The United States Supreme Court unanimously rejected the notion that a defined benefit plan sponsor must consider merging its plan with another retirement plan as a method of plan termination. Siding instead with the position taken by the plan sponsor, as well as the Department of Labor and PBGC, the Court ruled on June 11, 2007, that ERISA does not permit merger as a method of plan termination, because merger is an alternative to, rather than an example of, termination. Beck v. PACE International Union.
In connection with the plan sponsor’s bankruptcy proceedings, the sponsor sought to terminate its defined benefit plan by purchasing annuities to fund the participants’ benefits. By engaging in such a “standard termination,” the plan sponsor was entitled under ERISA to retain a $5 million surplus after the annuities had been purchased. The sponsor rejected a proposal made by the union whose members were covered by the plan to merge the plan with the union’s own multi-employer plan. The union thereafter filed suit, arguing that the sponsor’s failure to consider this alternative was a breach of fiduciary duty. Somewhat remarkably, the union prevailed throughout the lower courts.
All of the parties acknowledged that the sponsor’s decision to terminate the plan was a “settlor” act, which was not governed by ERISA. The union argued, however, that the implementation of that decision was a fiduciary function, and that the proposed merger was a permissible form of termination that the sponsor should have considered.
The Supreme Court disagreed. Finding the union’s interpretation of the governing statutes strained, the Court concluded that merger “represents a continuation, rather than a cessation, of the ERISA regime.” Terminating a plan by purchasing annuities, as the statute explicitly authorizes, “formally severs the applicability of ERISA to plan assets and employer obligations.” Thus, employers need not consider merger as a method of plan termination.