Green light for hybrid plans

The decision rendered in Hirt v. The Equitable Retirement Plan for Employees, Managers and Agents, No. 06-4757-cv & Byerton v. Verizon Communications, Inc. No. 07-1680, 2008WL 2669346 (2d Cir. 9 July 2008) is one of several district court rulings in the US that confirm the legality of cash balance plans and cash balance conversions under the rules in effect before implementation of the Pension Protection Act of 2006 (PPA). The PPA provides that cash balance plans are not inherently age discriminatory prospectively for periods on or after 29 July 2005, but does not include provision for periods before that date. Therefore, any litigation involving cash balance plans filed before that date continued.

In Hirt, the US Second Circuit Court of Appeals ruled that cash balance plans do not violate federal age discrimination legislation. Following several other court decisions on this issue, the Second Circuit stated that while the benefits provided to younger employees are worth more than the same benefits provided to older employees, in terms of a retirement age annuity that could be purchased, that difference is the result of time and compound interest and does not constitute age discrimination.


Appellate decision consistent with other appeals court rulings

The recent decision in Hirt is significant as there have been conflicting opinions in Second Circuit district courts as to whether cash balance plans were age discriminatory. In litigation against Citigroup (In re Citigroup Pension Plan (S.D.N.Y. 2006)), JP Morgan Chase (J.P. Morgan Chase Balance Litigation (S.D.N.Y. 2006)), Fleet Boston (Richards v. FleetBoston Financial Corp. (D.Conn, 2006)) and AT&T (Parsons v. AT&T Pension Benefit Plan (D.Conn 2006)), district courts in the Second Circuit have ruled that the subject cash balance plans were age discriminatory.

In cases involving Southern New England Telephone (Curtis v. Southern New England Telephone Company (D.Conn. 2008)), PricewaterHouseCoopers (Laurent v. PricewaterHouseCoopers LLP. (S.D.N.Y. 2006) and Equitable (Hirt v. Equitable Ret. Plan for Employees, Managers & Agents (S.D.N.Y. 2006)) the district court has held that the cash balance plans were not age discriminatory.

Although the appellate decision is binding only in the Second Circuit, it is consistent with the rulings in three other appeals courts: Cooper v. IBM (7th Cir. 2006), Register v. PNC (3rd Cir. 2007) and Drutis vs. Rand McNally (6th Cir. 2007). These three other circuit courts that have addressed the age discrimination issue have likewise ruled that cash balance plans are not age discriminatory. Because the circuit courts have all agreed on this issue to date, it is unlikely the US Supreme Court would grant certiorari and agree to hear this case in the event the plaintiffs seek an appeal.


Invalidating cash balance plans would put pension system at risk

The legality of cash balance plans has been an issue in the US for several years and the key premise for plaintiff arguments has been that these plans illegally discriminate based on age. Unlike traditional defined benefit plans which reward employees with larger benefit accruals at the end of their careers, cash balance plans accrue benefits over the course of one's career. Cash balance plans, which do not distinguish between long-serving employees and employees who change jobs many times, are the product of today's economy as it is unlikely employees will remain long term with one employer and typically change jobs several times over the course of their careers. Cash balance plans define an employee's benefit as the sum of the employee's accumulated pay credits and interest credits.

Cooper v. IBM, 274 F. Supp. 2d 1010 (S.D. Ill 2003) was the decisive case in which it was held that cash balance plans were discriminatory. The IBM decision drew attention because the underlying ruling was one of the first in the US to provide a decisive win for plaintiffs on the basis of age discrimination claims.

The lower court decision in the IBM case was rendered by Judge G. Patrick Murphy of the Southern District of Illinois. This was a chilling decision for employers as it suggested that all cash balance plans were inherently illegal. A decision invalidating every cash balance plan in the US would place the private pension system at risk.


Accumulation of interest credits is central issue

The Employee Retirement Income Security Act of 1974 (ERISA) requires that the interest provided by a cash balance plan continue to accrue, even after an employee terminates employment, until the first benefit payment is made to the employee. Therefore, for any two employees who work for the same number of years and terminate their employment at the same time, the one who waits longer to receive his/her first payment will accumulate more interest credits.


PPA: plans no longer automatically deemed discriminatory

The premise of plaintiff arguments was that cash balance plans therefore provide greater incentives for younger employees and violate the age discrimination rules under ERISA, ERISA ¤ 204(b)(1)(H), 29 USC.¤ 1054(b)(1)(H). However, as a result of several court decisions and the implementation of the Pension Protection Act of 2006 (PPA), cash benefit plans are no longer automatically deemed age discriminatory in the US.

The PPA has been referred to as 'one of the most sweeping pieces of pension legislation in the US in over 30 years'. Not only did the legislation provide a number of significant tax incentives to enhance and protect retirement savings for Americans, but it also included specific provisions that addressed conversions of pension plans to cash balance plans.

The PPA amended ERISA with Code ¤ 411(b)(5)(A) - specially permitting cash balance plans and repudiating the age discrimination theory on a prospective basis. The PPA codified the view that hybrid plans, including cash balance plans, do not discriminate on the basis of age, as long as the accrued benefit of one participant is equal to or greater than the accrued benefit of any similarly situated younger participant. The accumulated benefit is the accrued benefit to date expressed as an annuity payable at normal retirement age, or the balance of a hypothetical account, or the current value of the accumulated percentage of the employee's final average pay.


PPA provisions, appellate court decisions keep cash balance plans on table

After the PPA was signed into law, in a landmark decision in Cooper v. IBM Personal Pension Plan, 457 F.3d 636 (7th Cir. 2006) at the Seventh Circuit Court of Appeals overturned the underlying decision that IBM's cash balance plan discriminated against the company's older workers. The Seventh Circuit concluded the IBM plan is, in fact, age neutral on its face because there is no age-based difference in the amounts imputed to an older employee and a younger employee's account. The court further noted that differences in pension benefits were 'a function of differing years of service, salary history, or the years the balance has been allowed to compound', and not age. The decision in Cooper applies to periods before the effective date of the PPA, which is generally effective for periods beginning on and after 29 June 2005.

In 2007, two other Circuit Courts - the 3rd US Circuit Court of Appeals in a case involving Pittsburgh-based PNC Financial Services in the matter entitled Register v. PNC Financial Services Group, Inc., 477 F.3d 56 (3rd Cir. 2007) and the 6th US Circuit Court of Appeals in a case involving World Color Press entitled Drutis v. Rand McNally & Co., 499 F.3d 608 (6th Cir. 2007) - also rejected age discrimination charges.

Each of the courts that have rejected the plaintiff's age discrimination claims, have done so under two separate theories: (1) that the age discrimination protections of ERISA ¤ 204(b)(1)(H) were not intended to protect workers until after they reached normal retirement age; or alternatively (2) assuming that ERISA ¤ 204(b)(1)(H) does apply before normal retirement age, it does not require the comparison of the benefits of younger or older participants projected to normal retirement age that is the premise of plaintiff's age discrimination claim.

With clarification, regulatory codification via the PPA and legal reinforcement in the courts, it seems possible that hybrid plans are now once again an option for companies to consider in the US.