Over the last several years, many employers have converted their traditional pension plans to cash balance plans. But according to two recent federal court decisions, these cash balance arrangements may violate the Employee Retirement Income Security Act, (ERISA), the federal law regulating employee benefits.
Plans Unlawful
In one case, a federal district court in Illinois found that a cash balance plan offered by IBM violated the age discrimination prohibition found in ERISA because it reduced the pension benefits available to older workers. IBM has said that it will appeal the decision.1 Note that this ruling comes up against proposed IRS regulations which state that cash balance plans don’t inherently discriminate against older employees.
400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.
In the other ruling, the Seventh Circuit Court of Appeals decided a cash balance plan offered by Xerox violated another provision of ERISA requiring that a lump-sum substitute for an accrued pension benefit be the actuarial equivalent of the pension benefit. The ruling will cost Xerox $300 million. Xerox has said it plans to seek a rehearing.
Impact of Rulings
As a result of these new rulings, employers offering cash balance funds, or considering converting from a traditional pension arrangement to a cash-balance program, should have their plans reviewed as soon as possible to help avoid the possibility of legal challenge.