Cash Balance 'Wear Away' Is Not an ERISA Violation

March 11, 2003 ( - Converting to a cash balance plan with a "wear-away" provision to cut off participants' anticipated benefits does not violate ERISA's prohibition on forfeiture of benefits.

Affirming a lower court’s decision, the US 1st Circuit Court of Appeals found ERISA’s nonforfeiture provision only applies to accrued benefits. In the current case, there was no forfeiture of accrued benefits because “no accrued benefits were reduced; only expected benefits were reduced, which [BankBoston] could, under the law, modify or eliminate,” Appeals Judge Sandra Lynch said in the court’s ruling in Campbell v BankBoston, according to Washington-based legal publisher BNA.

The court declined to take up the issue of whether the conversion to the cash balance plan violated ERISA’s antidiscrimination provisions. Although the court said it would not take up the issue because of the plaintiff’s failure to raise the argument in the lower court, the appeals court noted that ERISA’s anti-age discrimination provision “may not even apply to workers younger than the age of normal retirement.”

Additionally, the court upheld BankBoston’s decision to deny severance pay to the plaintiff. With this ruling, the court rejected James Campbell’s contention that the bank’s severance plan administrator violated her ERISA fiduciary duties by amending the plan to provide that participants were eligible for benefits only if they did not refuse an offer of employment with the bank’s purchaser.

Conversion Rates

Campbell worked for BankBoston and its predecessors for 37 years, spending part of those years as a senior fiduciary specialist in the company’s trust department.  

In 1989, BankBoston converted its defined benefit pension plan to a cash balance plan.   The conversion initially contained a provision guaranteeing long-term employees’ retirement benefits under the cash balance plan would be at least as much as had been payable under the defined benefit plan.  

However, the cash balance plan was amended in 1997 to “wear-away” older workers’ benefits.   Under the terms of the amendment, the continued accrual of benefits under the previous defined benefit plan would be eliminated after December 31, 1996.   The following year, BankBoston sold its trust department.

One day prior to the sale, BankBoston’s severance package was amended to exclude payments for anyone who refused offers of comparable employment with the purchasing company. Campbell was extended an employment offer, declined the offering, and was deemed ineligible for severance pay.

BankBoston’s actions lead to Campbell’s lawsuit.   In the suit, he alleged the company’s cash balance plan violated ERISA and the Age Discrimination in Employment Act (ADEA) in addition, to claims that the bank’s severance plan administrator breached her ERISA fiduciary duties by amending the plan and denying him severance benefits.

A federal judge from the District Court for the District of Massachusetts found no violations of ERISA or ADEA and dismissed Campbell’s lawsuit. Further, the court upheld the severance plan administrator’s decision to deny Campbell benefits.

Expecting, Not Accrued

The appeals court first rejected Campbell’s contention that the conversion to the cash balance plan with a wear-away provision violated ERISA’s nonforfeiture provision.   “The reduction of pension benefits of which Campbell complains was merely the elimination of future expected accruals of benefit,” the appeals court said. “The December 31, 1996 amendment to the plan protected all of the pension benefit based on Campbell’s work for the company up to that point; it merely ceased accruals under the old plan based on employment from that point forward.”

Also dismissed by the court was the plaintiff’s claim that ERISA’s antidiscrimination provision was violated by the cash balance plan, “because Campbell did not raise this argument before the district court, he has waived it.”

Additionally, the court ruled the lower court properly dismissed Campbell’s claim that BankBoston violated the ADEA because it knew that the cash balance plan conversion would decrease pension benefits for older workers. The ADEA claim was time-barred because of Campbell’s failure to file a charge with the Equal Employment Opportunity Commission (EEOC) within the applicable time period.

The court also dismissed the claims against BankBoston’s severance plan administrator, finding the administrator did not owe a fiduciary duty to him to not amend the plan in a manner that eliminated his right to collect benefits, as Campbell had contended.   “Because the plan administrator was not acting as a fiduciary when she amended the severance plan, and because employers have the right to amend or end a welfare benefit plan at any time, the September 30, 1998 amendment to BankBoston’s Separation Pay Plan was proper,” the court ruled.

The case is Campbell v. BankBoston N.A., 1st Cir., No. 02-1695, 3/7/03.