ERISA Doesn't Ban "Cash Balance" Plans; Second Circuit Joins Sisters

The Second Circuit today joined the Third, Sixth, and Seventh Circuits in holding that a "cash balance" pension plan doesn't violate the Employee Retirement and Income Security Act of 1974 despite the fact that older employees (sort of) get less bang for their buck.

A cash balance plan creates a phantom account for each plan participant.  The employer never contributes anything to the accounts but keeps records as if it does.  The employer thus pretends to put, say, five percent of a participant's salary each year into the fake account and then periodically adds non-existent earnings on the fantasy balance.  The make-believe account grows over time.  And the plans at issue in the case incurred an obligation to buy an annuity with the balance when the participant retires at age 65.

But the cash balance methodology disfavors participants who are closer to retirement.  Not because their accounts get lower hypothetical contributions.  No.  The discrimination occurs because the contributions-plus-earnings for older participants are less when they hit 65 than for younger ones.

Does that violate the prohibition in ERISA section 204 against reducing "the rate of an employee's benefit accrual . . . because of the attainment of any age"?  No, the Second Circuit concluded.  The rate of "benefit accrual" doesn't fall as a participant ages; he or she gets the same fake contribution regardless of how old the person is.  Yes, an older participant's account balance won't, when he or she turns 65, amount to as much as the balance of a younger participant's account will when he or she reaches 65.  But that outcome results from the fact that a 60-year-old has less time for the account balance to earn compound interest before age 65 than a 30-year-old does.  A $10,000 balance will earn less in five years than it would in 35.  Simple as that.  Hirt v. The Equitable Retirement Plan for Employees, Managers and Agents, No. 06-4757-cv (2d Cir. July 9, 2008).

Blawgletter frankly doesn't understand the plaintiffs' theory either.  It looks like a "gotcha" to us.  So there you have it.   

Comments

[Richard]

Your rather blithe comment -"Blawgletter frankly doesn't understand the plaintiffs' theory either. It looks like a "gotcha" to us. So there you have it." - shows that you really don't have the expertise to be credible. Do you understand the distinction between defined plans and defined contribution plans?

What would you say about a benefit formula that promised a person hired at 55 a benefit equal to 1% of pay per year of service (payable for life beginning at age 65), and a person hired at 25 a benefit of 2% per year of service (payable for life beginning at ate 65)? [BTW - that's cash balance plan expressed in defined benefit terms.]

If a company wanted to simply give the same rate of contribution to everyone despite their age, the way to do that is with a defined contribution plan.

No one seems to (or wants to)understand the distinction between defined contribution plans and defined benefit plans - they have different rules, different funding, different incentives, and different purposes.

Not every retirement plan works like a 401(k) plan!