By Alvin D. Lurie
The decision of the U.S. District Court for the Southern District of Illinois last summer in Cooper vs. IBM, holding the IBM Corp. cash balance plan violated the federal age discrimination statutes, set off tremors that have shaken the business community, Congress and the regulators far beyond what could have been expected.
It contradicted the conclusion of another federal district judge in favor of the Onan Corp., as well as decisions denying age discrimination claims against AT&T Corp. and BankBoston, and was itself recently squarely rejected by the federal court in Maryland in the ARINC Inc. case.
It was probably only a coincidence, but curious, that a few days after the ARINC decision, the Treasury Department suddenly pulled its proposed regulations that had given cash balance plans a strong boost since their introduction in 2002.
The Treasury announcement noted that no guidance would be issued on cash balance plans while they were "under consideration by Congress."
That was a most unfortunate action by the Treasury, because it consigns this issue to the vagaries and delays of the legislative process — certainly not to be resolved until after the fall elections at the earliest, and doubtless well into the 2005 session of the new Congress, if then.
The emergence of the cash balance model is the only hope for defined benefit plans to remain a viable retirement alternative to the currently more attractive — to business and employees alike — defined contribution plans.
The legislative delay will not be confined to consideration of the administration's proposal. Unquestionably, a slew of bills will land in the legislative hopper, in the name of reforming and strengthening defined benefit plans. The House Education and Workforce Committee has already started work to that end.
The patient upon an operating table could die while being "reformed." Such reform might be ultimately desirable, if it resolved the problems faced by hybrid plans such as the cash balance variety, which are hampered by the rigid DB/DC dichotomy of current law while falling somewhere between the two.
But we do not have the luxury of the time that such a legislative solution would take; and, besides, legislation is not necessary to deal with the so-called age discrimination problem. There is no age discrimination problem, except for a misapprehension in some quarters as to how a cash balance plan accrues benefits; and that, in turn, is directly due to Treasury's position concerning the so-called "accrued benefit" concept as applicable to cash balance plans. That concept, while having nothing to do with age discrimination, as the IRS and Treasury have made clear, was subsequently incorporated by others — not the federal government — into the discrimination dialogue.
In short, the discrimination problem does not arise from the current statute, but from the interpretation some have placed upon it: Most importantly the decision in the IBM case, where the judge acknowledged cash balance plans might not be able to survive his reading of the statute. The judge is expected to rule soon on a remedy, the kind of relief IBM will have to make to participants. An appeal on the case is a certainty.
It is unbelievable that the age discrimination charge has gotten as far as it has because the issue is entirely bogus. Its premise is that the unique way cash balance plans employ an interest factor in building the retirement benefit inherently violates ERISA and companion proscriptions against reducing the rate of an employee's benefit accrual in a defined benefit plan because of the attainment of any age. Mark that word "rate." Rate reduction does not happen under a cash balance plan. The age discrimination statutes do not define the "rate of accrual" concept.
Cash balance plans typically add yearly benefit segments for each year of service, plus an interest credit. Consequently, the farther the participant is from retirement, the more interest credits the participant will realize if the pension benefit is deferred until retirement age. Of course, the number of those interest credits will directly influence the benefit a participant will ultimately receive under the cash balance plan. That is obviously not a matter of age discrimination.
It is inconceivable that anyone could find anything objectionable about that. No participant's rate of accruing annual additions of retirement benefit becomes any lower in succeeding years (unless of course the plan is amended prospectively.) Two workers with the same number of service credits will accrue identical plan benefits (assuming the same pay grade), irrespective of any disparity in their ages, if they are both paid upon completion of service.
So where is the discrimination?
The problem is the "accrued benefit" concept, which is statutorily defined for defined benefit plans (and hence for cash balance plans) in both the Employee Retirement Income Security Act and the Internal Revenue Code as the benefit determined under the plan "expressed in the form of an annual benefit commencing at normal retirement age."
The Treasury has concluded that this statutory casting of the accrued benefit in terms of a right maturing at normal retirement age requires that interest be projected to retirement age in calculating the accrued benefit, so the rate of interest projections obviously declines in each succeeding year. But the participant's account balance at any time will reflect only interest actually earned to that point, and the rate of that does not decline. Moreover, the account balance is the amount the participant would receive as a pension if payment were made at that time, rather than at retirement age.
For more than 10 years, the Treasury has made clear in regulations, and the IRS in its determination letters approving thousands of cash balance plans, that the projected interest requirement has no bearing on age discrimination. Indeed, it is mainly intended to implement the anti-backloading rule guarding against the very reverse age discrimination that ironically would result from the massive infusions of interest credits for all older participants that would be required to satisfy the IBM decision.
It is readily apparent that there is a disconnect between the accrued benefit and the notional account balance of a participant. The declining accrual rate inheres in only the former because of the steadily reducing interest credits that are projected to normal retirement age. But it is the latter that governs the actual preretirement benefit a participant will earn, so only the latter that can properly be tested for discrimination.
The error of the trial judge in IBM and of those who support his decision was to confuse and conflate the two. But as the old saw goes, two into one won't go.
Alvin D. Lurie is an attorney with Alvin D. Lurie PC, New Rochelle, N.Y. He is the former assistant Internal Revenue Service commissioner for employee benefits and exempt organizations.