A federal trial court has ruled that IBM's cash balance plan violates
the age discrimination provisions of ERISA. If upheld on
appeal, and if followed by other courts, the court's analysis
would effectively kill cash
balance plans as they are
currently constituted. In light of
this decision, plan sponsors
should consider suspending
future cash balance pay
credits00erhaps substituting
additional defined contribution
benefits00ntil the case is
decided on appeal or Congress
grants relief.
The case, Cooper v. IBM
Personal Pension Plan , was
decided by the federal trial
court for the Southern District of
Illinois. The court concluded
that IBM's cash balance plan,
as well as IBM's prior pension
equity plan design, violated the
age discrimination provisions of
ERISA. The ruling is of great
importance for all cash balance
plan sponsors because the plan
feature the court found
objectionable is one that lies at
the heart of all cash balance
arrangements.
The court focused on the IBM
plan's interest credit rules and
found that they inherently favor
younger employees. The
court's reasoning was as
follows: Because interest is
credited from (a) the date of
The information herein has been prepared as a service by Shook, Hardy & Bacon L.L.P.'s Employee Benefits Group and is designed to
provide general information concerning recent developments in the law. As with any area of the law, determinations of what actions should
be taken in individual cases depend on the particular facts and interpretations of the applicable statutes and court decisions. No action
should be taken in reliance on items contained herein without obtaining the advice of an attorney.
Court Ruling Threatens All Cash Balance Plans
by John Utz
each annual pay credit, to (b) a participant's normal retirement
age (often, age 65), younger employees will enjoy more years
of interest credits with respect to a particular year's pay credit
than will older employees. If
one treats the interest credits for
all future years as "accruing" at
the time a pay credit is earned00/span>
as the IRS has suggested will
normally be necessary to avoid
violating the "antibackloading"
rules of the Tax Code and
ERISA00 pay credit for a
younger employee will be more
valuable than an equal pay
credit for an older employee.
This is due to the additional
years of interest credited to the
younger employee.
The immediate question for
cash balance plan sponsors is
whether to suspend future pay
credits under their cash balance
plans
pending
further
clarification of the law, or to
instead continue those credits
for the time being. If the federal
trial court's decisionis upheld on
appeal, and if other courts adopt
a similaranalysis, the resulting
liability associated with cash
balance plans will likely be
very substantial. This liability
will be exacerbated
by
continuing pay credits. As a
consequence,plan
sponsors should consider
ceasing future pay credits until
there is further clarification of
www.shb.com
Shook, Hardy & Bacon
Action Items
Cash balance plans sponsors
should:
Determine whether to suspend or
eliminate future pay credits
If pay credits are suspended,
consider whether to substitute a
defined contribution benefit
If pay credits are suspended,
determine whether a partial
termination will result
If pay credits are suspended,
issue the required notices under
ERISA Section 204(h) and Tax
Code Section 4980F
Consider, as an alternative to
eliminating future pay credits,
continuing pay credits with a
substantially reduced interest
credit (possibly coupled with an
additional defined contribution
benefit).
Shook, Hardy & Bacon
Employee Benefits
Compliance Alert
August 4, 2003
2
the law. A plan sponsor that ceases future pay credits may
wish to substitute a defined contribution benefit (perhaps in the
amount of the pay credit). Further clarification of the law could
come in the form of a decision by the United States Circuit
Court of Appeals for the Seventh Circuit, which would hear any
appeal from the IBM case. IBM has indicated that it will appeal
the decision. Notably, a different federal trial court earlier
concluded that the interest crediting rules for cash balance
plans do not necessarily violate ERISA's age discrimination
rules. Plan sponsors might also receive guidance by way of
new federal legislation, although employers should not depend
on relief in that form given Congress' historic hostility to cash
balance plans. Even if Congress were inclined to provide cash
balance relief, it probably could not do so retroactively.
Plan sponsors who choose to substitute a benefit under a
defined contribution plan (or increase contributions under an
existing DC plan) will need to consider whether those additional
contributions will cause benefits under the plan to exceed the
Tax Code's Section 415 limitations. Sponsors will, of course,
also need to consider the employee relations impact of such a
move. Employees may be more sympathetic to a move to an
added defined contribution benefit if the plan sponsor makes
clear that its decision is a consequence of a court decision and
that the sponsor is waiting for further clarification of the law
before determining whether to reinstate cash balance pay
credits. The disadvantage of referring to a court decision is, of
course, the possibility that doing so will trigger litigation
against the sponsor's own plan. Frankly, news of the IBM
decision will likely spread quickly in any event.
An important consideration in determining whether to suspend
future pay credits will be the funded status of
a plan. In determining that status, a plan sponsor should
probably assume that interest credits on prior pay
credits will need to continue, under the IRS' theory that those
interest credits "accrued" at the time the pay credit was
provided. If a cash balance plan is overfunded on a
termination basis, suspending future pay credits could result in
a "partial termination" of the plan, requiring accelerated vesting
of participants. If the plan is not overfunded, this may be a
naturaltime to switch to a defined contribution benefit even for
the longer term.
Another alternative would be to continue pay credits, but
substantially reduce the promised interest credits on those
amounts. This would reduce any damages related to new pay
credits should the sponsor's cash balance formula be
determined to violate the age discrimination provisions of
ERISA. As a makeup for this reduction in interest credits, a
plan sponsor may wish to consider making allocations under a
defined contribution plan (or increasing an existing allocation).
If a plan sponsor does choose to suspend or eliminate future
pay credits, it will need to comply with the notice requirements
of ERISA Section 204(h) and Tax Code Section 4980F. In
general, these would require that participants and alternate
payees be given at least 45 days advance notice of the
suspension (or elimination) of pay credits.
If you would like our assistance in determining what course
to take with your cash balance plan, or would like our help
in implementing any decision you make, please contact
John Utz or any of the other members of Shook,
Hardy & Bacon's employee benefits group.
Employee Benefits Compliance Alert
Employee Benefits Group
ERISA Litigation Group
Alson R. Martin . . . . . . . . . . . . . 913-663-8968
amartin@shb.com
John L. Utz . . . . . . . . . . . . . . . . . 913-663-8994
jutz@shb.com
J. Richard Golub . . . . . . . . . . . . 913-663-9976
rgolub@shb.com
Eric N. Miller . . . . . . . . . . . . . . . 913-663-8954
emiller@shb.com
Marcy Kincaid . . . . . . . . . . . . . . 913-663-8930
mskincaid@shb.com
Robert D. Grossman . . . . . . . . . 913-663-8963
rgrossman@shb.com
Gregory B. Kuhn . . . . . . . . . . . . 913-663-8961
gkuhn@shb.com
Carol Woodley Traul . . . . . . . . . 913-663-8953
ctraul@shb.com
Jeffrey M. Johns . . . . . . . . . . . . 913-663-8972
jmjohns@shb.com
Christine Young-Terpening . . . 913-663-8948
cterpening@shb.com
Howard Shapiro . . . . . . . . . . . . 504-310-4085
hshapiro@shb.com
Robert Rachal . . . . . . . . . . . . . . 504-310-4081
rrachal@shb.com
Heather Magier . . . . . . . . . . . . . 504-310-4084
hmagier@shb.com
Charles Seemann III . . . . . . . . . 504-310-4091
cseemann@shb.com
Kelly McNeil Legier . . . . . . . . . . 504-310-2023
klegier@shb.com
Tim O'Brien . . . . . . . . . . . . . . . . 913-663-8914
tobrien@shb.com
Ren茅 Thorne . . . . . . . . . . . . . . . 504-310-4090
rthorne@shb.com
Stacey Cerrone . . . . . . . . . . . . . 504-310-4086
scerrone@shb.com
Suzanne Dickey . . . . . . . . . . . . . 504-310-4096
sdickey@shb.com
Christopher Morris . . . . . . . . . . 504-310-2026
cgmorris@shb.com
search
