Cash Balance Pension Plans and Claims of Age Discrimination

Publication Date: July 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Labor

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Abstract:

The issue of whether cash balance pension plans violate federal laws that prohibit age discrimination has recently been examined by the federal courts, the Treasury Department, and Congress. The relevant age discrimination provisions are found in the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code (IRC), and the Age Discrimination in Employment Act (ADEA). There are two distinct claims that are usually made: (1) that cash balance plans inherently violate the age discrimination provisions because the rate of benefit accrual is decreased on account of age and (2) that the conversion of traditional defined benefit plans to cash balance plans violates the ADEA because of the negative impact on older workers.

In the past few years, several courts have looked at these issues. In a case that has received significant attention, Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 2d 1010 (S.D. Ill. 2003), a district court held that IBM's cash balance plan was discriminatory. It appears the court's reasoning would hold that cash balance plans inherently violate the age discrimination provisions. Other courts have held that the plans are not discriminatory or have dismissed the claims for procedural reasons.

In 1999, in response to the growing controversy about whether the plans are discriminatory, the Treasury Department issued a moratorium on approving cash balance plans as qualified pension plans. In 2002, the Treasury Department proposed regulations that addressed the requirements a cash balance plan or conversion would have to meet in order to not violate the age discrimination provisions. These regulations were withdrawn in 2004. Also in 2004, the Treasury Department released a legislative proposal concerning the age discrimination issue, which has been included in the Administration's budget proposals for fiscal years 2005 and 2006.

Since 2001, several measures have been introduced in Congress to address the age discrimination issue. In 2003, Congress attached a rider to the Treasury appropriations bill for FY2004 that prevented the Treasury Department from finalizing the proposed regulations. The House approved a similar measure the next year, but it was not included in the final appropriations bill. In the 109th Congress, two measures have been introduced that address the age discrimination issue: the Pension Preservation and Portability Act of 2005 (H.R. 2831) and the Pension Fairness and Full Disclosure Act (H.R. 2233 and S. 991). These bills are markedly different in their approaches.

This report describes cash balance plans, discusses the arguments that cash balance plans do and do not violate the age discrimination prohibitions, provides an overview of the court cases, and addresses the activity by the Treasury Department and Congress. It will be updated as events warrant.