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IRS to the rescue! That’s the unlikely rallying cry for IBM and supporters of its controversial cash-balance pension plan. Ruling that it violates the Employee Retirement Income Security Act of 1974 (ERISA) an Illinois federal judge on July 31 voided the plan because, dollar-for-dollar, it does not treat older participants as well as their younger colleagues. U.S. District Judge G. Patrick Murphy’s ruling, which considered only liability, not damages, immediately affects more than 140,000 IBM workers. If it stands, experts say, it could cost the company billions. IBM has said it will appeal. Cooper v. The IBM Personal Pension Plan, No. 99-829 (S.D.-Ill.). Ripples from a circuit court affirmation, should that occur, could touch as many as 1,300 U.S. corporations including AT&T, Microsoft, Kodak, Cigna and Electronic Data Systems, each of which uses the same type of program. By the time the case gets to the 7th U.S. Circuit Court of Appeals, opponents of Murphy’s decision could find themselves armed with a powerful weapon: a new Internal Revenue Service regulation OK’ing the very kind of plan that Murphy outlawed. Such regulations could persuade the circuit court to reverse Murphy’s ruling. Winning attorney Douglas Sprong, a partner in St. Louis’ Korein Tillery, said he believes that adoption of the new IRS regulation is inevitable. But he called the proposed rule a departure from the agency’s established ban on plans that decrease benefits as a participant ages. “How can an implementing agency exempt a whole slew of plans from a requirement they recognize is mandated by statute?” he said. “They can’t. It doesn’t make any sense.” IBM attorney Jeffrey Huevelle of Washington’s Covington & Burling declined to be interviewed for this story. Another Washington lawyer, David R. Levin of Wiley Rein & Fielding, insists that it’s Murphy’s decision that doesn’t make sense. Noting that there have been no allegations of secrecy in any plans’ implementation, he said, “All of a sudden, they’re illegal. Were they all flouting the law? I don’t think so.” THE CASH BALANCE ISSUE Cash balance plans are a hybrid of traditional employer-funded defined-benefit pensions and more portable easy-to-monitor defined-contribution plans typified by the 401(k). In a defined benefit scenario, Levin said, “as an employee, you knew what you were going to get.” “But, in a defined contribution plan, what’s it going to be when you retire?” he said. “You don’t have a clue.” Cash balance plans were meant to combine the certainty of defined benefit plans with the ease of tracking found in defined contribution plans. They were also supposedly more attractive to today’s more mobile work force. Judy Diamond, who owns a company that maintains a database of more than 800,000 employer benefit programs, said that because of their structure, cash balance pensions are more attractive to younger workers than to older workers. “Older workers get shafted,” she said, “because by starting out with the plan later, they get less money. Sometimes 50 percent less.” Murphy wrote that when IBM adopted its cash-balance plan in 1999, it “was aware of the age discrimination issues that would come” with the new cash balance formula. “Indeed, the Plan’s actuaries projected the age 65 annuity benefit earned by a younger employee for a year of service exceeded the benefit earned by an older employee for the same service.” Levin, co-chair of the American Bar Association’s Employee Benefits Committee, said that the judge found that five years with a company should be the same for a 60-year-old and a 35-year-old. The judge concluded that “economics be damned, the law won’t let you treat those five years differently,” Levin said. “The problem is that that’s how those plans work. The younger that you are, the more years that the credit has to grow. How could it not?” A statement released by IBM said that its plan is not age discriminatory, merely “indexed to take account of the time value of money.” REGULATORY IMPACT Diane Fuchs, a fellow of the American College of Employee Benefits Counsel, said, “The case struck me as an attempt by a court that was not as well versed in ERISA and tax procedure to look at a case and attempt to simplify it by using hypotheticals instead of the actual situation.” A partner in D.C.’s Womble Carlyle, Fuchs called the IRS proposal a “good first effort” and, while conceding that the new rules had not yet been formalized, questioned why the court had not acknowledged what she called the only “formal pronouncement” on the validity of cash balance plans. David Certner, director of federal affairs for the AARP, said that his retirees’ group opposes the new regulations because they were inconsistent with the law. He said the AARP will likely file an amicus brief in the IBM appeal. A Treasury Department spokeswoman declined to say when the new rules would be made final. Lawyers on both sides of the issue agreed that they will be ready no later than June 2004, possibly as soon as this fall, definitely before the circuit court hears arguments over Murphy’s reasoning.

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