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Member, Beacon International Group, Ltd.
WASHINGTON—The Supreme Court on Monday declined to review, and thus let stand, lower-court rulings that a cash balance pension plan that defined “normal” retirement age as completion of five years of service is legal.
Last year, in a unanimous decision, a three-judge panel of the 7th U.S. Circuit Court of Appeals in Chicago affirmed a lower court’s ruling that the cash balance plan established in 2002 by Chicago-based utility company Exelon Corp. is legal.
The ruling rejected a suit by Thomas Fry, who received a lump-sum payment from the plan after he left the company in 2003. Mr. Fry argued that Exelon’s definition of normal retirement age as completion of five years of service was a way to evade an Internal Revenue Service methodology used to calculate the value of lump-sum payments made by cash-balance plans.
In the appeals court’s ruling, Chief Judge Frank Easterbrook said the Employee Retirement Income Security Act gives employers considerable discretion in defining their plans’ normal retirement age.
The effect of the ruling, though, was blunted by subsequent events. In May 2007, the Internal Revenue Service adopted regulations that said a participant’s normal retirement age can’t be earlier than what is typical in an industry, a requirement that effectively banned normal retirement age as completion of five years of service, pension legal experts said.
In addition, in 2006, Congress passed pension reform legislation that included a provision that barred the IRS from enforcing a proposal affecting how cash-balance plan sponsors were to calculate the amount of lump-sum distributions.
Defining normal retirement age as completion of just a few years of service was a way to blunt the impact of the IRS proposal, which involved a methodology known as “whipsaw,” and in certain situations could have resulted in employees terminating employment receiving a sum greater than his or her account balance.