Northwest Target-Date DC Plan Escapes Legal Challenge

January 28, 2009 ( - A federal judge in Minnesota has rebuffed an age-discrimination challenge to Northwest Airlines' defined contribution plan, ruling the complex program's use of age as a factor for a benefits determination was permissible.

Relying heavily on the legal reasoning in a long line of cash balance plan cases, U.S. District Judge Joan N. Ericksen of the U.S. District Court for the District of Minnesota ruled that the DC plan did not violate the Employee Retirement Income Security Act (ERISA) or the Age Discrimination in Employment Act (ADEA).

Ericksen rejected assertions by a group of pilots that the DC plan, agreed to by both the company and the Air Line Pilots Association (ALPA), was not permitted to use age factors such as the federally required pilot retirement age when determining an employee’s benefit level.

While noting the plan design differences between cash balance and DC programs, Ericksen contended that it was nevertheless relevant that other federal courts had sanctioned the use of age as a benefits determination factor and that the reasoning used by the other jurists also applied in the Northwest case.

In the pilots’ challenge to the Northwest program, Ericksen said the plaintiffs would have to show that the allocations to their pensions ended or were reduced “because of” age.

“Although the pilots base their challenge on the effect age has on projected final average earnings, they provide no data or information as to the actual effect of age, isolated from other variables, on projected final average earnings or on allocations under the (Northwest plan),” the court said.

Ericksen declared: “Treating a younger pilot’s increased earning potential resulting from his greater remaining years of service as a form of age discrimination is not sensible.”

It is not age discrimination to base pension allocations on a factor that is analytically distinct from, yet correlated with, age, the court contended.

According to the ruling, after the passage of the Pension Protection Act (PPA) was passed by Congress, Northwest and ALPA went forward with their plans to freeze the defined benefit plan. Northwest and ALPA then negotiated a new defined contribution plan, under which Northwest would contribute certain pro-rata percentages of the pilots' earnings to the plan.

Ericksen said the Northwest plan targets approximately 50% of a pilot's projected final average earnings as retirement income using a complex methodology that includes one-time calculation of each active pilot's projected final average earnings. The method generated a hypothetical career for each pilot based on his or her seniority, years of service, age, and flight/seat position as of December 31, 2007.

According to the court, of the nearly 4,400 pilots participating in the plan, almost half will receive no contributions because their frozen pension plan benefits exceed their gross target benefit, and some will receive a smaller contribution than their contribution under Northwest's defined contribution plan.

Nothing in ERISA or the ADEA suggests that Congress intended the federal laws to limit employers to "arbitrarily selected targets" or to prohibit employers from using projected future average earnings as a target, the court said.

The opinion in Northwest Airlines Inc. v. Phillips, D. Minn., No. 07-4803 (JNE/JJG), 1/26/09, is available here .