State:
Free Special Resources
Get Your FREE Special Report. Download Any One Of These FREE Special Resources, Instantly!
Featured Special Report
Claim Your Free Cost Per Hire Calculator
This handy calculator lets you plug in your expenses for recruiting, benefits, salaries, and more.

Graphs automatically generate to show you your annual cost per hire and a breakdown of where you are spending the most money.

Download Now!
September 26, 2008
Do Cash Balance Plans Discriminate?
Ano
For a Limited Time receive a FREE Compensation Market Analysis Report! Find out how much you should be paying to attract and retain the best applicants and employees, with customized information for your industry, location, and job. Get Your Report Now!
ther set of judges has weighed in on whether cash balance pension plans, developed in the late 1980s, discriminate against older employees by including age as a factor in their calculations. This type of plan was developed to combine some of the advantages of 401(k)-type plans, called defined contribution plans, and traditional company-paid, or defined benefit pension plans.

What happened. The employees of several companies in the Northeast--Equitable, Verizon, Citigroup, and J.P. Morgan Chase in New York, and FleetBoston and AT&T in Connecticut--all sued, charging that their retirement plans violate the Employee Retirement Income Security Act (ERISA). All their employers had converted from traditional to cash balance plans, and employees felt that older employees received smaller benefits when they retired than they would have earned under traditional plans.

In federal district courts, four judges (ruling against four of the companies) ruled that cash balance plans do discriminate against older retirees, while the other two judges, in the Equitable and Verizon suits, ruled in favor of the employers. The Equitable plaintiffs appealed to the 2nd Circuit, which covers Connecticut, New York, and Vermont, and appellate judges combined their suit with that of the Verizon plaintiffs.

What the court said. The basic issue with the plans is whether, by potentially allowing younger employees to accrue greater benefits because they have participated in the plans for longer has the effect of reducing older employees' benefits and thus violating ERISA. Fortunately for 2nd Circuit judges, three other circuits confronted the question during 2006 and 2007--the 3rd (DE, NJ, PA), 6th (KY, OH, MI, TN), and 7th (IL, IN, WI)--and all had ruled the same way. ERISA, they found, bars age-based reductions in the "rate" of benefit accrual, but "the fact that the ultimate benefit might grow to be larger for younger employees ? would not be relevant to the comparison of accrual rates." So cash balance plans in the 2nd Circuit are not age discriminatory. Hirt et al. v. Equitable & Bryerton et al. v. Verizon, U.S. Court of Appeals for the 2nd Circuit, Nos. 06-4757-cv (L), 06-5190-cv (XAP), 07-1680-cv (2008).

Point to remember: Judges also defined the issue this way: The proper reading of ERISA is to look at "inputs" that an employer makes to a cash balance plan, rather than at the "outputs" employees will receive at retirement. A related factor is that the values of both 401(k)-type and cash balance accounts are subject to market fluctuations, while traditional, defined benefit pension accounts are not. And, cash balance accounts are portable, while traditional pensions are not.

Featured Free Resource:
Cost Per Hire Calculator
   
   
 
 
Twitter  Facebook  Linked In
Follow Us
CT-WEB02
Copyright © 2016 Business & Legal Resources. All rights reserved. 800-727-5257
This document was published on http://Compensation.BLR.com
Document URL: http://compensation.blr.com/Compensation-news/Benefits-Leave/ERISA/Do-Cash-Balance-Plans-Discriminate/