Cash balance plans are not age discriminatory. That was the decision reached August 27, 2007, by the U.S. Court of Appeals for the Sixth Circuit in a closely watched case. Drutis v. Rand McNally & Co., No. 06-6380 (Aug. 27, 2007). Affirming a lower court ruling, the 6th Circuit rejected claims by four former employees of Rand McNally& Co. who alleged that a cash balance plan sponsored by World Color Press Inc, defendant Rand McNally's successor, violated ERISA's age discrimination provision, section 204(b)(1)(H), which prohibits a reduction in the rate of an employee's benefit accrual because of the attainment of any age.

The plaintiffs alleged that the phrase "rate of benefit accrual," as used in section 204(b)(1)(H), which is not defined anywhere in ERISA, means the same thing as the statutorily defined term "accrued benefit." In a defined benefit plan, the accrued benefit means an annuity commencing at normal retirement age. Although cash balance plans are considered defined benefit plans by law, they more closely resemble defined contribution plans. In a cash balance plan, a hypothetical account is established for each participant to which pay and interest credits are added monthly. In order to calculate the "accrued benefit" in a cash balance plan, i.e., an annuity commencing at normal retirement age, the amount in a participant's hypothetical account as of the date of determination must be projected forward with interest at the plan's interest crediting rate to the normal retirement age (typically age 65) and then converted to an annuity. Thus, in a cash balance plan, the "accrued benefit" will be greater for younger employees because more years of projected interest will be added to their account to derive the value of the annuity payable at normal retirement age. If, as the plaintiffs' alleged, the "rate of benefit accrual" is synonymous with "accrued benefit," then the rate of benefit accrual of an older employee in a cash balance plan will always be less than the rate of benefit accrual of a younger employee and this, they argued, constituted age discrimination. At termination of employment, however, employees who take an immediate distribution of their benefit do not receive their "accrued benefit," but rather receive the present value of the projected age 65 annuity.

The U.S. District Court for the Eastern District of Kentucky had held that the World Color plan was not age discriminatory. In affirming the district court, the 6th Circuit held that the "rate of benefit accrual" does not mean the same thing as "accrued benefit," but instead refers to an employer's contributions to the cash balance plan. Accordingly, because under the World Color plan all employees were entitled to same percentage pay credits and the same interest crediting rate, the plan was not age discriminatory. The court found that any disparity in benefits received by employees of different ages from the plan was the result of the time value of money, not discrimination.

This issue has been hotly contested in courts in every circuit and has divided the district courts. Although most courts have held that cash balance plans are not discriminatory, several district courts have found that such plans discriminate on account of age. The Sixth Circuit now joins the Courts of Appeals for the Third and Seventh Circuits in ruling for the employers on this very important issue. Because all cash balance plans, not just the World Color plan, share the same design feature that gave rise to the plaintiffs claim of age discrimination in this case, a ruling for the plaintiffs would render all cash balance plans illegal. Similar appeals are also pending in the Second and Ninth Circuits.

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This Hot Topic was prepared by Carol Connor Cohen and Gretchen Dixon of the Washington, D.C. office of Arent Fox LLP.  Ms. Cohen and Ms. Dixon represented the defendants in this case.  Ms. Connor Cohen formerly served as General Counsel of the PBGC.