Compliance November 29, 2005

Court: Cash Balance Plans Aren't Age Discriminatory

November 29, 2005 (PLANSPONSOR.com) - A federal judge in Pennsylvania in large measure relied on pronouncements from the US Treasury Department and a growing body of case law in upholding a cash balance pension plan transition.
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Dismissing claims by plan participants who alleged the plan treated younger workers more favorably than older workers, US District Judge Legrome Davis of the US District Court for the Eastern District of Pennsylvania noted that the Treasury Department “has consistently stated that cash balance plans are not age discriminatory.”

PNC Bank converted its traditional defined benefit pension plan to a cash balance arrangement in January 1999. Under the new cash balance formula, benefits that accrued under the defined benefit plan were restated in the form of opening hypothetical cash balance accounts.

According to theDavis ruling, each participant’s hypothetical account was credited annually with an earnings credit, which was a percentage of pay ranging from 3% to 8%. The earnings credit percentage was based on the sum of a participant’s age and years of service, the court noted. At each participant’s normal retirement date, his or her account was actuarially converted into an annual annuity.

However, a participant group took PNC to federal court, alleging the conversion to a cash balance plan violated the Employee Retirement Income Security Act (ERISA) because:

  • the conversion resulted in the absence of benefit accruals for a number of years for some participants in violation of ERISA Section 204(b)(1)(B)
  • a participant’s benefit accrual decreased on account of his or her age in violation of ERISA Section 204(b)(1)(H).

Dismissing each claim in turn, Davis first found that the plan did not violate ERISA Section 204(b)(1)(B) because some participants’ benefits would not increase for a number of years. Davis said the participants had not proven that the plan would fail ERISA’s 133 1/3 percent antibackloading test. According to Davis, a plan will fail this test if the value of the benefit an employee accrues in any one year is 33 1/3 percent greater than the value of the benefit accrued in any prior year of employment.

In reaching his decision,Davis relied on case law, which included a 2000 Indiana case in which the court ruled that a cash balance conversion did not violate ERISA.  Davis rejected a ruling by a federal judge in Illinois in Cooper v. IBM Personal Pension Plan (See  Murphy’s Law: IBM Loses Cash Balance Ruling ), that all cash balance plans would run afoul of ERISA’s age discrimination provisions.

Davis also turned aside the participants’ claim that the SPD distributed by PNC failed to disclose that the cash balance plan would, among other things, cause participants’ rate of future benefit accruals to be reduced as they got older.

The case is Register v. PNC Financial Services Group Inc., E.D. Pa., No. 04-CV-6097, 11/21/05.

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