Tuesday, August 8, 2006

Back on the Rails: 7th Circuit Harmonizes Cash Balance Plan Conversion Law

IbmAfter the Eastern District of Pennsylvania found in Register v. PNC Financial Services Group, Inc., No. 04-CV-6097 (11/21/05), that the conversion of PNC's traditional defined benefit plan to a cash balance plan did not violate the age discrimination provisions of ERISA Section 204(b)(1)(H), it appeared that there was a developing conflict between various courts about whether such conversions were in fact age discriminatory.

Previously, the Southern District of Illinois found in Cooper v. IBM Personal Pension Plans, 274 F. Supp. 2d 1010 (S.D. Ill. 2003), that cash balance plans conversions almost inherently violate the benefit accrual rate age discrimination provisions of ERISA because the employee's benefit accrual must be determined solely in terms of a single life, normal retirement age annuity.

Now, all is well again in the cash balance plan conversion world.  Actually for two reasons.  First, prospectively such conversions will afforded some relief under provisions in the about-to-be-signed Pension Protection Act (PPA).  And second, even for those conversions that occurred prior to the enactment of the PPA and thus can't take advantage of those provisions, the Seventh Circuit has now reversed the district court in Cooper v. IBM, No. 05-3588 (7th Cir. Aug. 7, 2006), and found that such conversions are not age discriminatory.

Writing for the 7th Circuit panel, Judge Easterbrook explains:

All terms of IBM’s plan are age-neutral. Every covered employee receives the same 5% pay credit and the same interest credit per annum. The basis of the plaintiffs’ challenge—and the district court’s holding—is that younger employees receive interest credits for more years.

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Interest is not treated as age discrimination for a defined-contribution plan, and the fact that these subsections are so close in both function and expression implies
that it should not be treated as discriminatory for a defined benefit plan either.The phrase “benefit accrual” reads most naturally as a reference to what the employer puts in (either in absolute terms or as a rate of change), while the defined phrase “accrued benefit” refers to outputs after compounding.

That’s where this litigation went off the rails: a phrase dealing with inputs was misunderstood to refer to outputs. As long as we think of “benefit accrual” as referring to what the employer imputes to the account—an understanding reinforced by the use of the word “allocation” in the subsection addressing defined-contribution plans—there is no statutory difference between the treatment of economically equivalent defined-benefit and defined-contribution plans. For defined-benefit plans, where the account is an accounting entry rather than cash, “benefit accrual” matches the money “allocated” to a defined-contribution plan.

All a little confusing for those who do not follow cash balance plans that closely, but suffice to say that the 7th Circuit's reasoning means that most cash balance plan conversions will not be considered age discriminatory going forward as long as all the terms in the plan are age-neutral, as they were in the IBM plan.

Janell Grenier at The ERISA blog has some more commentary on this "highly significant" cash balance plan decision by the 7th Circuit.

PS

http://lawprofessors.typepad.com/laborprof_blog/2006/08/back_on_the_rai.html

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Comments

"Harmonize" is the wrong word for this opinion, unless you consider the bull to be "harmonizing" the china shop. Justifying the decision on an interpretation of "benefit accrual" because it "reads most naturally" (to the judge)indicates that he does not have the patience for the complexities of defined benefit plans. The opinion misses the point of a defined benefit plan. In a defined benefit plan, everything is measured by the "output," including funding, vesting and IRS nondiscrimination standards.

Posted by: Richard Rogers | Aug 9, 2006 11:30:40 AM

The key question is whether this case, along with the recently passed Pension Protection Act provisions on cash balance plans and ADEA, will spur employers to reintroduce CB plans as one last attempt at some role for DB plans (other than Social Security). I think it's too little, too late.

Posted by: William Arnone | Aug 11, 2006 7:27:15 AM

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