Appellate Judges Affirm Years-of-Service Definition for Retirement

July 10, 2009 (PLANSPONSOR.com) - An employer with a legacy cash balance plan could define normal retirement age as the completion of five years of service without running afoul of federal benefits law, an appellate court has ruled.

The7th U.S. Circuit Court of Appeals decision came in a challenge to Exelon Corp.’s cash balance plan by Thomas Fry who questioned the plan’s normal retirement age definition after getting a lump sum distribution when he left Exelon in 2003. Fry contended in his lawsuit that the retirement age definition was a way to get around performing a whipsaw calculation when determining an employee’s plan balance for distribution, which Fry asserted violated theEmployee Retirement Income Security Act (ERISA).

Chief Circuit Judge Frank Easterbrook, writing for the court, said employers had a good deal of leeway in determining the definition of normal retirement age to be used for their plan. The appellate panel upheld a trial court’s ruling in the case (see New Retirement Age Rule Does not Change Ruling on Plan’s Definition ).

The lower court reviewed its decision when the IRS in May 2007 issued regulations that a participant’s normal retirement age cannot be earlier than what is typical for an industry.

But the decision may have a limited impact since the Pension Protection Act (PPA) indicates that employers no longer have to use the whipsaw approach for distributions starting August 17, 2006. After that point, the PPA indicates, terminating employees’ accrued account balances can be used as the lump-sum benefit.

The 7th Circuit ruling is available here .

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