ERISA Violation Did Not Occur in Cash Balance Conversion

June 14, 2004 ( - Another court has ruled that a conversion from a traditional defined benefit pension plan to a cash balance scheme was not age discriminatory, and does not run afoul or violate the Employee Retirement Income Security Act (ERISA).

U.S. District Judge Catherine Blake of theU.S. District Court for the District of Maryland read ERISA’s age discrimination provisions applicable only to employees who have reached normal retirement age.   Thus, in Tootle v. ARINC Inc Blake found ERISA’s age discrimination provision “do not bar all cash balance plans.”

In fact, Blake  found the company’s cash balance plan appeared to favor older employees.   “The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured,” Blake said, instead pointing to ERISA statues as they apply to defined contribution plans.  The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual’s account balance, as the ERISA provisions designed for traditional defined contribution plans would direct.”  

Case History

On January 1, 1999 ARNIC converted its defined benefit plan to a cash balance plan.   Prior to the conversion, the company’s traditional pension plan offered participants a fixed monthly payment from an annuity upon their retirement. The annuity payment was calculated based on two variables – the employee’s years of service and a percentage of his highest three consecutive years of salary within the ten years preceding retirement, the court said in the factual briefing.  

All employees who were eligible to participate in the existing pension plan at the time of the conversion and who were transferred to the new plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the existing plan, as well as bonus “transition credits.”   However, a group of roughly300 employees were offered a choice between continuing to accrue benefits under the defined benefit plan, or switching and accruing future benefits under the new cash balance plan.  

The company stated that only employees who were vested participants under the existing pension plan (meaning they had at least five years of service under the plan), and who were either 55 years old or had 25 or more years of service under the plan, were eligible for this option.   However, plaintiff Dan Tootle claims all employees over the age of 55 were offered the choice, regardless of their years of service.   Tootle, one of the 300 offered the decisions, offered to convert his plan.  

In March 2002, Tootle was terminated and elected a lump sum distribution of $94,772.24 for his accrued benefits under the cash balance plan. An actuary for ARINC has calculated that if Tootle had remained under the defined benefit plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42.

Tootle filed a class action suit, alleging that the conversion to the cash balance plan violated ERISA because the manner in which accrued benefits were calculated under the cash balance plan favored younger workers over older workers. Additionally, the plaintiff alleged ARINC violated its ERISA fiduciary duties by misrepresenting to employees the consequences of the cash balance plan conversion.

District Court’s Decision

In the ruling, Blake noted the sharp division among the legal community about the appropriateness of cash balances plans, citing both Cooper v. IBM – the monumental ruling out of the U.S. District Court of Southern Illinois where U.S. District Judge G. Patrick Murphy found IBM’s cash balance plan in violation of ERISA’s age discrimination provisions (See  Murphy’s Law: IBM Loses Cash Balance Ruling ) – and Eaton v.Onan Corp(See  UpFront: Like It Or “Lump” It ) – where U.S. District Judge David Hamilton of the U.S. District Court of the Southern District of Indiana found no age discrimination in a plan conversion.   Blake sided with Hamilton, and the Eatonruling, finding “ERISA’s age discrimination provisions do not bar all cash balance plans.”

Citing Eaton , Blake said the “the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age.”   Applying this standard, which Blake said was “designed for traditional defined benefit plans” across all cash balance plan conversions, “could lead to illogical results, as illustrated in this case.”   

Rather, Blake directed cash balance conversion standards to use ERISA provisions for defined contribution plans, following the precedent set by Hamilton in Eaton , adopting the previous case’s defendant’s suggestion to measure benefit accrual by the changes in an individual’s account balance from year to year. “Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton, ARINC’s cash balance plan does not discriminate against employees because of their age,” Blake said.

The case is Tootle v. ARINC Inc. , D. Md., No . CCB-03-1086.