## Facts

- Allied Structural Steel Co., an Illinois corporation, operated a small Minnesota office and maintained a § 401-qualified, employer-funded pension plan begun in 1963.
- Under the plan, employees could receive benefits at age 65, but vesting depended on meeting specified age-and-service conditions; some long-term employees had no vested rights when employment ended.
- Allied was the sole contributor and retained contractual authority to amend or terminate the plan at any time; the plan did not require fixed annual contributions or impose sanctions for underfunding.
- In 1974, Minnesota enacted the Private Pension Benefits Protection Act, which applied to certain employers maintaining § 401-qualified plans and imposed a “pension funding charge” when an employer closed a Minnesota office or terminated a plan and the plan was insufficiently funded for covered employees.
- The Act treated pre-enactment service as qualifying service for coverage, including employees with at least 10 years’ service.
- Allied closed its Minnesota office shortly after enactment (pursuant to earlier plans), discharged employees, and was assessed about $185,000 in pension funding charges for employees who had 10+ years’ service but lacked vested benefits under Allied’s plan.
- Allied sought declaratory and injunctive relief in federal court, alleging the Act, as applied, violated the Contract Clause.

## Issues

1. Whether Minnesota’s Private Pension Benefits Protection Act, as applied to Allied, substantially impaired existing contractual obligations under Allied’s pension plan.
2. If so, whether the impairment was justified as a reasonable and appropriately tailored measure serving a significant and legitimate public purpose under the State’s police power.

## Decision

- The Supreme Court reversed the district court and held the Act unconstitutional as applied to Allied under the Contract Clause.
- The Act imposed a severe, immediate, and permanent retroactive change by converting non-vested pension expectations into legally enforceable obligations and requiring a substantial lump-sum payment.
- The statute operated retroactively by counting pre-1974 service toward coverage, altering obligations based on past employment relationships.
- The law targeted a narrow class of employers and lacked attributes associated with permissible Contract Clause impairments, such as broad, generalized application or a temporary response to an emergency.
- Dissenting justices would have upheld the law as a permissible supplemental obligation within the State’s police power to protect employee pension interests.

## Legal Principles

- The Contract Clause limits state power to modify existing private contractual relationships, including when the State acts pursuant to its police power.
- A court evaluates Contract Clause challenges by asking whether a law substantially impairs a contractual relationship; if so, the law must serve a significant and legitimate public purpose and impose conditions reasonable in light of that purpose.
- Severe retroactive alterations that impose large, unexpected financial obligations and single out a narrow group of contracting parties are less likely to be justified under the police power.

## Conclusion

The Court held that Minnesota’s pension-funding charge, by retroactively and substantially altering Allied’s preexisting pension-plan obligations without adequate public-purpose justification or reasonable tailoring, violated the Contract Clause as applied to Allied.


Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978)