The U.S. Court of Appeals for the Seventh Circuit has rejected a lawsuit charging that IBM’s conversion to a cash-balance pension plan violated age discrimination prohibitions in the Employee Retirement Income Security Act (ERISA).
With cash balance plans, employers contribute a percentage of employee pay plus interest to each employee’s account. Benefits are then paid out in a lump sum when the employee leaves. When a company converts to a cash balance program from a traditional pension plan, workers typically are only credited with the amount they earned under the old plan—plus the new pay/interest contributions. They lose future benefits they would have received under the old plan. The problem for older workers is that they have less time to accrue new benefits.
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Cash balance plans had suffered a big setback in 2003, when a lower court ruled IBM’s plan violated the age discrimination rules. And following that decision, IBM had agreed to pay out $1.4 billion to settle the claims if the ruling was affirmed on appeal. But now, the appeals court has concluded the terms of IBM’s plan were age-neutral because every covered employee received the same pay and interest credit.
Note that the new Pension Protection Act of 2006, discussed above, clarifies the age discrimination rules for cash balance plans, making conversions from traditional pension plans to cash balance programs less risky. However, the Act will apply retroactively only to June 29, 2005, so the status of earlier plan conversions may remain in doubt.
Additional Resources:
Cooper v. IBM Personal Pension Plan and IBM Corp., U.S.C.A. 7th Cir. No. 05-3588, 2006