Protecting COLAs

New Rule Protects Cost-Of-Living Adjustments

The Treasury Department issued a final rule on August 12, 2005 overturning a court case that would have allowed plans to take away cost of living adjustments from pensioners if they had retired before the increase was adopted by the plan. 

In 2003, the U.S. Court of Appeals for the Fourth Circuit had ruled that a cost-of-living adjustment that was added to a pension plan by an amendment after workers had retired was not an “accrued benefit,” and that, therefore, no law was violated when the cost-of-living adjustment was later revoked. An “accrued benefit” is the amount a worker has earned in their pension that cannot be taken away.

The new regulation overrules the court's decision so that benefits which are added to a pension plan through an amendment are protected benefits, even if they are added after the worker has retired.

Note: The Treasury Department regulation only applies to COLAs that are incorporated into pension plan documents. It does not apply to one-time increases, sometimes called ad hoc increases, such as "13th checks". 

Read the entire regulation [PDF].  The relevant portion is on page 47116 at Section 1.411(d)-3.

Read about other cost of living adjustments in retirement savings.