Guest Article

(From the August 11, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Second Circuit Joins Others in Ruling that Pre-PPA Cash Balance Plans Do Not Violate ERISA Age Discrimination Provisions

The Second Circuit Court of Appeals resolved lingering doubts about whether it considers pre-PPA cash balance plans to violate the age discrimination provisions of ERISA § 204(b)(1)(H)(i). The court ruled that the ERISA provisions -- which prohibit an employee's "rate of benefit accrual" from being reduced because of age -- refer to the employer's contributions to the plan and not to the employee's accrued benefit (which is expressed as an annuity commencing at normal retirement age). As such, a cash balance plan does not violate ERISA § 204(b)(1)(H)(i) where two similarly situated employees receive the same contribution even though a smaller annuity at normal retirement age will result for the employee who is older. Hirt v._______, 44 EBC 1289 (2nd Cir. July 9, 2008).

This is the latest in a series of federal court rulings validating the legality of cash balance plans and cash balance conversions under the rules in place before the Pension Protection Act (PPA) of 2006 (P.L. 109-280). PPA added new ERISA provisions -- ERISA§ 204(b)(5) -- which specifically allow cash balance plans under the age discrimination provisions of ERISA § 204(b)(1)(H)(i). However, the new ERISA provisions are effective June 29, 2005, and do not address compliance before that date. As a result, litigation has continued to move forward on whether cash balance plans and cash balance conversions prior to PPA violated the ERISA age discrimination provisions.

The Second Circuit's decision in Hirt resolves a split among the lower courts of that circuit, which had inconsistently held that pre-PPA cash balance plans inherently violated -- and did not inherently violate -- the age discrimination provisions of ERISA § 204(b)(1)(H)(i). By its decision in Hirt, the Second Circuit (Connecticut, New York and Vermont) joins the Third Circuit (Delaware, New Jersey, Pennsylvania and the Virgin Islands), Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee), and Seventh Circuit (Illinois, Indiana and Wisconsin) in holding that the prohibition against age-based reductions in the rate of benefit accrual under ERISA § 204(b)(1)(H)(i) does not forbid cash balance plans even prior to PPA.

The Hirt court noted the absence of IRS guidance on the issue of whether ERISA § 204(b)(1)(H)(i) (or the parallel IRC § 411(b)(1)(H)(i)) prohibited cash balance plans prior to PPA. The court concluded that, "[T]here is nothing to which we can defer, and the statutory language is consistent with, indeed it compels, the result we reach today."

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