Feds took a look at Qwest
Labor Dept. probed severance payments out of pension fund
By Jeff Smith, Rocky Mountain News
Friday, July 8, 2005

The U.S. Labor Department considered but decided not to take legal action against Qwest Communications in connection with the telco paying more than $400 million of severance benefits out of the employee pension fund between 2000 and 2003, documents show.

A Labor Department senior investigator told a Qwest executive in March 2003 that the government likely would allege that the Denver telco had violated the Employee Retirement Income Security Act by failing to properly inform participants of plan amendments, according to a summary of the interview.

The executive, Felicity O'Herron, Qwest's director of compensation and benefits, expressed concern during the interview that Qwest would not be able to repay the pension plan if the Labor Department found an ERISA violation.

The documents were obtained by the Association of U S West Retirees under a Freedom of Information request.  ERISA, a federal law enacted in 1974, sets minimum standards for private pension and health plans to protect plan participants.

The documents also show the Labor Department asked for an accounting of each severance payout and, in April 2004, got each Qwest director, including former CEO Joe Nacchio, to sign a document agreeing to extend the statute of limitations on the issue.

Curtis Kennedy, attorney for the Association of U S West Retirees, said the retirees "would all like to know why the Department of Labor seemed to be so interested in this matter and then why it would just drop it."

Labor Department officials didn't respond Thursday to a request for an explanation of why the department decided not to file action against Qwest.

The retirees group learned only recently that the Labor Department had concluded its three-year investigation of Qwest's pension plan.  The only adverse finding was that Qwest had improperly charged $83,321 of company expenses to the pension plan, which has since been repaid.

Kennedy estimated that $480 million of severance payments were made from the pension fund to more than 12,000 employees - including top managers - between August 2000 and June 2003 as part of Qwest's downsizing.

Qwest defended its handling of the severance distributions, known as "additional defined lump sum" benefits, or ADLS.

"We strongly believe that these pension benefit payouts were proper under the terms of the plan and in accordance with the law," said Qwest spokesman Bob Toevs.  "The DOL fully investigated this question and had no adverse finding and took no action."

Qwest declined to confirm or deny the amount of severance payments made from the pension plan.

Mark Johnson, a Texas benefits consultant who was managing director of benefits compliance and pensions for American Airlines from 1992 to 2001, said it's not uncommon for companies to make severance payments out of pension funds.

"It's a matter of how you do it," Johnson said. "There's a lot of requirements - properly amending the plan and then properly informing all the plan participants of the amendment and making sure the benefit doesn't improperly favor one group of people over another."

Johnson said a company also would have to take the payments into account when calculating whether a pension plan is properly funded.

Toevs noted that Qwest's pension plan was fully funded as of Dec. 31, 2004, with a surplus of $204 million. But that hasn't always been so.

Qwest's pension plan was underfunded by $314 million at year-end 2002, two years after having a $4.1 billion surplus.  At the time, Qwest officials blamed the decline on stock- market losses but didn't mention severance payments as a factor.

Kennedy also is bothered that the Labor Department withheld 15 to 20 pages of material that appear to include inter-agency memos.  He said he plans legal action to release the information.

"I think that's where they made the decision of whether it was worth it or not" to pursue legal action against Qwest, Kennedy said. "Qwest already had said, 'There's no way we could pay it back.' "