News & Information

 

FEATURED PRODUCT

Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.

Learn More »

CCH® PENSION — 08/14/09

Five years of service is valid "normal retirement age" in pre-2006 plan

A pre-2006 cash balance plan did not violate ERISA when it defined "normal retirement age" to be five years of service with the employer, the U.S. Court of Appeals in Chicago (CA-7) has ruled in Fry v. Exelon Corporation Cash Balance Pension Plan.

Plan design

In designing its pre-2006 cash balance plan, an employer attempted to minimize the impact of the so-called "whipsaw" calculation, which required plans calculating a lump-sum distribution to add to the current balance in an employee's "account" any interest promised through "normal retirement age," and then discount that sum back to present value via use of a prescribed interest rate. (The Pension Protection Act of 2006 eliminated use of the "whipsaw" calculation.)

The employer's solution was to define "normal retirement age" as the age reached by any given employee after five years of service, which was also when, under the plan's vesting rules, employees were first entitled to ask for a lump-sum distribution upon termination of employment. By using this definition of "normal retirement age," the plan could effectively avoid the whipsaw calculation and distribute only the current balance of the worker's "account."

A former employee who received more than $500,000 in lump-sum benefits when he left the employer at age 55 filed suit, arguing that the plan's definition of "normal retirement age" violated ERISA and unlawfully denied him the value of ten years of "investment credits" under the plan. The district court found for the employer.

ERISA's definition

The appellate court concluded that ERISA did not bar the employer from defining "normal retirement age" as it did. ERISA §3(24)(A) gives a plan wide discretion in how it defines retirement age. ERISA does not require "normal retirement age" to be the same for every employee, nor does the law require it to be defined as the age when most people retire, whether in the employer's industry or in the U.S. population generally.

The court also rejected the relevance of 2007 IRS regulations requiring a plan's normal retirement age to mirror the typical retirement age for its industry. Those regulations only have prospective effect, the court said.

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

Visit our News Library to read more news stories.