IRS Challenges Post-Retirement COLA Cut-Back

The Service has filed a notice of appeal with a federal appeals court, challenging a December finding by the US Tax Court that a COLA added to a pension plan after the retirement of some of the plan’s participants was not an ‘accrued benefit’ as to retired participants.  Based on that conclusion, the court found that the elimination of the COLA for such retirees did not violate ERISA’s anti-cutback rule, according to a Bureau of National Affairs report.

Michael Roach, chief of the IRS Qualified Plans Branch 1, Tax Exempt and Government Entities, told an American Law Institute-American Bar Association seminar that the appeal was filed with the US Court of Appeals for the Fifth Circuit in Board of Trustees of the Sheet Metal Workers’ National Pension Fund v. Commissioner on February 27, according to the report.

ERISA’s anti-cutback rule ‘indicates that a retirement benefit may be ‘accrued’ only by an ’employee.’  However, once accrued, the benefit is protected from diminution as long as the individual who accrued the benefit is a ‘participant’ in the plan, whether as an employee or as a retiree. The Tax Court said that while a retiree may enjoy COLAs added after retirement, such COLAs are not ‘accrued benefits’ as to that retiree, because the COLAs were not accrued while he was an employee.’

The case involved a separate COLA fund established in 1985 by the Sheet Metal Workers’ National Pension Fund, a multi-employer defined benefit pension plan, to provide cost-of-living adjustments to plan participants.