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CCH® PENSION — 7/25/08

Cash Balance Plans Are Not Inherently Age-Discriminatory, According To Second Circuit

From Spencer's Benefits Reports: Ruling in two consolidated class action lawsuits, the Second Circuit U.S. Court of Appeals has held that cash balance plans are not inherently age-discriminatory, even prior to amendments made by the Pension Protection Act of 2006 (PPA). The cases are Hirt, et al. v. The Equitable Retirement Plan for Employees, Managers, and Agents, et al. and Bryerton, et al. v. Verizon Communications, Inc., et al. (Nos. 06-4757, 06-5190, and 07-1680).

In the Equitable case, the Equitable Life Assurance Society of America, over a four-year period beginning in 1988, converted the three defined benefit plans that it offered to employees, managers, and agents into a single cash balance plan. On Aug. 23, 2001, the plaintiffs in this case filed a class action suit alleging that the cash balance plan formula violated ERISA Sec. 204(b)(1)(H)(i), which prohibits a pension plan from reducing the rate of an employee’s benefit accrual because of the attainment of any age.

In the Bryerton case, on June 30, 2006, Verizon froze its defined benefit plan for nonunion employees as a cost-cutting measure and replaced it with the Verizon Management Pension Plan, a cash balance plan. Participants with a combined age and years of service under 35 received monthly pay credits equal to 4% of monthly salary; participants whose combined total was between 35 and 49 received pay credits at 5% of monthly salary; participants whose combined total was between 50 and 64 received pay credits at 6% of monthly salary; and participants with a combined total of 65 and above received pay credits at 7% of monthly salary. In addition, the amount in the cash balance account earned (and continues to earn) interest at a uniform rate equal to the average annual yield on one-year Treasury bills plus one percentage point, with the total limited to the yield on 30-year Treasury bonds. The four plaintiffs in this case filed a class action suit alleging a violation of ERISA Sec. 204(b)(1)(H).

The U.S. District Court for the Southern District of New York dismissed both suits, and after consolidating the cases, the Second Circuit affirmed the dismissal. In rendering its decision, the Second Circuit initially cited three recent decisions by other appellate courts in cash balance plan cases, all of which held that cash balance plans are not inherently age-discriminatory. The Second Circuit went on to note that, effective June 29, 2005, the PPA amended ERISA to specifically provide that cash balance plans do not violate ERISA Sec. 204(b)(1)(H). The Second Circuit then added, “All of our sister circuits that have considered this question have found that, even prior to amendment by the PPA, ERISA did not proscribe cash balance defined benefit plans. Even prior to the PPA, cash balance plans could survive scrutiny under ERISA section 204(b)(1)(H)(i).”

According to the Second Circuit, “Plaintiffs’ ‘simple arithmetic’ depends on measuring the ‘rate of benefit accrual’ by reference to the end product—the age-65 annuity that can be purchased with the account balance—instead of the periodic deemed contribution thereto. We decline to endorse this reading, finding ourselves in agreement with every circuit court to consider the question: The better view is that the ‘rate of benefit accrual’ refers to the employer’s contribution to a plan, and therefore any difference in output as a result of time and compound interest does not violate section 204(b)(1)(H)(i).

“In arguing for an output-oriented evaluation of the rate of benefit accrual, plaintiffs emphasize ERISA’s definition of the similar term, ‘accrued benefit.’ But Congress did not use the term ‘accrued benefit’ when it drafted ERISA section 204(b)(1)(H)(i); rather, Congress used the term ‘rate of benefit accrual.’ When Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional. Had Congress meant to incorporate the concept of the retirement-age annuity into section 204(b)(1)(H)(i), Congress could have drafted it to reference the defined term, ‘accrued benefit.’ In sum, we hold that cash balance defined benefit plans do not by definition violate ERISA’s prohibition against age-based reductions in the rate of benefit accrual, even as that prohibition existed prior to amendment by the PPA.”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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