In Case Of First Impression of Cash-Balance Pension Plans Under ERISA § 204(b)(1)(H)(i), Seventh Circuit Agrees with Defense that Time Value of Money is not Age Discrimination and Reverses Judgment in Favor of Class Action Plaintiffs
Older employees filed a class action against IBM alleging that its cash-balance defined-benefit pension plan violates the federal Employee Retirement Income Security Act (ERISA) prohibition against age discrimination. Cooper v. IBM Personal Pension Plan and IBM Corp., ___ F.3d ___ (7th Cir. August 7, 2006). Unlike a defined-contribution plan, “the personal account in a cash-balance plan is not separately funded”; rather, “IBM imputes value to the account in the form of ‘credits.'” Slip Opn., at 1. The district court rejected defense arguments that the plan did not violate ERISA because its terms are age-neutral, and entered judgment in favor of the class action plaintiffs because “younger employees receive interest credits for more years.” Id., at 2. The district court’s decision turned on its interpretation of the phrase “benefit accrual” under ERISA § 204(b)(1)(H)(i), which is not defined in ERISA or its regulations. Id., at 4. The district court used the definition of “accrued benefit” under ERISA, which is “an amount’ expressed in the form of an annual benefit commencing at normal retirement age.'” Id. In so doing, “the rule against discrimination then refers not to what IBM puts into the plan, but what the employee takes out on retirement” and thus discriminates against older employees because younger workers will receive a greater payout because they benefit from compound interest. Id. “This approach treats the time value of money as age discrimination.” Id., at 4.
The Seventh Circuit concluded that the district court’s interpretation was fundamentally flawed because “benefit accrual” refers to what an employer puts into a plan while “accrued benefit” refers to what an employee takes out of the plan. Slip Opn., at 4-5. “That’s where this litigation when off the rails: a phrase dealing with inputs was misunderstood to refer to outputs.” Id., at 5. The Circuit Court also rejected the premise that time value of money can form the basis for an age discrimination claim, explaining at page 5:
Nothing in the language or background of §204(b)(1)(H)(i) suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year’s retirement savings. Treating the time value of money as a form of discrimination is not sensible. (Italics added.)
The bottom line is that IBM’s pension plan is age-neutral: “Under IBM’s plan any differences in pension benefits are a function of differing years of service, salary history, or the years the balance has been allowed to compound; age is not a factor.” Slip Opn., at 10. The Circuit Court ended at page 12 with a note of caution against similar lawsuits:
Litigation cannot compel an employer to make plans more attractive (employers can achieve equality more cheaply by reducing the highest benefits than by increasing the lower ones). It is possible, though, for litigation about pension plans to make everyone worse off. After the district court’s decision IBM eliminated the cash-balance option for new workers and confined them to pure defined-contribution plans. . . . Whether that is good or bad (for employees or society as a whole) is not for us to say. What we can and do conclude, however, is that the decision may again be made freely, governed by private choice rather than legal constraint.