Cash Balance Plan - Lump Sum Calculation Cases

Lump Sum Calculation Cases

In 1993, the Third Circuit decided in Goldman v. First National Bank of Boston that the terminated worker did not demonstrate that the adoption of the cash balance plan violated age discrimination rules. In 2000, the Eleventh Circuit in Lyons v. Georgia Pacific and the Second Circuit in Esden v. Bank of Boston decided that the employer violated rules for calculating lump sums, and a district court in Eaton vs. Onan Corp. decided that adopting the cash balance plan did not violate age discrimination rules. In early 2003, the First Circuit in Campbell v. BankBoston did not decide that the employer violated the age discrimination rules against a former worker because the former worker made a procedural error and brought the issue up late.

Then in summer of 2003, the Seventh Circuit in Berger v. Xerox Corp. Retirement Plan, decided that the lump sum calculation for workers terminating service prior to retirement who were covered by the defendant cash balance pension plan cannot violate the rules for defined benefit plans and in a district court in Illinois in Cooper vs. IBM Personal Pension Plan, decided that the very design of the cash balance plan – the issue that the Campbell court only reached in dicta – had indeed violated the age discrimination rules because the “rate of benefit accruals” did “decrease” on account the “attainment of any age.”

The Lump Sum cases all held that because cash balance plans were defined benefit plans, they had to abide by the rules for defined benefit plans when the employer calculates the lump sum actuarial present value by first accruing the account balance to normal retirement age and then converting the account balance at retirement age into a life annuity before then discounting back to the current date at a statutorily required discount rate. Because these cash balance plans were designed to “look like” defined contribution plans, the defendants asserted that these cash balance pension plans were not true defined benefit plans but were “hybrid” plans instead. Therefore, because, they were “hybrids” and looked like defined contribution plans and because workers are only entitled to the actual balance in defined contribution plans, the plaintiffs should get lump sums equal only to their “hypothetical” account balances. In Berger v. Xerox, Judge Richard Posner noted in the case – “for hybrid read unlawful” – held that the lump sum amounts should have been larger. So the cash balance plan is not an exotic “hybrid” plan in the eyes of the law but remained in the defined benefit part of the pension taxonomy.

This process of taking the account balance forward from the terminated worker’s current age up to the worker’s normal retirement age, before discounting back to the current age is sometimes called the “whipsaw.” If the interest rate used for discounting back is lower than the rate used for interest credits on the hypothetical account balances, then the legally required lump sum values would be higher than the worker’s account balance in his hypothetical account.