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Second Circuit Holds That Cash Balance Plans Are Not Age Discriminatory

August 7, 2008

Authors: Kelly Smith Hathorn, Richard I. Cohen, Ira H. Goldman

In a decision issued on July 9, 2008, the Second Circuit Court of Appeals ruled that cash balance plans do not inherently discriminate on the basis of age, joining all of the other Circuit courts (the Third, Sixth and Seventh) that have considered this issue. Hirt v. The Equitable Retirement Plan for Employees, Managers & Agents, No. 07-1680-CV, 2008 U.S. App. LEXIS 14325 at *1 (July 9, 2008). The Hirt court held that, in determining whether an employee’s rate of benefit accrual under a cash balance plan reduces because of age, the analysis should focus on the "inputs" to the employee’s account rather than the "output" at age 65. Accordingly, the fact that the "ultimate benefit might grow to be larger for younger employees – who have more time until normal retirement age than their older counterparts" does not by itself render a plan age discriminatory. Id. at *17.

At issue in Hirt was whether the cash balance plans of the defendants violated ERISA § 204(b)(1)(H)(i), which, prior to June 29, 2005, prohibited a defined benefit plan from reducing an employee’s rate of benefit accrual because of the attainment of any age. See 29 U.S.C. § 1054(b)(1)(H)(i). The two district court cases on appeal in Hirt had been decided in favor the plans, finding that they did not violate ERISA § 204. However, a number of other district courts in the Second Circuit had found cash balance plans to be age discriminatory, based on the view that an older employee receiving the same contribution to his or her cash balance account as a younger employee actually receives a smaller benefit, because the contribution to the older employee’s account has less time to earn interest credits and accordingly results in a smaller age-65 annuity benefit. See, e.g., Richards v. FleetBoston Fin. Corp., 427 F. Supp. 2d 150 (D. Conn. 2006).

In making its findings, the Hirt court relied on a literal reading of ERISA § 204(b)(1)(H)(i). The court said that, had Congress meant to incorporate the concept of an age-65 annuity into the statute, it could have used the term "accrued benefit", which it did in the preceding subsection. Congress instead used "rate of benefit accrual", which implies a calculation that is controlled for the passage of time.  

The Hirt court’s reasoning, which centers on the statutory language, and its position as the fourth Circuit court to find no age discrimination, along with the PPA’s blessing of cash balance plans after June 29, 2005, renders similar age discrimination claims unlikely to succeed in those Circuits that have not yet decided the issue. With this decision, and the PPA, we believe that the age discrimination issue for cash balance plans has been laid to rest, after many years of uncertainty.

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1 The Pension Protection Act of 2006 (the"PPA") provides that cash balance plans are not age discriminatory, for periods on or after June 29, 2005, as long as a participant's accrued benefit, as of any date, is equal to or greater than that of any simlarly situated younger individual who is or could be a participant in the plan.

Questions or Assistance?

If you have any questions about this alert, please contact Kelly Smith Hathorn at (860) 251-5868 or you may contact a member of our Employee Benefits and Executive Compensation Practice Groups.

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