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2nd Circuit Finds Cash Balance Plans Do Not Offend ERISA Bias Rules
New York Law Journal
July 15, 2008
Cash balance plans do not violate the rule against age-based reductions in the rate of benefit accrual under the Employment Retirement Income Security Act, the 2nd U.S. Circuit Court of Appeals has ruled.
Resolving an issue that had generated uncertainty among its district court judges, the 2nd Circuit clarified the law under 29 U.S.C. §204(b)(1)(H)(i) in two companion cases from the Southern District of New York.
The trial court judges, Judge Alvin Hellerstein in Hirt v. The Equitable Retirement Plan for Employers, Managers and Agents, 06-4757-cv and 06-5190-cv, and Judge Denny Chin in Bryerton v. Verizon Communications Inc., 07-1680-cv, decided in favor of companies accused of violating the rule against age bias.
Jeffrey G. Huvelle of Covington & Burling in Washington, D.C., who represented the Verizon defendants, called the circuit's ruling "a nail in the coffin for plaintiffs' lawyers attempting to invalidate cash balance plans."
Judges Dennis Jacobs, Amalya Kearse and Robert Katzmann decided the appeals, with Judge Katzmann writing for the circuit in Hirt v. The Equitable Retirement Plan for Employers, Managers and Agents, 06-4757-cv (L).
The Employment Retirement Income Security Act recognizes two kinds of retirement plans: a defined contribution plan such as a 401(k), where the employee bears investment risks, and a defined benefit plan, which generally promises a specific benefit regardless of how the market performs.
In a cash balance plan, the circuit explained in Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), "a hypothetical account" is established in an employee's name and "Benefits are credited to that 'account' over time, driven by two variables: (1) the employer's hypothetical 'contributions,' and (2) hypothetical earnings expressed as interest credits."
Katzmann explained that "cash balance plans are often described as 'hybrid': they create a benefit structure that simulates that of a defined contribution plan, but employers do not deposit funds in actual individual accounts, and employers, not employees, bear the market risks."
And because "the individual accounts and contributions thereto are merely for record-keeping purposes (and do not actually exist), cash balance plans constitute defined benefit plans under ERISA," Katzmann said.
Congress amended ERISA through the Pension Protection Act in 2006, allowing for cash balance defined benefit plans beginning on or after June 29, 2005. So the question for the circuit was whether, prior to June 29, 2005, such plans violated §204.
District courts in the circuit have been divided on the issue, with some judges finding that cash balance plans violate §204(b)(1)(H)(i), including Judge Harold Baer in In re J.P. Morgan Chase Cash Balance Litigation, 460 F.Supp. 2d 479 (SDNY 2006).
But three circuits -- the 3rd, 6th and 7th -- have held that the plans survive scrutiny under §204, and the 2nd Circuit said it was now joining the others in so holding.
Section 204 states that "a defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age."
In their papers, the Hirt plaintiffs argued "as a matter of simple arithmetic ... the rate at which participants earn their pension decreases with advancing age."
But Katzmann said their "'simple arithmetic' depends on measuring the 'rate of benefit accrual' by reference to the end product -- the age-65 annuity that can be purchased with the account balance -- instead of the periodic deemed contribution thereto."
While this was the approach that led Baer and others to invalidate cash balance plans, Katzmann said, "We decline to endorse this reading, finding ourselves in agreement with every circuit court to consider the question."
He cited the 6th Circuit in Drutis v. Rand McNally & Co., 499 F.3d 608 (2007), which said, "The better view ... is that the 'rate of benefit accrual' refers to the employer's contribution to a plan, and therefore any difference in output as a result of time and compound interest does not violate §204(b)(1)(H)(1)."
The section, Katzmann pointed out, "outlaws age-based reductions in the rate of benefit accrual."
"In this context, one cannot evaluate a rate of accrual without controlling for the passage of time," Katzmann said. "Thus, the fact that the ultimate benefit might grow to be larger for younger employees -- who have more time until normal retirement age than their older counterparts -- would not be relevant to the comparison of accrual rates."
Edgar Pauk, who represented the Hirt plaintiffs, disagreed with the circuit's position.
"It's a policy driven decision and too much money is at stake to let employees win this kind of case and therefore we were bound to lose," Pauk said.
But Huvelle, who represented Verizon in Bryerton, said, "Had the court ruled that the plans violated ERISA, that would invalidate a very large percentage of defined benefit plans in the country."
Unlike defined contribution plans, Huvelle said, "these plans are not subject to market fluctuations and that's why they are a very important part of the retirement packages available to workers."
Eli Gottesdiener of the Gottesdiener Law Firm in Brooklyn represented the Bryerton plaintiffs.
Kenneth S. Geller of Mayer Brown in Washington represented The Equitable defendants.
