Information Center

Courts Disagree on Pension Credit for Early Breaks-in-Service

01/03/11

In a recent case, DiGiacomo v. Teamsters Pension Trust Fund of Philadelphia and Vicinity, the U.S. Court of Appeals for the Third Circuit ruled that if a retiree earned the right to a pension after the private pension law went into effect in 1976, a plan must count all the years he was a member of the plan in figuring the amount of his pension, including years before a break in service occurring before the law was enacted. This ruling sided with an earlier ruling by the Second Circuit Court of Appeals.  It rejected a decision by the Seventh Circuit that had said that pension credit for a retiree’s pre-break, pre-law years should be determined by the rules of the plan in effect at the time of the break-in-service.

In the DiGiacomo case, the retiree had worked for 10½ years under a Teamsters Pension Plan, worked elsewhere for 5 years, and then returned to work under the plan for 18 years.  The five years when he was not working under the plan constituted a break-in-service under the rules of the plan at the time. Under the law at the time, plans were allowed to disregard all employment before a break-in-service when calculating the final retirement benefit.  When DiGiacomo applied for his benefit, the Teamsters plan claimed that he would only receive 18 years worth of benefits.

Before the private pension law, ERISA, was enacted, plans could disregard all years worked before a break-in-service both for purposes of figuring whether a retiree had earned a benefit, and how much he had earned. ERISA provided new protections for workers who had breaks in service both for purposes of “vesting” (earning a benefit) and “accrual” (calculating the amount of a benefit).

But ERISA treated breaks-in-service that occurred before the law was passed differently for “vesting” than for “accrual” purposes. It said that in determining whether a retiree had earned a benefit, plans did not have to include pre-ERISA pre-break-in-service years. But in the provision of the law dealing with figuring the dollar amount someone had earned, there was no mention of pre-ERISA breaks-in-service, only a general statement that “all years” of participation in the plan had to be counted.

The courts that ruled in favor of the retirees said that in ERISA 204(b)(4)(a) (29 USC Section 1054(b)(4)(a)) the law states “all years” must be used for determining the amount of a benefit. The Seventh Circuit, which ruled against the retirees, said that the rules relating to earning a benefit and calculating its amount are parallel and should be read together. The court argued that if these laws are read as parallel, then pre-ERISA benefits are determined purely based on what was set out in the plan. Recently, the Supreme Court declined to hear the DiGiacomo case, allowing the decision (to use all of the retiree’s years of work in determining the amount of his benefit) to stand.

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