AK Steel Cash Balance Distributions Not Covered by PPA

April 23, 2007 (PLANSPONSOR.com) - While the Pension Protection Act (PPA) lifted the "whipsaw" calculation requirement from cash balance plan distributions, the change only applied after August 17, 2006 - too late to affect AK Steel's cash balance program, a court ruled.

So, the 6 th  U.S. Circuit Court of Appeals threw aside company arguments that it was not compelled to use the lump sum distribution calculation requirement by the Employee Retirement Income Security Act (ERISA) or Internal Revenue Service regulations.     

Even though the PPA changed the “whipsaw” calculation law, the distributions in the AK Steel case were all made between January 1995 and April 2005 – before the passage of the PPA, the court said.

The appellate court ruling keeps intact a decision by Chief U.S. District Judge Sandra Beckwith of the U.S. District Court for the Southern District of Ohio awarding of more than $46 million in benefits and prejudgment interest to the 1,250 former AK Steel workers who received lump-sum distributions prior to the age of 65 (See  AK Steel Charged $46M for Miscalculated Pension Benefits ).

According to  Circuit Judge Ronald Lee Gilman , in writing for the appellate court, a “whipsaw” calculation comes about when participants opt to cash out their hypothetical accounts in a cash balance plan before reaching normal retirement age.

To comply with ERISA, the lump-sum payments must be the actuarial equivalent of the normal accrued pension benefit, the court said. The first step in the calculation is to project forward to normal retirement age a participant’s hypothetical account balance using the rate at which future interest credits would have accrued if the participant had stayed in the plan until that time. Then, the second step is to discount that amount back to its present value on the date of the actual lump-sum distribution.

According to the court, the lawsuit was brought by John D. West on behalf of AK Steel employees who received lump-sum distributions from the company’s cash balance plan between January 1995 and April 2005. West worked for AK Steel and its predecessor, Armco Inc., for nearly 30 years when he retired in 1997 at the age of 57.

After not getting the “whipsaw” calculation, West sued, alleging an ERISA violation.

The court likewise rejected AK Steel’s argument that affirming the district court’s requirement that the plan base early lump-sum payments on the whipsaw calculation would lead to “unintended and catastrophic results.” Even if the whipsaw calculation may have an unintended effect on AK Steel’s plan, the plan “is nonetheless required to comply with ERISA,” the court said.

The appeals court turned away AK Steel’s contention that calculating lump-sum payments using a whipsaw calculation would lead to age discrimination. “[W]hat may appear at first blush to be age discrimination is really nothing more than the time value of money,” the 6th Circuit said, citing a recent decision by the 7th U.S. Court of Appeals which ruled that IBM Corp.’s cash balance plan did not discriminate against older workers

Although there was no claim by West that the plan discriminated against older workers, the appeals court stated that what appears to be age discrimination in cash balance plans “is nothing more than the time value of money.”

The ruling in West v. AK Steel Corp. Retirement Accumulation Pension Plan,   6th Cir., No. 06-3442, 4/20/07 is  here .