Friday, July 15, 2011

Third Circuit Approves AT&T's Cash Balance Plan Conversion After Twelve Years Of Litigation

Engers v. AT&T, Inc. (2011, CA3) 2011 WL 2507089 (unpublished)

A twelve-year lawsuit stemming from AT&T's conversion of its defined benefit pension plan to a cash balance formula has culminated with the Third Circuit's affirmance of the district court's grants of summary judgment to AT&T on all remaining issues.

Facts. In’88, a class of management employees sued AT&T over the conversion of its traditional defined benefit plan to a cash balance plan. The AT&T cash balance plan was a “greater of” plan, under which participants were entitled to the larger of the benefit accrued under the traditional defined benefit plan, a special update benefit, or the benefit under the new cash balance plan. As often happens in cash balance plan conversions, older employees with longer service accrued no additional retirement benefit until such time as annual additions to the cash balance account, in the form of pay and interest credits, increased the cash balance benefit to an amount greater than the defined benefit under the prior plan formula. This period where no additional benefit is earned is referred to as “wear-away.”

The employees claimed that the cash balance conversion disproportionately harmed older employees in violation of the Age Discrimination in Employment Act (ADEA), and violated ERISA's disclosure, anti-backloading, and anti-cutback rules as well. After a lengthy period of litigation, the district court granted summary judgment to AT&T on the ADEA and ERISA claims, and the employees appealed.

ADEA claims. Before the Third Circuit, the employees argued that the’97 amendments to AT&T's pension plan discriminated against older workers by subjecting them to longer periods of wear-away. According to the employees, the district court had erred in treating the plan's compliance with ADEA §4(i) (29 USC 623(i)) as a complete defense to their ADEA claims, as’90 amendments to ADEA had changed the scope of ADEA §4(a)(1), and so the wear-away claims fell under subsection ADEA §4(a)(1) and not ADEA §4(i). In dismissing this claim, the Third Circuit said that it agreed with the Tenth Circuit's careful analysis in Jensen v. Solvay Chemicals, Inc. (2010, CA10), 2010 WL 3472945, in which that circuit had held that the’90 amendments to ADEA did not affect the scope of ADEA §4(i). Thus, the Third Circuit held that the employees' wear-away claims were barred by the plain language of ADEA §4(i)(4).

Anti-backloading claim. The employees claimed that the wear-away that resulted from the cash balance amendments violated the anti-backloading rule of ERISA §204(b) because benefit accrual rates in later plan years would be more than 133 1/3% of the benefit accrual rate during the wear-away period, which was zero. The district court had rejected this argument because, even though early retirement benefits do not increase during the wear-away period, the plan participants' cash balance accounts continue to increase.

On appeal, the employees argued that the accrual of early retirement benefits, instead of cash balance amounts, should have been used in applying the anti-backloading rule. In rejecting the argument, the Third Circuit pointed to the “plain language” of ERISA §204(b), which provides that the anti-backloading rule applies to benefits payable at the plan's normal retirement age, and that benefits payable before normal retirement age are disregarded. Further, in applying the anti-backloading rule, any plan amendment that's in effect for the current year is treated as in effect for all other plan years, which meant that the wear-away resulting from the cash balance conversion had to be disregarded.

Anti-cutback claim. The employees' final claim was that the cash balance conversion had violated the anti-cutback rule of ERISA §204(g)(2). According to the employees, AT&T's traditional defined benefit plan provided that participants retiring between ages of 50 to 55 could receive their age-55 early retirement benefits, reduced by 6% for each year they were retiring before age 55. But, due to the action of the plan's age and service requirements, participants could not receive these early retirement benefits before age 50. The cash balance amendments had removed the age and service restrictions on receiving benefits before age 50, but provided that benefits taken before age 50 would be also be reduced by 6% for each year a participant retired before age 55. According to the employees, the extension of the 6% per-year benefit reduction to benefits available when retiring before age 50 was an additional restriction on benefits that violated the anti-cutback rule.

In reviewing this claim, the Third Circuit said that if failed for two reasons. First, before the cash balance amendments took effect, there was no provision that allowed participants to receive any benefits before age 50, and so there was no early retirement benefit that was “improperly reduced” by the cash balance amendments. Instead, the amendments “simultaneously” provided participants with a right to receive benefits before age 50, while providing that these benefits would be reduced by 6% for each year that participants retired before age 55. Second, said the court, even if participants were considered to have “earned” early retirement benefits before age 50, the cash balance amendments did not place greater restrictions on receiving these benefits, and did not reduce the benefits payable before age 50, because the benefits were increased from nothing to a percentage of the age-55 early retirement benefit. Thus, the district court's grant of summary judgment to AT&T on the anti-cutback claim was proper.

References: For cash balance plans, see FTC 2d/FIN ¶H-6271; United States Tax Reporter ¶4014.191; TaxDesk ¶280,106; TG ¶8095.

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