Duke Energy Cash Balance Ruling a Mixed Bag

June 5, 2008 (PLANSPONSOR.com) - A ruling by a federal judge in South Carolina in a lawsuit alleging Duke Energy Corp.'s cash balance plan violated the Employee Retirement Income Security Act (ERISA) awarded some of the contested issues to both sides.

On the employer’s side, U.S. District Judge R. Bryan Harwell of the U.S. District Court for the   District of South Carolina threw out participants’ claims that the Duke plan ran afoul of ERISA’s anti-discrimination and anti-backloading prohibitions (See Duke Energy Workers Sue Over Cash Balance Conversion ). Harwell also dismissed   claims that the plan treated older workers differently than their younger counterparts in violation of the Age Discrimination in Employment Act (ADEA).

“Under Duke’s Cash Balance Plan, the pay credits and interest credits are applied to each employee’s hypothetical cash balance account in an age neutral fashion. Cash balance plans are not rendered discriminatory simply because younger employees have more time within which to accrue interest credits than older employees,” Harwell wrote in the opinion.

At the same time, the jurist handed the plaintiffs a series of victories. His ruling included:

  • a refusal to throw out a claim that the plan’s “wear away” effect violated the ADEA,
  • permission for the plan participants to pursue claims that Duke breached its duties by misleading participants about the effect the conversion would have on their benefits,
  • a finding that the plan improperly calculated lump-sum distributions by failing to perform a whipsaw calculation, and
  • a finding that the plan applied the wrong interest rate credits for the plan years 1997 and 1998, rejecting Duke Energy’s claim that it was permitted to use interest rates found in a summary plan description rather than the rates in the formal plan documents.

In turning aside contentions that the plan violated   ERISA’s anti-discrimination rule for defined benefit pension plans, Harwell said that to determine whether a cash balance plan discriminates against older workers, the issue is whether the plan sponsor’s “inputs” into the plan discriminate against older employees, not whether the “outputs” the employees receive at retirement are less than younger employees.

Further, Harwell asserted the plan did not violate ERISA’s anti-backloading rule because the rate of benefit accrual was the result of a plan amendment so the only relevant formula for purposes of the anti-backloading rule was the cash balance plan formula with no consideration of the plan’s prior traditional accrual formula.

With an eye toward decisions by three federal appellate courts that cash balance arrangements do not inherently discriminate against older workers, Harwell contended that ERISA's age discrimination prohibition for defined benefit plans must look at the "inputs" made by the employer, not the "outputs" employees receive at retirement.

Duke Energy converted its traditional defined benefit plan to a cash balance plan in 1997. The cash balance formula consisted of pay or compensation credits and interest credits. Compensation credits would end after a participant terminated employment, but the interest credits would continue until the participant withdrew his or her benefits.

According to the court, to make sure the cash balance plan did not reduce a participant's accrued benefit, the plan utilized a "greater of" formula, which converted each participant's hypothetical cash balance account to an annuity, then compared it to the frozen accrued benefit under Duke Energy's pension. Participants were entitled to the greater of their frozen benefits under the traditional plan or the cash balance amount.

The decision in   George v. Duke Energy Retirement Cash Balance Plan,   D.S.C., No. 8:06-cv-373-RBH, 6/2/08, is available here .