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Cash balance plans nondiscriminatory: Court

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Back-to-back appeals court decisions that cash balance pension plans do not discriminate against older employees significantly increase the likelihood that other appeals courts will follow suit, legal experts say.

Last week, a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals became the second appeals court to reject the argument--advanced by the plaintiffs' bar in numerous lawsuits against employers--that the plans are age discriminatory because the same earned benefit will produce a smaller retirement-age annuity for older employees than younger employees.

In its decision, which involved Pittsburgh-based PNC Financial Services Group Inc.'s eight-year-old cash balance plan, the 3rd Circuit joined the 7th U.S. Circuit Court of Appeals in Chicago, which ruled last August in a case involving IBM Corp., that age discrimination should be measured by what an employer puts into employees' accounts, not what employees eventually receive at retirement.

"In evaluating the plan's inputs, PNC does not reduce contributions (in the form of earnings or interest credits) to older employees," the Philadelphia appeals court said.

"The circumstance that the same contribution in the form of interest may result in a more valuable annuity for a younger employee is not discrimination in whole or in part based on age; rather it is the completely appropriate consequence of the application of an age-neutral principle to an accumulating account of the time value of money," the 3rd Circuit concluded.

The strength of the 3rd Circuit ruling, coupled with the unanimous decision by the 7th Circuit in the IBM case, will serve as powerful precedents and increase the likelihood that other appeals courts will rule the same way, said Christopher Rillo, a partner with Groom Law Group in Washington.

"The combined effect of the two rulings will be very powerful," said Jeffrey Huvelle, a partner with Covington & Burling L.L.P. in Washington, who represented IBM before the 7th Circuit. "Now there are six appellate judges who have concluded, based on a very careful examination" of the law, that cash balance plans are not age discriminatory."

The rulings will "make it very difficult for the plaintiffs' bar to convince other appeals courts to go along" with their arguments, said Nancy Ross, a partner with McDermott, Will & Emery L.L.P. in Chicago. "These appear to be airtight decisions, and those are the ones that will prevail at the end of the day."

While encouraged by the latest appeals court ruling, others say the final outcome still is far from certain. "With the score now 2-0, that should make it even more difficult for plaintiffs to prevail in the other circuits. But, of course, there is by no means a guarantee that the other circuits will all fall in line," said Larry Sher, a principal and director of retirement policy at Buck Consultants L.L.C. in New York.

The growing optimism that other federal appeals courts may join the 3rd and 7th Circuits in ruling that cash balance plan design is not age discriminatory is in stark contrast to the fear that gripped employer ranks following the 2003 decision by a federal judge that cash balance plans, in general and IBM's in particular, violated age discrimination law.

That decision was a catalyst for widespread employer reviews of whether their cash balance plans should be frozen, benefit consultants say. The 7th Circuit subsequently reversed the lower court, and last month the U.S. Supreme Court declined to review the IBM decision.

About 1,200 to 1,500 U.S. employers now sponsor cash balance plans, so named because benefits are expressed as a cash lump sum. Employers, including some of the nation's largest corporations, rapidly added the plans, which were seen as combining the best features of defined benefit and defined contribution plans--until the plans were enveloped by legal controversy.

The rulings mean an end to age discrimination suits in Illinois, Indiana and Wisconsin--the states where the 7th Circuit has jurisdiction--and in Delaware, New Jersey and Pennsylvania--where the 3rd Circuit has jurisdiction.

About 30 cash balance plan age discrimination suits have been filed against plan sponsors since the late 1990s, defense attorneys say, with many of those suits still pending.

Employers setting up new cash balance plans do not face age discrimination litigation worries, however. Congress, as part of pension funding reform legislation passed last year, included a provision that protects new plans from age discrimination suits as long as the plans meet a few basic standards. The most significant requirement is that plans do not decrease benefit credits on the basis of age.

Since that legislation was passed, employer interest in exploring cash balance plans has been picking up, said Kyle Brown, an attorney with Watson Wyatt Worldwide in Arlington, Va.

So far, though, only one major employer--MeadWestvaco Corp., a Richmond, Va.-based paper and packaging products manufacturer--said it is converting a traditional defined benefit plan to a cash balance plan.

Sandra Register et al. vs. PNC Financial Services Group Inc., 3rd U.S. Circuit Court of Appeals; No. 05-5445; Jan. 30, 2007.