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Court Rules for IBM in Cash-Balance Case

August 9, 2006
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CHICAGO—IBM Corp.’s cash-balance pension plan does not discriminate against older employees, a federal appeals court ruled Monday, August 7

In the first appeals court ruling on whether cash-balance plans are age discriminatory, a unanimous three-judge panel of the 7th U.S. Circuit Court of Appeals said: "All terms of IBM’s plan are age neutral."

While a federal judge, in a 2003 ruling that drew national attention, said the plan discriminated against older employees because younger employees receive interest credits for more years, the appeals court specifically rejected that argument.

Nothing in federal law "suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus have a greater opportunity to earn interest on each year’s retirement savings," the appeals court stated in overturning Judge G. Patrick Murphy’s ruling.

"Treating the time value of money as a form of age discrimination is not sensible," the appeals court ruled.

The decision comes within days of Congress passing pension funding reform legislation that makes it clear that new cash-balance plans—plans created after June 29, 2005—will be protected from age discrimination suits. The two developments are likely to mean that employers are much more likely to continue their existing plans, while those without the plans will be more likely to adopt them, experts say.

"Companies will have a much higher comfort level in maintaining these plans," says Ethan Kra, chief actuary for Mercer Human Resource Consulting in New York.

"The ruling takes away some of the legal uncertainty," says Bill Sweetnam, a principal with the law firm Groom Law Group in Washington, D.C.

IBM earlier froze its cash-balance plan, which it adopted in 1999 as part of a retirement plan revamp to make its costs more predictable and more in line with those of its competitors. Beginning in 2008, an enriched 401(k) plan will be the only retirement plan IBM will offer to its U.S. employees.

Employers sponsor more than 1,500 cash-balance plans. Until the plans became the target of numerous age discrimination suits, they were the only type of defined-benefit plan to be added by employers in large numbers.

"Hopefully, this will be the beginning of the end of what has been a litigation nightmare, and employers can offer plans that make sense for them and their employees," says Larry Sher, a principal and director of retirement policy at Buck Consultants Inc. in New York.

Others, though, say plaintiffs lawyers likely will continue their drive to prove that the plans are age discriminatory, but, in light of the appeals court ruling, they will find it much tougher to prove their cases.

The 7th Circuit is one of the more influential circuits, and other courts are likely to give the IBM ruling deference, Groom Law Group’s Sweetnam says.

Jerry Geisel

Jerry Geisel is a writer for Business Insurance, a companion publication of Workforce Management. This article originally appeared online at businessinsurance.com.

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