandate the level of benefits to be provided under such plans. Thus, there is no specific bar in the Act that would prevent the adjustment of plan benefits or contributions up or down. However, the Act contains mandatory minimum vesting and funding provisions which must be adhered to when making such adjustments. The minimum vesting and funding requirements become effective for plan years beginning after December 31, 1975 in the case of a plan in existence on January 1, 1974.

It must be pointed out that although benefits can be reduced, the reduction may not be made retroactively, but only prospectively, with respect to benefits that are already vested at the time the benefits are adjusted. Also, if contributions are reduced after the minimum funding requirements become effective, the contributions may not be below the level required to meet the minimum funding standard.

Section 207 of the Act authorizes the Secretary of Labor to prescribe temporary variances from the vesting requirements when he finds that:

1. compliance with the vesting standard would increase the costs of the plan to such an extent that there would result a substantial risk to the voluntary continuation of the plan or a substantial curtailment of benefit levels or the levels of employee’s compensation,
2. compliance with the vesting standard or discontinuance of the plan would be adverse to the interests of plan participants in the aggregate, and
3. a waiver or extension of time to amortize unfunded liabilities under sections 303 or 304 of the Act would be inadequate.

Plans in existence on January 1, 1974 must file application for such variance within two years after the Act was enacted. If the Secretary should find that a variance is warranted, a variance will be granted for a period not to exceed four years. If necessary, the Secretary may extend such period for an additional three years provided an application therefor is made not later than one year before the expiration of the initial four years.

In addition, section 304(a) of the Act authorizes the Secretary of Labor to extend the amortization period for any unfunded liabilities for a period of time (not to exceed ten years) if he determines that the failure to permit such extension would result in a substantial risk to the voluntary continuation of the plan or a substantial curtailment of pension benefit levels or employee compensation, and that the denial of an extension would be adverse to the interests of plan participants in the aggregate.

I hope this information will be helpful to you.