Boeing Workers Strike Out Again in Cash Balance Battle

In the most recent holding, U.S. District Judge David R. Herndon of the U.S. District Court for the Southern District of Illinois rejected plaintiff employees’ new theory that the plan violated ERISA’s backloading regulations once their accrued benefits were aggregated using the plan’s cash balance formula and traditional defined benefit plan formula.

Herndon earlier threw out employees’ claim that the plan violated the anti-backloading rules in the Employee Retirement Income Security Act (ERISA) by using a variable interest rate to compute interest credits.

The court’s latest ruling arose from a plaintiffs request to reconsider Herndon’s first ruling. In the latest decision, the four plaintiff Boeing employees pointed to the plan’s “greater of” formula. That formula provided that participants would receive as their accrued benefit the greater of their accrued benefit as calculated under the plan’s cash balance formula, or a minimum benefit calculated under a traditional defined benefit formula set out in the plan document.

According to the employees, that formula caused the plan to violate the 133 1/3% rule because, under Treasury Department regulations dealing with ERISA’s minimum accrual rates, the accrued benefits of plan participants must be calculated as the aggregate of their accrued benefits under the Plan’s cash balance formula and their accrued benefits under the plan’s traditional defined benefit formula.

However, Herndon rebuffed the employees’ interpretation of 26 C.F.R. §1.411(b)-1. He asserted that the regulation specifically provides that, where a participant’s benefit is to be determined under alternative plan formulas, the accrued benefits produced under the competing formulas should not to be aggregated when doing a backloading test.

Herndon noted that his interpretation of 26 C.F.R. §1,411(b)-1 matched the thinking of the 3rd U.S. Circuit Court of Appeals’ decision in Register v. PNC Financial Services Group Inc.(See Cash Balance Proponents Get Two Legal Victories).

The Boeing employees had originally alleged in their lawsuit that the cash balance plan violated ERISA Section 204(b)(1)(B) by using a variable interest rate for the plan’s interest credits.

In its earlier decision, the court rejected the employees’ contention that the plan violated the 133 1/3% backloading test because swings in the interest rate on 30-year Treasury securities “were likely” to cause interest credits allocated to participants’ accounts to accrue in later years at a rate more than one-third higher than the rate of accrual of such benefits in earlier years.

The court found that this variable interest rate, calculated as the annual rate on 30-year Treasury securities, actually made the plan frontloaded and was permissible under Treasury regulations.

Herndon’s latest ruling in Wheeler v. Pension Value Plan for Employees of Boeing Co.,   S.D. Ill., No. 06-cv-500-DRH, 9/6/07 is  here .