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August 07, 2006
Court Rules in Favor of IBM in Cash-Balance Pension Case

The U.S. Court of Appeals for the 7th Circuit has rejected older workers' claim that IBM's conversion to a cash-balance pension plan violated a provision in the Employee Retirement Income Security Act that prohibits age discrimination.

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Under cash-balance plans, workers accrue benefits steadily over time with a "pay credit" and an "interest credit."

In 2003, a federal judge had ruled IBM's conversion to a cash-balance plan violated ERISA. However, the U.S. Court of Appeals for the 7th Circuit--which covers Indiana, Illinois, and Wisconsin--said that all terms of IBM's plan are age-neutral because every covered employee receives the same 5 percent pay credit and the same interest credit per IBM.

In the lawsuit, the plaintiffs argued that IBM's a cash-balance plan was discriminatory because younger employees receive interest credits for more years. The court disagreed, looking to ERISA's nondiscrimination provisions that cover defined-benefit plans and defined-contribution plans.

"Either way, the employer can't stop making allocations (or accruals) to the plan or change their rate on account of age," the court wrote. "The IBM plan does neither of these things and therefore, one would suppose, complies with the statute. If this were a real, rather than a phantom, defined-contribution plan, that much would be taken for granted. Yet if the 5 percent-plus interest formula is non-discriminatory when used in a defined-contribution plan, why should it become unlawful because the account balances are book entries rather than cash?"


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