Latest Cash Balance Ruling Backs Plan Design

February 27, 2007 (PLANSPONSOR.com) - Case law supporting the legality of cash balance plans continues to grow with the most recent addition of a ruling by a federal judge in St. Louis rejecting claims that such plans are age discriminatory.

The decision by U.S. District Judge Richard Webber of the U.S. District Court of the Eastern District of Missouri came in a challenge to the U.S. Bank Pension Plan by plaintiffs Edward Sunder III and Louis Jarodsky, who claimed the cash balance design discriminated against older workers.

The plan was set up in 1998 by Mercantile Bank ofSt. Louis, which was later acquired by Firstar Corp. Firstar later bought the majority of stock of U.S. Bancorp and started using the U.S. Bancorp name for the surviving corporation.

As has been the case in numerous other cash balance legal challenges, the U.S. Bancorp case revolved around a prohibition by the Employee Retirement Income Security Act (ERISA) against the stopping of an employee’s benefit accrual or “the rate of an employee’s benefits accrual (being) reduced because of the attainment of any age.”

The issue repeatedly raised in the courts is whether the phrase rate of benefit accrual refers to the employer’s contributions to the plan or the employee’s retirement benefit.

“This Court agrees with Defendants, that the term rate of benefit accrual, as applied to cash balance plans, is best read as referring to the employer’s contribution to the plan, and not the benefit the employee receives upon retirement,” Webber wrote.

So, Webber asserted, if an older employee gets a smaller retirement annuity from a cash balance plan than a younger counterpart, it’s because of the “time value of money, a characteristic correlated with age, but not age itself.”

The ruling is the first since a second circuit court – the 3rd U.S. Circuit Court of Appeals – ruled last month that the plans are not age discriminatory (See  Cash Balance Proponents Get Two Legal Victories ). The 7th U.S. Circuit Court of Appeals, in a widely publicized decision, ruled last year that cash balance plans in general and IBM Corp.’s in particular (See Murphy’s Law: IBM Loses Cash Balance Ruling ), are not age discriminatory (See IBM Cash Balance Discrimination Ruling Reversed ).  

Of the seven lower court rulings since the IBM decision, five have rejected age discrimination charges, while two courts have said the plans were age discriminatory.

The latest case is Edward W. Sunder III, et al., vs. U.S. Bank Pension Plan, Case No. 4:05CV01153 ERW, February 16, 2007.

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