SPRECHER, Circuit Judge.
The Pension Benefit Guaranty Corporation and the United Auto Workers appeal from the district court order granting summary judgment in favor of the plaintiff, Nachman Corporation. The lower court granted declaratory relief, limiting Nachman's pension liability to the amounts accumulated in a pension plan trust fund.
Pursuant to collective bargaining with the UAW, in 1960 Nachman established a pension plan for certain employees at its Armitage Avenue facility in Chicago. The plan terms provided for vesting of benefits after employees fulfilled specified age and length-of-service requirements. This pension plan is characteristic of "defined-benefit" plans, promising a fixed monthly benefit level for each year of service. As is typical of a defined-benefit plan, Nachman was required to make annual contributions to a trust fund on an actuarial basis. Those contributions were calculated by reference to administrative costs of the fund, benefit liabilities accruing during the current plan year ("normal costs"), and the amounts necessary to amortize the past service liability over thirty years.
On October 1, 1975, Nachman gave timely notice to the UAW that it was terminating the pension plan effective December 31, 1975. The termination accompanied the closing of the Armitage Avenue facility, which had become unprofitable. The propriety of the termination is not challenged.
It is also undisputed that the assets in the trust fund are insufficient to pay all the vested benefits which accrued before December 31, 1975. Apparently the fund assets can provide only thirty-five percent of the accrued vested benefits. Under the terms of the plan, the employees' benefits would be reduced ratably. Nachman would not be obligated to assume liability for the unfunded benefits. Article V, section 3 of the plan provides:
Nachman brought an action for declaratory relief to determine whether ERISA would impose any liability on it for the vested, but unfunded, benefits. The district court granted summary judgment in Nachman's favor, holding that Congress did not intend until January 1, 1976, to subject employers to liability for unfunded benefits which they had disclaimed. Since Nachman terminated the pension plan prior to that date it was not found subject to statutory liability.
In 1974 Congress passed the Employee Retirement Income Security Act (ERISA) in order to establish "minimum standards . . . assuring the equitable character of . . . [private pension] plans and their financial soundness." 29 U.S.C. § 1001(a). ERISA consists of four titles, each designed to correct different abuses perceived in the private pension system.
The mechanics of the insurance system established in Title IV control the resolution of this case. Congress created the Pension Benefit Guaranty Corporation (PBGC) within the Department of Labor to administer the termination insurance program. The PBGC guarantees the payment of "nonforfeitable benefits (other than benefits becoming nonforfeitable solely on account of the termination of a plan) under the terms of a plan which terminates at a time when . . . this title applies to it." Id. at § 1322(a). Prior to the termination by an employer-sponsor of a covered pension plan, a notice of intent to terminate must be filed with the PBGC. Id. at § 1341(a). The PBGC then examines the plan and determines whether the assets of the fund are sufficient to pay all benefits guaranteed by the Act. If the assets are sufficient, termination proceeds. If, on the other hand, the PBGC is unable to determine that the assets are sufficient, a trustee is appointed and the guaranteed benefits are then paid out from the trust assets and, if those are insufficient, from PBGC funds.
When the PBGC guarantees benefits in excess of the fund assets, the act provides for recovery from the employer-sponsor. Id. at § 1362. The amount of the employer's liability is determined by the value of the "plan's benefits guaranteed under this subchapter on the date of termination" offset by the allocable assets of the trust fund. Id. at § 1362(b)(1). Liability, however, is limited to a maximum of thirty percent of the net worth of the employer. Id.
Nachman's potential liability to the PBGC depends upon whether the employees' vested benefits, unfunded at the date of termination, are "guaranteed" under Section 1322, that is, whether these benefits are "nonforfeitable . . . under the terms of a plan" and the plan termination occurred after the effective date of Title IV, September 2, 1974. If they are so guaranteed, the PBGC must provide them and assess liability against the employer.
Title IV does not provide a definition of "nonforfeitable." However, the word nonforfeitable is used in Title I, the "minimum vesting" sections, as well. Title I requires that after January 1, 1976, every plan must provide that benefits become "nonforfeitable" upon the satisfaction of the minimum eligibility requirements. Id. at § 1053(a). The term "nonforfeitable right" is defined for purposes of Title I in Section 1002(19) as
Another definition of nonforfeitable for the purposes of Title IV was promulgated by the PBGC as the administering agency. Benefits are nonforfeitable, and guaranteed, if
29 C.F.R. § 2605.6(a) (1977) (emphasis added). Nachman's employees have satisfied all conditions required of them. The benefits in issue are therefore clearly "nonforfeitable" if the PBGC definition is employed.
The district court concluded that Nachman employees did not have nonforfeitable rights under the plan. Relying on the definition provided in Title I, the judge concluded that the employer liability exclusion clause in the plan rendered the employee rights both "conditional" and not "legally enforceable" and therefore forfeitable. The court reasoned that since Title I requires that plans be amended to make benefits nonforfeitable, such exclusion clauses could not be operative after January 1, 1976, the effective date of that title. Since the Nachman plan was terminated before Title I took effect, however, the judge concluded the clause retained validity. The court found no contrary legislative intent, relying on the congressional purpose to delay the effective date of the minimum vesting requirements until January 1, 1976. Under the lower court reading of the Act, between September 2, 1974 (the effective date of Title IV) and January 1, 1976 (the effective date of Title I) the PBGC would only be authorized to guarantee benefits which had become vested and had not been disclaimed by the employer under the terms of the plan.
We conclude that ERISA was designed to insure benefits which were vested under the plan terms, without regard to liability exclusion clauses, effective September 2, 1974. Benefits which would only vest by mandate of Title I standards rather than prior plan terms would not be insured until 1976. Since the Nachman plan was terminated after 1974, and since the benefits had admittedly vested under the terms of the plan (without regard to Title I) we hold that Nachman is subject to liability under ERISA. 29 U.S.C. § 1362.
We agree with the district court that the definition of "nonforfeitable" provided in Title I should govern the construction of that term's use in Title IV.
Under ordinary usage, it may seem illogical to conclude that the Nachman plan provides employees with nonforfeitable benefits when a clause in the plan expressly precludes recovery from the employer in the event the plan terminated with insufficient assets. It certainly appears to be a forfeiture. This is undoubtedly the "illogic" which led the district court below, and the district court in A-T-O, Inc. v. Pension Benefit Guaranty Corp., 456 F.Supp. 545 (N.D.Ohio 1978), to conclude the benefits were forfeitable. But see In re Williamsport Milk Products Co., Inc., (M.D.Pa.1978). But as the Second Circuit recently stated in Riley v. MEBA Pension Trust, 570 F.2d 406, 408-09 (2d Cir. 1977), "the court fell victim to the not uncommon error of reading technical pension language as if it were ordinary English speech."
Notwithstanding the plausibility of the lower courts' construction of "nonforfeitable" another construction is also possible; and it is that construction which we believe to be the correct one. This construction, like the district court's also derives from the three elements required for nonforfeitability under the Section 1002(19) definition: the "claim" to the benefits must "arise from the participant's service," it must be "unconditional" and it must be "legally enforceable against the Plan." (Emphasis added). The benefit claims in issue can be seen to satisfy all three elements. The claims arise from participant service. Second, although the benefit claim is admittedly not legally enforceable against the employer under the terms of the plan, the statute requires only that the claim be enforceable against the plan. Nachman's employees' claims are enforceable against the plan, they simply may not be collectable. Nor is their claim against the plan conditional. All conditions placed upon the participant such as age and length of service have been met. The PBGC definition interprets "unconditional" only as referring to those conditions placed on the participant and not to sufficiency of assets.
In sum, the definition instructs that nonforfeitability must be measured by the quantum of rights against the plan and without regard to rights against the employer. The liability exclusion clause is therefore irrelevant to a determination of nonforfeitability because it relates only to a claim the employee may have had against an entity other than the plan itself.
Not only does this construction more closely conform to the statute itself, but it is also the only construction substantially supported by the legislative history. Two facts from the legislative history are significant in this regard. First, there is ample evidence that Congress used "vested" and "nonforfeitable" interchangeably and understood the definition of "vest" to mean that benefits would "vest" upon the participant's fulfillment of plan requirements regardless of employer liability exclusion clauses.
Turning to the first important aspect of the legislative history — the interchangeability of Congressional use of the terms "vested" and "nonforfeitable" — it must be realized that "vested" had a clear meaning which determined the meaning of its corollary term, "nonforfeitable." It had been commonly understood that benefits would "vest" even when the plans contained employer liability exclusion clauses. See McGill, supra at 6. The Nachman plan itself is illustrative, providing for the "vesting" of benefits upon satisfaction of age and service requirements, despite the inclusion of the exculpatory clause in the plan. Thus the substitution of the word "vested" for the word "nonforfeitable" in the statutory language further clarifies that Title IV guarantees benefits not contractually guaranteed by the employer.
The definitional substitution is entirely appropriate. There is overwhelming evidence that the words vested and nonforfeitable were in fact used synonymously in this regard by Congress.
The second significant aspect of the legislative history supporting our construction of "nonforfeitable" is even more direct: the purpose of Title IV was to guarantee benefits that might be lost because of employer liability disclaimers. We must note initially that construing ERISA, as did the court below, to cover only instances in which the employer assumed liability for incompletely funded plans would import so narrow a purpose to Congress as to make the enactment of Title IV almost meaningless.
There is, however, no need to infer such a narrow purpose to Congress since in fact Congressional representatives definitely believed that Title IV of ERISA had been written to insure the benefits which employers had declined to guarantee. It was definitively stated during the floor debates in both the House and Senate, that the termination insurance, had it been in force in 1960, would have insured the vested benefit losses of the employees of the South Bend Studebaker plant. II Legislative History at 1639 (Remarks of Senators Bentsen and Javits); III Legislative History at 4694 (remarks of Rep. Brademas).
Therefore, it is beyond doubt that the vested benefits of Nachman's employees are guaranteed by Title IV. The lower court suggested that even if the benefits were guaranteed Nachman would not be liable. As discussed supra, Section 1362, subjecting employers to liability for all guaranteed benefits, prohibits this conclusion. Moreover, the legislative history confirms that Section 1362 was intended to impose liability on employers for the benefits they had disclaimed contractually. Although the primary concern of the legislature was to guarantee benefits to workers, it was determined that imposition of liability on the employer would be essential to prevent abuse.
Id. at 4766. To hold that the unconditionally vested benefit rights of Nachman's employees are not insured under the Act would totally subvert the Congressional intent. Since the benefits are guaranteed under the Act, Nachman is subject to liability under Section 1362.
Nachman argues that Congress cannot constitutionally impose retroactive liability for the payment of unfunded, vested benefits under the Due Process Clause. U.S.Const. Amend. V. The Plaintiffs rest their claim of unconstitutionality principally on the Supreme Court's decisions in Railroad Retirement Board v. Alton Railroad, 295 U.S. 330, 55 S.Ct. 758, 79 L.Ed. 1468 (1935) and Allied Structural Steel Co. v. Spannus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978). The defendants argue that the liability imposed should be characterized as prospective, but that even if retroactive, this exercise of legislative power is reasonable and constitutional under the Supreme Court decision in Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976).
The Supreme Court has confirmed that Congress has broad latitude to readjust the economic burdens of the private sector in furtherance of a public purpose. Only if Congress legislates to achieve its purpose in an "arbitrary and irrational way" is due process violated. Usery v. Turner Elkhorn Mining Co., supra, at 15, 96 S.Ct. 2882; Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978). Turner Elkhorn Mining also instructs however that it is not necessarily true that "what Congress can legislate prospectively it can legislate retrospectively," 428 U.S. at 16, 96 S.Ct. at 2893. Judicial scrutiny of a statute must therefore include an assessment of the rationality of the retroactive effects as a means to achieving the Congressional purpose.
Title IV of ERISA does affect Nachman retroactively. The defendants argue that since ERISA only requires employers to assume liability for pension benefits which become due upon terminations after the effective date of the Act, it assesses liability prospectively. This argument, however, relates only to the degree of retroactive impact. Although it is true that the statute applies only to prospective terminations, it also applies retrospectively to invalidate exclusion of liability clauses in pension plans agreed upon prior to ERISA. Thus to the extent that ERISA invalidates Nachman's otherwise valid acts which occurred prior to enactment, it is retroactive. See generally Allied Structural Steel Co. v. Spannus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978).
The Congressional purpose in enacting Title IV of ERISA was to protect employees from the loss of vested benefits when a pension plan terminates with insufficient
The success of Nachman's position ultimately must rest on the applicability of several Supreme Court precedents. Recently, the Supreme Court in Allied Structural Steel invalidated a Minnesota statute assessing liability on employers for the payment of unfunded benefits upon the termination of a private pension plan. Upon termination, covered employers were required to purchase deferred annuities sufficient to provide full pensions to all employees who had worked at least ten years. Allied Structural Steel Co. terminated a pension plan after the effective date of the Act with insufficient funds. The plan provided benefits for employees retiring after having served the company for a prescribed period, in no case less than fifteen years, and contained an exclusion of liability clause. Nine of the eleven employees discharged did not have any vested pension rights under the plan since they had not fulfilled the minimum service requirements. However, these employees had been in the company's employ for ten years and were therefore entitled to benefits under the Minnesota statute.
The Supreme Court found the employer could not be held to the liability imposed by the statute. The Court reviewed the statutory scheme and found it constitutionally insufficient, concluding that the legislature had made "no showing . . . that this severe disruption of contractual expectations was necessary to meet an important general social problem." 438 U.S. 247, 98 S.Ct. at 2724. Although decided under the Contract Clause, which is applicable only to state legislation, several authorities have suggested that the analysis employed in Contract Clause cases is also relevant to judicial scrutiny of Congressional enactments under the Due Process Clause. Allied Structural Steel Co. v. Spannus, 438 U.S. at 262 note 9, 98 S.Ct. 2732 (dissenting opinion); Veix v. Sixth Ward Building & Loan Association, 310 U.S. 32, 41, 60 S.Ct. 792, 84 L.Ed. 1061 (1940); Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 448, 54 S.Ct. 231, 78 L.Ed. 413 (1934). See also Hochman, supra note 19, at 695; Hale, The Supreme Court and the Contract Clause, 57 Harv.L.Rev. 852, 890-91 (1944). Both employ a means-end rationality test. However, since we are convinced that ERISA withstands the scrutiny employed under the Contract Clause cases, we need not decide whether the two clauses in fact impose identical restraints on legislative impairment of contracts.
A second Contract Clause case,
In Railroad Retirement Board v. Alton Railroad, 295 U.S. 330, 55 S.Ct. 758, 79 L.Ed. 1468 (1935), the Supreme Court invalidated under the Due Process Clause a federally imposed compulsory retirement and pension system for all carriers subject to the Interstate Commerce Act. The Act required employers to pay the cost of retirement pensions for all workers presently in their employ as well as for those workers who had terminated employment in the year prior to enactment. Whether the purpose of the legislation was viewed as a legislative effort to improve efficiency, safety or the retirement security of workers,
The defendant, on the other hand, relies principally on the Supreme Court's decision in Usery v. Turner Elkhorn Mining, 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976). There the Court upheld Congressional imposition of liability on coal industry employers to compensate employees suffering from black lung disease. The challenged provision subjected employers to liability for injury to employees who had terminated employment prior to the effective date of the Act. The Court resolved that Due Process was satisfied because the legislation represented "a rational measure to spread the costs of the employees' disabilities to those who have profited from the fruits of their labor . . . ." 428 U.S. at 18, 96 S.Ct. at 2893.
Application of the factors relevant to judicial assessment of rationality, as distilled from these and other precedents, indicates that Title IV of ERISA satisfies Due Process. Rationality must be determined by a comparison of the problem to be remedied with the nature and scope of the burden imposed to remedy that problem. In evaluating the nature and scope of the burden, it is appropriate to consider the reliance interests of the parties affected, Allied Structural Steel Co., 438 U.S. 234, 98 S.Ct. 2716; Adams Nursing Home of Williamstown, Inc. v. Mathews, 548 F.2d 1077, 1080-81 (1st Cir. 1977); whether the impairment of the private interest is effected in an area previously subjected to regulatory control, Allied Structural Steel Co., 438 U.S. 234, 98 S.Ct. 2716; Federal Housing Administration v. The Darlington, Inc., 358 U.S. 84, 91, 79 S.Ct. 141, 3 L.Ed.2d 132 (1958); the equities of imposing the legislative burdens, Alton Railroad, 295 U.S. at 354, 55 S.Ct. 758; Turner Elkhorn Mining, 428 U.S. at 19, 96 S.Ct. 2882, and the inclusion of statutory provisions designed to limit and moderate the impact of the burdens. W. B. Worthen Co., 292 U.S. at 434, 54 S.Ct. 816; Allied Structural Steel Co., 438 U.S. 234, 98 S.Ct. 2716. It must be emphasized that although these factors might improperly be used to express merely judicial approval or disapproval of the balance struck by Congress, they must only be used to determine whether the legislation represents a rational means to a legitimate end.
Congress determined that each year somewhere in the vicinity of 20,000 workers lost vested pension benefits due to causes
An analysis of the retroactive burden imposed suggests that unlike the legislation in Allied Structural Steel Co., Worthen and Alton Railroad, the burdens imposed by ERISA are rationally related to the Congressional purpose. It is true that the monetary measure of Nachman's potential liability cannot be characterized as insubstantial.
The second and more important distinction in the nature of the reliance interests is that in this case Congress found that the employees' reliance interests in vested benefits
The basic equities of imposing the liability has also been relevant to the determination of whether the burden is irrational. In Allied Structural Steel Co., and Alton Railroad the Court emphasized that the employer was being forced to pay added compensation for fully compensated services. The employers received no benefit in the bargain. In Alton Railroad the employer had never agreed to pay any retirement benefits. In Allied Structural Steel Co. the employer had agreed to pay retirement only if the employee served him for the requisite period of time — a time period not satisfied by nine of the eleven employees terminated. As the Supreme Court has noted, "the `true nature' of the pension payment is a reward for length of service." Alabama Power Co. v. Davis, 431 U.S. 581, 593, 97 S.Ct. 2002, 2009, 52 L.Ed.2d 595 (1977). Here, however, Nachman received the benefit he bargained for. The Nachman employees entitled to ERISA benefits in this case served Nachman for the requisite number of years required by the company under the terms of the plan and thus conferred the full benefit on the employer. In this case, then, the question Congress answered was not merely who should provide workers with retirement income, but who should bear the costs of a plan termination: a solvent employer who has received the full benefit he bargained for or the employee with vested benefit rights. As in Turner Elkhorn Mining, it was reasonable for Congress to conclude that this liability represented "an actual, measurable cost of . . . [the employer's] business." 428 U.S. at 19, 96 S.Ct. at 2894.
Perhaps the most important facts distinguishing ERISA from the Minnesota statute in Allied Structural Steel are those revealing the Congressional attempt to moderate the impact of the liability imposed. Title IV provisions represent a rational attempt to impose liability only to the extent necessary to achieve the legislative purpose. Congress concluded that it was necessary to insure unfunded vested benefits and established a federal corporation for that purpose. However, it was also determined that it would not be possible to maintain an
Acknowledging that employers on the verge of bankruptcy would be unlikely to terminate pension plans solely to take advantage of termination insurance, Congress provided net worth limitations on the amount of potential liability. 29 U.S.C. § 1362. Congress also devised other provisions to temper the burdens imposed. Employers will not necessarily be liable for the full amount of benefits promised in the plan, since Congress set a level on the amount of benefits guaranteed. 29 U.S.C. § 1322(b)(3). In Section 1323 Congress required the PBGC to provide optional insurance to an employer who desires to protect against this contingent liability.
The record supporting the enactment of ERISA, wholly unlike that present in Allied Structural Steel, demonstrates that "the presumption favoring `legislative judgment as to the necessity and reasonableness of a particular measure'" must be allowed to govern here. 438 U.S. at 247, 98 S.Ct. at 2724. Turner Elkhorn Mining, 428 U.S. at 18, 19, 96 S.Ct. 2882; Williamson v. Lee Optical Co., 348 U.S. 483, 488, 75 S.Ct. 461, 99 L.Ed. 563 (1955). Title IV of ERISA satisfies Nachman's rights to Due Process.
The order of the district court is reversed.
H.R.2, 93rd Cong., 1st Sess., § 3(19) (1973), reprinted in II Legislative History of Employee Retirement Income Security Act of 1974, 2251-52 (herein Legislative History). See also S.1557, 93rd Cong., 1st Sess., § 3(t) (1973), I Legislative History at 285. Despite a wide variance in the definitions employed in various versions of the act, there is substantial evidence that the object of coverage in this regard never differed. Thus even though this language was replaced, the committee report accompanying H.R.12906, the bill incorporating definitional language very similar to that eventually passed, clarifies that both definitions were designed to "requir[e] plans to insure unfunded vested . . . [liabilities up to the amounts insured by the Act]." II Legislative History at 3346. See also note 10 infra.
We find only one statement in the legislative history potentially supportive of this construction of the statute. The district court relied on the following passage in the conference report to conclude that Congress intended to insure only those unfunded, vested benefits for which the employer had assumed liability: "Under the conference substitute, vested retirement benefits guaranteed by the plan . . . are to be covered. . . ." III Legislative History at 4635. The court concluded that if the plan did not guarantee the vested benefits Congress did not intend to guarantee those benefits (until Title I became effective).
Although the sheer weight of the contrary history probably precludes the district court's conclusion, a closer reading of the paragraph cited reveals the propriety of a different inference than that drawn by the A-T-O court. The sentence reports the conference bill resolution of an issue of what variety of vested benefits should be insured. The report explains that the House version of the bill insured only those benefits "required to be vested under the bills minimum vesting standards" while the Senate version insured all benefits which vested by reason of plan terms. We read the quoted sentence as merely explaining that the Senate version was adopted and that vested benefits "guaranteed" by the plan, rather than Title I, would be insured. Thus it is inappropriate to read the word "guarantee" so strictly in a context where limitation-of-liability issues were not under discussion.
There in fact never was a dispute between the bills on the desirability of protecting vested benefits without regard to employer liability exclusion clauses. Senator Williams explained that "the conference substitute, as did the House and Senate bills, establishes an insurance program to protect employees against the loss of vested benefits . . ." without any qualification that those vested benefits be recoverable from the employer under the plan.
The district court in Nachman, on the other hand, apparently recognized that the words were used interchangeably throughout the Act, but nonetheless concluded that Congress used the word "vested" to describe unfunded benefit rights enforceable against the employer. We refuse to presume, without supporting legislative history, that Congress used this standard pension term to mean something other than its accepted definition. The legislative history, as discussed, indicates traditional usage of the term "vested."
Alternatively it is conceivable that "nonforfeitable" was preferred to "vested" to clarify that benefits guaranteed by Title IV must have vested unconditionally during the period before Title I's restrictions on vesting conditions went into effect. See note 7 supra.
Moreover, the committee reports reveal clearly that although the statutory language was altered, the intent remained constant. In S. 1179, the first Senate bill to use the term "nonforfeitable," the accompanying committee report explained that insured benefits were those "vested . . . under the plan." S.Rep.No.93-383, I Legislative History at 1094.
Evidence in the record here suggests that 78 of the 136 plans terminated before January 1, 1976 contained limitation of liability clauses similar to the one in the Nachman plan, a figure representing a lower percentage than these sources suggest has been traditionally true. This evidence does not reveal however whether some of the terminated plans used various other forms of indirect disclaimers instead of the standard clause. See McGill, Fulfilling Pension Expectations, supra, at 88-89.
Although the loss of pension benefits was not considered a national emergency by Congress, Allied Structural Steel Co., confirms the prior precedents holding that retroactive liability can properly be imposed to remedy problems which fall short of an emergency. Id. at 248 n. 24, 98 S.Ct. 2725.
II Legislative History at 3296.