U.S. District Judge Catherine Blake for the federal district court in Maryland has provided her opinion on the whole cash balance plan controversy in Tootle v. ARINC, Inc., et al., holding that a company’s cash balance plan did not discriminate against employees because of their age.
Facts of the Case. The company’s defined benefit plan (“DB Plan”) was converted to a cash balance pension plan (“CB Plan”), effective January 1, 1999. Employees who were eligible to participate in the DB Plan at the time of the conversion and who were transferred to the new CB Plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the DB Plan, as well as bonus “transition credits.” A group of almost 300 employees were offered a choice between continuing under the DB plan or switching to the CB plan. Under the CB plan the percentage of the employee’s salary that was to be credited to the account (the “contribution credit”) increased with the employee’s age. For example, an employee under age 25 would receive a contribution credit of 3% of salary, while an employee age 60 or over would receive a contribution credit of 16% of salary.
The plaintiff was offered a choice between the two plans and agreed to the switch. When he was terminated in March 2002, he elected to take a lump sum distribution of $94,772.24 for his accrued benefits under the CB Plan. An actuary for ARINC had calculated that if the plaintiff had remained under the DB Plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42. (The court stated that the “difference of over $14,000 in these two figures may be attributed in part to the transition credits of $11,466 which [plaintiff] received when he switched to the cash balance plan.”) The plaintiff brought suit under the Age Discrimination in Employment Act and ERISA and sought class certification for all participants who “suffered age discrimination due to the conversion” of the plans. The plaintiff claimed that the conversion constituted unlawful age discrimination under ERISA, saying that the manner in which accrued benefits were calculated under the CB Plan favored younger workers.
What the Court Had to Say About Cash Balance Plans
1. “The claim of age discrimination arises because money contributed to a younger employee will be worth more (when expressed as an annuity starting at age 65) than the same amount of money contributed to an older employee, because the contribution to the younger employee will have more years to accrue interest before normal retirement age. . . Stated another way, if any employer contributes the same amount to an employee’s cash balance account every year, the value of those annual benefits (when expressed as an annuity starting at age 65) decreases with every passing year. . . This inevitably results in a declining benefit accrual rate as an employee ages, in apparent violation of ERISA. In other words, all cash balance plans per se violate the ERISA age discrimination provision, by virtue of their design (See Eaton, 117 F. Supp. 2d at 814-15, 823 (noting that if this argument is accepted “it is likely that hundreds of cash balance plans with millions of participants will be deemed illegal”).”
2. “The existing case law on this specific issue is sparse and divided. Compare Cooper, 274 F. Supp. 2d at 1022 (finding violation of ERISA), with Eaton, 117 F. Supp. 2d at 826 (finding no violation of ERISA); see also Campbell, 327 F.3d at 10 (noting problems with this theory of age discrimination). I agree with Judge Hamilton’s conclusion in Eaton that ERISA’s age discrimination provisions do not bar all cash balance plans. First, the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age. See Eaton, 117 F. Supp. 2d at 826-29. Statutory headings in the text of the original enactment and in a parallel age discrimination provision in the Internal Revenue Code enacted at the same time both refer to accrual of benefits “beyond normal retirement age.” See id. at 826 (citing 26 U.S.C. section 411(b)(1)(H) and Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, 100 Stat. 1874, 1975). Statements in the legislative history confirm that ERISA’s age discrimination provisions were enacted to protect employees after normal retirement age. See Id. at 827-29.”
3. “Applying the ERISA provisions designed for traditional defined benefit plans to cash balance plans could lead to illogical results, as illustrated in this case. On its face the terms of the ARINC cash balance plan appear to favor older employees. All employees are entitled to regular interest credits at the same guaranteed rate, the regular contribution credits are based on a percentage of an employee’s salary that increases with age, and the transition credits were provided in terms slightly more favorable to older employees. The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual’s account balance, as the ERISA provisions designed for traditional defined contribution plans would direct. Judge Hamilton followed a similar approach in Eaton, adopting the defendant’s suggestion to measure benefit accrual by the changes in an individual’s account balance from year to year. See 117 F. Supp. 2d at 832-33. Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton ARINC’s cash balance plan does not discriminate against employees because of their age.”
Comments: This case is very important in that it provides another federal district court’s “take” on the cash balance plan controversy, with the count now being 3 to 1 (with 3 courts generally holding that CB Plans do not violate ERISA, and the lone case of Cooper v. IBM et al. holding that they do.) It is interesting to note that Judge Blake in this recent case relied heavily on the reasoning in the Eaton case (holding CB plans did not violate ERISA). Oddly enough, the Eaton case was never even mentioned in the Cooper case which was decided last year.
The Tootle case also seems to be consistent with Treasury’s recent proposals which would “clarify that a cash balance plan satisfies the age-discrimination rules if the plan provides pay credits for older participants that are not less than the pay credits for younger participants, in the same manner as any defined contribution plan.”
You can read more about the cash balance plan controversy at this link. Also, PlanSponsor.com has a great article on the case here.