In the past couple decades, many companies have converted their traditional pension plans to cash balance plans in order to make benefits more predictable. But some workers have complained of violations of the Employee Retirement Income Security Act (ERISA) when their benefits are reduced as compared to their former traditional plans. On August 11, the 10th Circuit ruled in Tomlinson et al. vs. El Paso Corporation that employees don’t need to be specifically warned about “wear-away” periods when traditional pension plans are converted to cash balance plans. The court also held that even if older employees are disproportionally subject to frozen benefits, this doesn’t violate the Age Discrimination in Employment Act (ADEA).
A wear-away is the time it takes for a benefit under a new cash balance plan to reach the minimum benefit of the old traditional plan. In Tomlinson, the plaintiffs claimed that the wear-away periods resulting from El Paso’s transition to a new pension plan amounted to unlawful age discrimination, and that El Paso violated the anti-backloading and notice provisions of ERISA (see “Backloading Accusations”). But the 10th Circuit found that El Paso’s transition to the cash balance plan favored, rather than discriminated against, older employees, and that the plan was not backloaded. It further held that “ERISA does not require notification of wear-away periods so long as employees are informed and forewarned of plan changes.”