5500 Preparer's Manual for 2012 Plan Years
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An employer's pre-PPA cash balance plan did not discriminate against older workers in violation of the Age Discrimination in Employment Act (ADEA) solely because during the transition from the traditional defined benefit plan to the cash balance plan, older workers would tend to experience longer wearaway periods than younger workers, the U.S. Court of Appeals in Denver (CA-10) has ruled.
In January 1996, an employer informed its employees of its intent to end its traditional pension plan and adopt a cash balance plan. After a five-year transition period, during which participants would accrue benefits under both the traditional plan and the cash balance plan, participants would cease to accrue benefits under the traditional plan, but the cash balance plan "accounts" would continue to grow. At retirement, participants could choose the greater of the benefit under the cash balance plan, or their final amount under the traditional plan.
At the end of the transition period, for some employees, the value of the old pension plan was greater than the value of their account in the cash balance plan, and would remain so for some years, until the cash balance plan values caught up to the those of the old pension plan. Older employers were more likely to experience such a "wearaway" period, and their wearaways tended to be longer than those of younger workers.
Older workers filed suit against the employer, alleging violations of the ADEA and ERISA. The district court ruled for the employer, and the workers appealed.
The appellate court concluded that longer wearaway periods for older workers did not constitute age discrimination. The ADEA is satisfied as long as an employer treats older and younger workers equally with respect to credits to their cash balance accounts, even if such treatment results in longer wearaways for older workers. In other words, to demonstrate age discrimination, workers must show that plan inputs --in this case, the pay and interest credits --are discriminatory, rather than pointing to disparate outputs such as the longer wearaway period.
The appellate court also concluded that the cash balance plan did not violate the anti-backloading provision of ERISA §204(b)(1). It further held that the employer provided adequate notice of the plan changes under ERISA §204(h), and that there was no requirement that wearaway periods be explicitly discussed in the SPD.
Source: Tomlinson v. El Paso Corporation (CA-10).
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