U.S. District Judge Catherine Blake of the
U.S. District Court for the District of Maryland read
ERISA's age discrimination provisions applicable only to
employees who have reached normal retirement age.
Thus, in
Tootle v. ARINC
Inc Blake found ERISA's age discrimination provision "do
not bar all cash balance plans."
In fact, Blake found the company's cash
balance plan appeared to favor 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," Blake said, instead pointing to ERISA
statues as they apply to defined contribution plans.
"
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."
Case History
On January 1, 1999 ARNIC converted its defined
benefit plan to a cash balance plan.
Prior to the conversion, the company's traditional
pension plan offered participants a fixed monthly payment
from an annuity upon their retirement. The annuity payment
was calculated based on two variables - the employee's
years of service and a percentage of his highest three
consecutive years of salary within the ten years preceding
retirement, the court said in the factual briefing.
All employees who were eligible to participate in the
existing pension plan at the time of the conversion and who
were transferred to the new plan received initial credits
to their cash balance accounts equal to the lump sum value
of the benefits they had accrued under the existing plan,
as well as bonus "transition credits."
However, a group of
roughly300 employees were offered a choice between
continuing to accrue benefits under the defined benefit
plan, or switching and accruing future benefits under the
new cash balance plan.
The company stated that only employees who were
vested participants under the existing pension plan
(meaning they had at least five years of service under the
plan), and who were either 55 years old or had 25 or more
years of service under the plan, were eligible for this
option.
However, plaintiff Dan Tootle claims all employees
over the age of 55 were offered the choice, regardless of
their years of service.
Tootle, one of the 300 offered the decisions, offered to
convert his plan.
In March 2002, Tootle was terminated and elected a
lump sum distribution of $94,772.24 for his accrued
benefits under the cash balance plan. An actuary for
ARINC has calculated that if Tootle had remained under
the defined benefit plan until his termination, he would
have been entitled to a lump-sum equivalent of
$80,438.42.
Tootle filed a class action suit, alleging that the
conversion to the cash balance plan violated ERISA
because the manner in which accrued benefits were
calculated under the cash balance plan favored younger
workers over older workers. Additionally, the plaintiff
alleged ARINC violated its ERISA fiduciary duties by
misrepresenting to employees the consequences of the cash
balance plan conversion.
District Court's Decision
In the ruling, Blake noted the sharp division
among the legal community about the appropriateness of cash
balances plans, citing both
Cooper v. IBM
- the monumental ruling out of the U.S. District Court of
Southern Illinois where U.S. District Judge G. Patrick
Murphy found IBM's cash balance plan in violation of
ERISA's age discrimination provisions
(See
Murphy's Law: IBM Loses Cash Balance
Ruling
)
- and
Eaton v.
Onan Corp
(See
UpFront: Like It Or "Lump" It
) - where U.S. District Judge David Hamilton of the U.S.
District Court of the Southern District of Indiana found no
age discrimination in a plan conversion.
Blake sided with Hamilton, and the
Eatonruling, finding "ERISA's age discrimination
provisions do not bar all cash balance plans."
Citing
Eaton
, Blake said the "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."
Applying this standard, which Blake said was "designed for
traditional defined benefit plans" across all cash balance
plan conversions, "could lead to illogical results, as
illustrated in this case."
Rather, Blake directed cash balance conversion
standards to use ERISA provisions for defined
contribution plans, following the precedent set by
Hamilton in
Eaton
, adopting the previous case's defendant's suggestion to
measure benefit accrual by the changes in an individual's
account balance from year to year. "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,"
Blake said.
The case is
Tootle v. ARINC Inc.
, D. Md.,
No
. CCB-03-1086.