Guest Article

All In The Family On Foley Square

By Alvin D. Lurie
August 13, 2008

The 2nd Circuit just resolved a family squabble among its district court judges -- 5 in the SDNY and 3 in the Connecticut district -- involving an age discrimination issue that has had the pension community across the country in a tumult for 5 years. The appeals court affirmed the judgments of 2 courts of the Southern District of New York in separate cases, Hirt v. The Equitable Retirement Plan and Bryerton v. Verizon Communications, that had ruled that the cash balance plans at issue were not age discriminatory (2008 US App. LEXIS 14325). It thereby settled an issue that had split 9 district cases in its circuit (5 in favor of the plans, 4 against), and in so doing sided with the 3 other courts of appeal that had similarly upheld the plan sponsors' positions, starting with the seminal decision of the 7th Circuit in the IBM case in 2006.

In an opinion that is almost as remarkable for its brevity as for the ease with which it dismisses arguments that have been wrestled with in nearly 30 courts in the 5 years since a trial judge fired a shot in the IBM case that shook the pension community to its timbers, the 2nd Circuit appears finally to have put this issue to rest, fulfilling the hope of many pension watchers that the appeals court would not get hung up in procedural issues that had been implicated in the trial court decisions and thereby duck an opportunity to write a crucial opinion that could resolve the important age discrimination issue, not merely in its own circuit, but "nationwide." Happily the court wrote such a crucial opinion. (It disposed of the procedural issues summarily in a separate one-sentence opinion.) Whether that at last marks the end of a tortuous journey through the courts for cash balance plans, forced to defend against an age discrimination claim that never should have seen the light of day, is now in the hands of plaintiffs' attorneys, who must decide whether to go yet again to a well that has run dry.

The source of this litigation frenzy has been language in the relevant anti-age discrimination provisions in ERISA and the Internal Revenue Code that prohibit defined benefit plans from reducing "the rate of an employee's benefit accrual... because of the attainment of any age." This provision causes no problem for traditional defined benefit plans and nothing but problems for cash balance plans, that are treated as defined benefit plans but use a benefit formula adapted from the defined contribution design, i.e., a percentage of compensation for each year of participation plus, in lieu of earnings, an addition for interest each year. The question has been how the interest component figures in measuring the "rate of benefit accrual." The statute was enacted before cash balance plans came into usage, and its language obviously was not drafted in contemplation of this interest element that is unique to cash balance plans (unique not in the fact of interest accruals per se, but in how the interest figures into calculations relevant to tax treatment).

The issue, in brief, is whether the interest is backloaded (that is, taken into account when the participant's benefit is paid), or frontloaded, meaning projected to retirement at the same time as accrual of each annual pay credit to which the interest attaches. One would naturally assume that the interest accrues ratably with the passage of time, rather than all up front. But there is a complication: ERISA and the Code state that the "accrued benefit" under a DB plan is "expressed in the form of an annual benefit commencing at normal retirement age," and the Service has stated in a much-cited announcement, Notice 96-8, that for qualification purposes the measurement of accrued benefit, as so expressed, requires the forward projection of each year's interest component to normal retirement age. Now we are at the nub of the problem: does that frontloaded interest projected to NRA get taken into account in determining the rate of accrual of benefits each year before NRA for purposes of ascertaining whether age discrimination is occurring within the meaning of the statute? If it does, no cash balance plan can pass muster because the rate of accrual would then appear to decrease inversely to increasing age. But the statute requires more than just a benefit rate decline, namely, that the decline be because of age, more precisely, because of age discrimination.

What it comes down to is whether the accrued benefit concept has any relevance to the age discrimination prohibition, as a matter of strict interpretation of the words of the statute, even apart from policy considerations. The short answer of the 2nd Circuit was "no." That was also the answer in the 3 other circuit courts and in the majority of cases in the lower courts of the 2d Circuit, and in every other district court but one in the country. So the 2d Circuit had a wealth of judicial literature (to say nothing of briefs, 5 amici briefs in just the Equitable/Verizon appeal) -- truly an embarrassment of riches -- to draw upon, no 2 the same. It is remarkable that the Court was able to work its way through all that material, master the intricacies, and complexities and abstractions that characterize much of that literature, discern the central principle, and express it in cogent, compact and comprehensible prose.

The decision can be called (with slight hyperbole) the judicial equivalent of "E equals MC squared." A reader of the opinion, unfamiliar with the tangled history of this issue in the courts, will wonder that there could be any question as to its resolution. The opinion really must be read to be appreciated. What follows are merely highlights jotted down by this observer:

Copyright 2008 A. D. Lurie

Alvin D. Lurie is a practicing pension attorney. He was appointed as the first person to administer the ERISA program in the IRS National Office in Washington. Mr. Lurie is the first recipient of the Lifetime Employee Benefits Achievement Award sponsored by the Employee Benefits Committee of the American Bar Association Tax Section. He can be contacted at Alvin D. Lurie, P.C. in Larchmont, New York, at (914) 834-6725 or via email: allurie@verizon.net.

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