Another Court Determines Cash Balance Plan not Age Discriminatory

January 29, 2008 ( - Yet another legal victory has been won for cash balance plans as the U.S. District Court for the District of Connecticut has ruled a cash balance plan's interest accrual and conversion formulas are not age discriminatory.

In dismissing the case, Judge Stefan R. Underhill agreed with the landmark IBM cash balance decision (See IBM Cash Balance Discrimination Ruling Reversed) and other rulings, noting in his opinion “the rate of an employee’s benefit accrual” refers to the change in the participant’s cash balance account from year to year, rather than the annual benefit commencing at normal retirement age. Underhill stated the interest credit formula of SNET’s cash balance plan is not age-discriminatory, but it merely accounts for the time value of money.

According to Underhill’s opinion, “[A]n employee’s benefits are not calculated based upon whether that employee is older or younger, but are instead calculated based upon whether he is a newer or more senior employee. The critical determinant of an employee’s benefits [is] his years to retirement, not his age.”

Underhill also decided Southern New England Telephone Company’s (SNET) cash balance plan did not discriminate against older workers by front-loading certain benefits upon conversion. Under the new plan, all retiring employees receive the greater of the value of their benefits under the old defined benefit plan as of the conversion date increased by ten percent or the value of their lifetime annuity under the new cash balance plan.

The court disagreed with the plaintiffs’ argument that the period during which benefits accrued under the new plan catch up to the ramped up benefits under the old plan primarily affects older workers, who generally have greater frozen benefits under the old plan than younger workers, and that older workers suffer longer catch up periods on account of age. Underhill pointed out that the period is not necessarily longer for older workers; it is longer for workers that have greater frozen benefits, and under the old plan, the size of a worker’s frozen benefits is a function of a worker’s salary and years of service, not his age.

Effective July 1, 1995, SNET converted its defined benefit plan to a cash balance plan. Under the cash balance plan, each participant’s cash balance account is comprised of the opening account balance, accrued service credits, and accrued interest credits. The opening balance is generally based on the participants’ benefits under the old plan as of July 1, 1995. Participants then earn service credits at the end of each month based upon their level of pay and years of service, and earn interest credits annually based upon fixed negotiated percentages.

A participant’s benefits were also determined by the “front-loading” formula of SNET’s plan.

Barbara Custer and other SNET plan participants filed a lawsuit claiming, among other things, that the plan’s interest credit structure violates the Employee Retirement Income Secuity Act’s (ERISA’s) age discrimination provision and that the front-loading formula also violates ERISA’s age discrimination provision.

The opinion in Custer v. Southern New England Telephone Co., D. Conn., No. 3:05cv1444 (SRU), 1/25/08 can be accessed here .