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District court judge says cash balance plans are age discriminatory

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NEW YORK—The legal status of cash balance pension plans remains far from settled after a federal judge ruled last week that the plans discriminate against older workers.

When cash balance plan benefits are expressed as a retirement-age annuity, an older employee who started working at the same time as a younger employee will receive a smaller benefit, which is age discrimination, ruled Judge Harold Baer Jr. of the U.S. District Court for the Southern District of New York, in a case involving JPMorgan Chase & Co.'s plan.

Judge Baer's ruling, which rejected JPMorgan Chase's motion to dismiss the age discrimination charge, is the first to go against an employer since the 7th U.S. Circuit Court of Appeals in August ruled in a case involving IBM Corp. that the plans do not discriminate against older employees.

That ruling bolstered employers' hopes that the uncertainty about the legality of cash balance plans would soon come to an end. The uncertainty was fueled by a federal judge's 2003 ruling in a class action suit against IBM that the design of cash balance plans is inherently age discriminatory.

Many pension experts believed that the reasoning of the appeals court, which reversed Judge G. Patrick Murphy's decision in the IBM case, would prove so persuasive that other courts would quickly fall in line, putting an end to cash balance plan age discrimination litigation, which has been going on for at least seven years and costing employers tens of millions of dollars in legal fees.

There were good reasons for that optimism. In the first two district court rulings following the IBM decision, both courts dismissed age discrimination charges against the employers sponsoring the plans, with the two judges specifically citing the appeals court ruling in the IBM case in their rejection of the age discrimination claims (BI, Oct. 30).

But with Judge Baer's decision in the JPMorgan Chase case, that optimism was short lived. While the appeals court had ruled that the plans are age neutral, since the benefits and interest credits employees earned are not based on age, Judge Baer rejected that analysis.

"It is immaterial," Judge Baer wrote in his Oct. 30 decision, "that the plans appear age neutral. Despite the fact that every employee receives pay credits based on their completed years of service and the same interest rate is applied to each employee's account balance, that is not the yardstick by which to test, nor the means to avoid, age discrimination results."

What matters, Judge Baer ruled, is "simple arithmetic." When converting employees' account balances to a retirement annuity, that conversion results in a smaller benefit for older employees because they have fewer years in which to earn interest, he ruled.

Judge Baer's ruling dashes hopes that the age discrimination controversy would be put to rest soon. "We don't have closure. Two different judges can have two very different views," said Nancy Ross, a partner with McDermott, Will & Emery L.L.P. in Chicago.

Pension attorneys say the decisive legal action will be at the appeals court level, with the final outcome perhaps two years away.

"Appeals courts will be the next legal battleground," said Christopher Rillo, a principal with the Groom Law Group in Washington.

"The action is going to be at the appeals court level," concurred Larry Sher, a principal and director of retirement policy at Buck Consultants Inc. in New York.

The next appeals court likely to rule on the age discrimination issue will be the 3rd U.S. Circuit Court of Appeals, which next month will hear oral arguments involving a 2005 lower court ruling that dismissed cash balance plan age discrimination charges against Pittsburgh-based PNC Financial Services Group Inc.

Cash balance plan age discrimination cases also likely will be heard in the months ahead by appeals courts in Cincinnati and San Francisco.

And in New York, the 2nd U.S. Court of Appeals likely will review Judge Baer's decision as well as a conflicting ruling reached one month earlier in which now retired Judge Michael Mukasey dismissed cash balance plan age discrimination charges against PricewaterhouseCoopers L.L.P.