Pension Plans: Billion Dollar Surplus Nightmare For Employer; How To Stay Legal


If you have a defined benefit pension plan for your employees, thanks to stock market gains it may contain more money than you’ll need to pay out in benefits. But be careful before you use this “extra” money. One employer recently found there are strict rules about what you can and can’t do with excess pension plan assets.

Employer Uses Retirement Plan Surplus

Hughes Aircraft in Southern California provided a defined benefit pension plan that promised retired employees a specific pension per month. Hughes and its employees contributed to the plan, which ultimately grew to $1 billion more than was needed to pay out the required benefits. Hughes then stopped making contributions to the plan, but employees continued to pay into it.Hughes used part of the plan’s surplus to fund an early retirement program. It also allegedly transferred some of the funds into a separate pension plan with different benefits. Both new programs involved employees who hadn’t participated in the original plan.A group of retirees who were covered by the original plan sued, claiming Hughes violated the Employee Retirement Income Security Act (ERISA) by using the extra money to benefit itself and workers who were never participants. Hughes said it had done nothing wrong and asked to have the lawsuit dismissed before trial.

Assets Must Be Used To Benefit Participants

The federal Ninth Circuit Court of Appeal, which covers California, said ERISA prohibits employers from using plan assets that are at least partly attributable to employee contributions to benefit anyone other than plan participants or their beneficiaries. The court also noted that Hughes’ use of excess assets to fund early retirement offers might have illegally benefited the company by lowering its labor costs.

How To Stay Legal

The retirees who brought the suit will now be given the chance to prove their claims in court. If they succeed, Hughes could be on the hook for huge sums of money, depending on how much was improperly used. To avoid a similar fiasco, here are some guidelines for how to handle excess plan assets that come at least partly from employee contributions:

  • Use assets only for plan participants’ benefit. Glenn Borromeo, with the law firm of Mackenzie & Albritton in San Francisco, says you can use pension plan assets solely to provide benefits to participants and their beneficiaries or to defray the plan’s reasonable administrative expenses. And, plan participants are entitled to accrued benefits traceable to their contributions, even if those benefits exceed the plan’s defined benefit.
  • Use caution when terminating a plan. Similarly, if you’re ending a plan that’s partly funded by employee contributions, ERISA says plan participants are entitled to receive the assets attributable to their contributions, even if they exceed what’s needed to pay out the defined benefits. Borromeo says you can use the excess assets to provide retirees more generous benefits, start another plan for the same participants, or provide retiree medical benefits. Note that if you’re terminating a plan that’s entirely employer-funded, you have sole discretion over how to use any excess assets. And, regardless of whether the funds come from employer or employee contributions, you may face hefty federal and state taxes for withdrawing excess assets.
  • Review options for dealing with excess assets in ongoing plans. If you have a continuing plan that has a surplus, it may not be prudent to use the excess to boost retirement benefits. That’s because the amount of the surplus could fluctuate depending on how plan investments are performing. Instead, consider temporarily suspending your own and/or employee contributions if permitted by the plan.


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