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Cash Balance Pension Plan Unlawfully Reduced Benefits Based on Age of Participants

  • August 8, 2003

In a decision that may have implications for every cash balance pension plan, the U.S. District Court for the Southern District of Illinois has ruled that an employer's cash balance pension formula violated the benefit accrual requirements of the Employee Retirement Income Security Act. Cooper v. IBM Personal Pension Plan, No. 99-829-GPM (S.D. Ill. 7/31/2003). The court's decision turns on its interpretation of Section 204(b)(1)(H) of ERISA, which prohibits the reduction in benefit accruals under a plan because of a participant's age. IBM already has announced its intention to appeal the decision to the U. S. Court of Appeals for the Seventh Circuit in Chicago. Plan sponsors with cash balance pension formulas should wait for further developments before determining what actions to take with respect to their plans.

Until the federal appeals court actually hears and decides the case, it is impossible to predict the future of cash balance pension plan formulas. In a case similar to IBM, the U. S. District Court for the Southern District of Indiana interpreted the same provision of ERISA (and the parallel tax qualification requirements at Section 411(b)(1)(H) of the Internal Revenue Code) and reached the opposite conclusion. There, the court held that a cash balance pension formula is not automatically prohibited by ERISA or the Code. Eaton v. Onan Corp., 117 F. Supp. 2d 812 (S.D. Ind. 2000). Further, proposed regulations issued by the Internal Revenue Service in December 2002 apply the same interpretation to Section 411(b)(1)(H) of the Code as applied by the Indiana federal district court. In this regard it is important to note that under both the ERISA Reorganization Act of 1978 and the Internal Revenue Code, the IRS has regulatory jurisdiction of the statutory provisions at issue here.

Notwithstanding the amount of publicity the IBM decision has generated, employers using cash balance pension formulas must wait for the outcome of the appeal process before there will be a definite answer to the question of the viability of such plans. In the meantime, more information about cash balance pension plans is available on the Employee Benefits Security Administration website. Or, you may contact an attorney in the Jackson Lewis Employee Benefits Practice Group to discuss specific situations and questions.

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