Changing Distribution Timing in ESOPs Does Not Violate "Anti-Cutback" Rules

Can a company change its distribution rules to pay people out later than initially promised and not face legal problems? According to a recent court case (Thomas Lee v. The Builders' Supply Co., 8:CV93-267, USDC NE), it can. The so-called "anti-cutback" rule of ERISA prohibits plan sponsors from reducing promised benefits to plan participants. A special ESOP exception, however, allows ESOPs to change distribution rules in a nondiscriminatory manner. In the case at issue, the Builders' Supply ESOP had initially been designed to pay out plan participants in cash upon termination. In 1989, the plan was amended to delay the payout for five years for people leaving for reasons other than for death, disability, or retirement. Payout would now be in the form of stock, with an installment payout for the put option to be paid over five years. Because the plan applies in the same way to all participants, rather than favoring one class over another, the court ruled the change was acceptable.