The Supreme Court on Feb. 22 declined to review, and thus let stand, lower-court rulings that a cash balance plan that defined “normal” retirement age as completion of five years of service is legal.
Last year, in a unanimous decision, a three-judge panel of the 7th U.S. Circuit Court of Appeals in Chicago affirmed a lower court's ruling that the cash balance plan established in 2002 by Exelon Corp., Chicago, is legal.
The ruling rejected a suit by Thomas Fry, who received a lump-sum payment from the plan after he left the company in 2003. Mr. Fry argued that Exelon's definition of normal retirement age as completion of five years of service was a way to evade an IRS methodology used to calculate the value of lump-sum payments made by cash balance plans.
In the appeals court's ruling, Chief Judge Frank Easterbrook said ERISA gives employers considerable discretion in defining their plans' normal retirement age.
The effect of the ruling, though, was blunted by subsequent events. In May 2007, the IRS adopted regulations that said a participant's normal retirement age can't be earlier than what is typical in an industry, a requirement that effectively banned normal retirement age as completion of five years of service, pension legal experts said.
In addition, in 2006, Congress passed pension reform legislation that included a provision that barred the IRS from enforcing a proposal affecting how cash balance plan sponsors were to calculate the amount of lump-sum distributions.
Defining normal retirement age as completion of just a few years of service was a way to blunt the impact of the IRS proposal, which involved a methodology known as “whipsaw,” and in certain situations could have resulted in employees who quit, were let go or retired receiving a sum greater than his or her account balance.
Exelon had about $10.282 billion in retirement plan assets as of Sept. 30, according to a Pensions & Investments estimate.
Jerry Geisel is editor-at-large at Business Insurance, a sister publication of Pensions & Investments.
