Order Code RL33004
CRS Report for Congress
Received through the CRS Web
Cash Balance Pension Plans and
Claims of Age Discrimination
July 1, 2005
Erika Lunder
Legislative Attorney
American Law Division
Jennifer Staman
Law Clerk
American Law Division
Congressional Research Service ˜ The Library of Congress

Cash Balance Pension Plans and Claims of Age
Discrimination
Summary
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regulations were withdrawn in 2004.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.

Contents
Types of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Defined Benefit and Defined Contribution Plans . . . . . . . . . . . . . . . . . . . . . 1
Cash Balance Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Plan Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Anti-cutback rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Claims of Age Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Violation of the OBRA Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Rate of benefit accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Application of the OBRA language . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Claims that Conversions Violate the ADEA . . . . . . . . . . . . . . . . . . . . . . . . . 6
Disparate treatment claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Disparate impact claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Court Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Cooper v. IBM Pers. Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Other Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Engers v. AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Eaton v. Onan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Campbell v. BankBoston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Godinez v. CBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Tootle v. ARINC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Treasury Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Moratorium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Treasury regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Treasury proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Summary of Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Prior Congresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
H.R. 2831 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
H.R. 2233; S. 991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Cash Balance Pension Plans and Claims of
Age Discrimination
This report examines the issue of whether a type of defined benefit pension plan,
the cash balance plan, violates federal laws that prohibit age discrimination. The
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).1 While employer participation in the private pension
system is voluntary, any offered plan must satisfy the legal requirements. The failure
to do so may result in civil and criminal liability and the loss of favorable tax
treatment for plan contributions and disbursements. Furthermore, ERISA and the
ADEA create substantive rights for plan participants that they can seek to have
judicially enforced.
This report will briefly describe a typical cash balance plan,2 and then discuss
the federal laws that prohibit age discrimination and the arguments that the plans are
or are not discriminatory. The report will next look at several court decisions dealing
with the issue of whether cash balance plans or the conversion to such plans violate
the age discrimination provisions. It ends with a discussion of recent activity by the
Treasury Department and Congress, including a summary of legislation that has been
introduced in the 109th Congress.
Types of Pension Plans
Defined Benefit and Defined Contribution Plans
There are two categories of pension plans under federal law: defined benefit
plans and defined contribution plans. In a defined benefit plan, an employee is
promised a specified future benefit that traditionally is an annuity beginning at
retirement. The amount of the annuity is generally determined by a formula that
factors in the employee’s years of employment and the average salary of the
employee’s highest salaried years. Other factors, such as age, may be included. To
fund the plan, the employer makes contributions to the common pension fund that are
actuarially expected to grow through investment to cover the promised benefits. The
employer bears the risk that the investments will not provide adequate funds and is
responsible for any shortfalls. If the plan is terminated, the benefits are partially
1 ERISA was enacted in 1974, P.L. 93-406, and is codified in Title 29 of the United States
Code, starting at section 1001. The Internal Revenue Code is found in Title 26. The ADEA
was enacted in 1968, P.L. 90-202, and is codified in Title 29, starting at section 621.
2 For more information on cash balance plans, see CRS Report RL30196, Pension Issues:
Cash-Balance Plans
, by Patrick J. Purcell.

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insured by the Pension Benefit Guaranty Corporation. An employee who terminates
employment before retirement will generally receive any vested benefits as an
annuity at normal retirement age.
In a defined contribution plan, the employee is promised that the employer will
currently make a specified contribution to the employee’s pension account. The
contribution is commonly a percentage of the employee’s salary. Due to the risk of
investment, the value of the account at the time of retirement is unknown. The
employee bears the investment risk and the benefits are not insured by the Pension
Benefit Guaranty Corporation. An employee who terminates employment before
retirement may generally receive any vested benefits as a lump-sum payment at the
time of termination.
In the past several decades, plans have been developed that modify the
traditional defined benefit plan. These plans are referred to as hybrid plans because
they are defined benefit plans that conceptualize the benefits in a manner similar to
defined contribution plans. One type of hybrid plan is the cash balance plan.
Cash Balance Plans
Cash balance plans are defined benefit plans that look like defined contribution
plans because the employee’s promised future benefits are stated as the individual’s
account balance. The account is hypothetical (i.e., each employee does not actually
have an account), but is used to conceptualize the amount of benefits the employee
has accrued. The account reflects contributions that are a percentage of annual
compensation (called pay credits) and interest earned on those contributions (called
interest credits). The interest rate may be fixed or tied to an index rate and is
specified in the plan. The plan may use other factors in its benefit formula, such as
age and length of service.
The employer currently contributes to the general pension fund. The employer
bears the risk that the fund’s investments will provide the promised benefits. In the
event of plan termination, the benefits are partially insured by the Pension Benefit
Guaranty Corporation. An employee who terminates employment before retirement
may generally receive the current value of any vested benefits as a lump-sum
payment at the time of termination.
Plan Conversions
During the past two decades, numerous employers have either converted or
considered converting their traditional defined benefit plans to cash balance plans.
A conversion to a cash balance plan involves amending the original plan and is not
treated as a plan termination.
Anti-cutback rule. The conversion is subject to the rules that apply to any
plan amendment. An important rule is that once a benefit is accrued, it may only be
decreased in limited circumstances and with prior approval by the Treasury

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Secretary.3 An amendment may not eliminate or reduce an early retirement subsidy
with regard to service that has already been performed.4
While a plan amendment may not decrease benefits that are already accrued, it
may reduce future benefit accruals since these benefits have not yet been earned.
This reduction may include ceasing benefit accrual for a period of time. Any
amendment that significantly reduces the rate of future benefit accrual requires
clearly-written notice to affected participants.5
Claims of Age Discrimination
There have been claims that cash balance plans and/or the conversion to such
plans violate the laws prohibiting age discrimination. The age discrimination
provisions are found in ERISA, the IRC and the ADEA, although plan participants
are only able to bring legal actions under ERISA and the ADEA. All three provisions
were added by the Omnibus Budget Reconciliation Act of 1986 (OBRA).6 They are:
ERISA § 204(b)(1)(H) [29 U.S.C. § 1054(b)(1)(H)] and IRC § 411(b)(1)(H):
[A] defined benefit plan shall be treated as not satisfying the requirements of this
paragraph [relating to benefit accrual] if, under the plan, an employee’s benefit
accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because
of the attainment of any age.
ADEA § 4(j)(1) [29 U.S.C. § 623(i)(1)]:
[I]t shall be unlawful for an employer, an employment agency, a labor
organization, or any combination thereof to establish or maintain an employee
pension benefit plan which requires or permits-
(A) in the case of a defined benefit plan, the cessation of an employee’s benefit
accrual or the reduction of the rate of an employee’s benefit accrual, because of
age.
For purposes of this report, these sections will be collectively referred to as “the
OBRA language.” While their language differs slightly, they are intended to be
interpreted in the same manner.7
Two distinct claims are usually made that cash balance plans or the conversions
to such plans violate the law. The first claim is that the plans violate the OBRA
language because the rate of an employee’s benefit accrual is reduced on account of
age. The second claim is that the conversions to the plans violate the ADEA because
older workers are treated unfavorably in comparison to younger workers. Both
claims are discussed below.
3 ERISA § 204(g)(1), 29 U.S.C. § 1054(g)(1); ERISA § 302(c)(8), 29 U.S.C. § 1082(c)(8);
IRC § 411(d)(6); IRC § 412(c)(8).
4 ERISA § 204(g)(2), 29 U.S.C. § 1054(g)(2); IRC § 411(d)(6).
5 ERISA § 204(h)(1), 29 U.S.C. § 1054(h)(1).
6 P.L. 99-509.
7 See House Report 99-727 at 378-79; P.L. 99-509, § 9204(d).

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Before continuing, it should be noted that this report only addresses the issue of
whether cash balance plans or the conversions to such plans are inherently
discriminatory. While not addressed in this report, it is clear that specific cash
balance plan designs or conversions could violate the age discrimination rules for
reasons unique to that plan or conversion. Furthermore, the design of a cash balance
plan could violate other ERISA or IRC provisions not related to age discrimination,
such as the anti-cutback rules that were discussed above.
Violation of the OBRA Language
The OBRA language prohibits an employee’s rate of benefit accrual from being
decreased on account of age.8 In order to determine whether cash balance plans
violate this prohibition, two basic issues must be decided: (1) how to interpret the
phrase “rate of benefit accrual” and (2) whether the language applies to employees
who are younger than normal retirement age.
Rate of benefit accrual. There is disagreement on how to determine the
employee’s “rate of benefit accrual” under a cash balance plan. Those who claim the
plans are discriminatory argue that it is defined with reference to an annuity that
begins at normal retirement age. This will be referred to as an “age 65 annuity.” The
argument is based on the fact that cash balance plans are a type of defined benefit
plan, the “accrued benefit” of a defined benefit plan is defined in ERISA as being “in
the form of an annual benefit commencing at normal retirement age,”9 and an accrued
benefit that is defined under a plan in a different form must be converted into such
an annuity.10 The proponents of the discrimination claims argue that this framework
requires that the benefits in a cash balance plan, which are conceptualized as an
account balance, be converted into an age 65 annuity in order to test for age
discrimination. Under this argument, when the benefits are expressed as an age 65
annuity, the cash balance formula violates the OBRA language because the rate of
benefit accrual decreases as the employee’s age increases.
If the argument that “rate of benefit accrual” must be determined with reference
to an age 65 annuity is correct, then the rate under the typical cash balance formula
does appear to decrease as the employee’s age increases. This is because of the
interest credit and the effect of compounding interest. Specifically, as an employee
approaches age 65, the contributions made in each subsequent year have a decreasing
impact on the amount of the age 65 annuity because they have less time to earn
interest. Thus, as the employee’s age increases, the rate of benefit accrual,
calculated using an age 65 annuity, decreases.
Those who claim that the plans are not discriminatory respond that there is
nothing that requires an age 65 annuity be used to test for age discrimination since
8 The rate of benefit accrual that is being tested is the rate in the cash balance plan. The rate
of benefit accrual under the traditional plan is not being compared with the rate of benefit
accrual under the cash balance plan.
9 ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A); IRC § 411(a)(7)(A)(i).
10 See IRC § 411(c)(2)(B); 26 CFR § 1.411(a)-7(a)(1)(ii).

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the phrase “rate of benefit accrual” is not defined in the statutes and the term
“accrued benefit” has various usages in ERISA and the IRC. They argue that instead
of using an age 65 annuity, the rate should be tested using the amount that is in the
employee’s hypothetical account since this is how benefits are expressed in cash
balance plans. Thus, under this argument, the “rate of benefit accrual” refers to the
rate at which the contributions are made to that account.11 Additionally, the
opponents of the discrimination claims argue that the effect noted by the proponents
is not a result of “the attainment of any age,” but rather the economic effect of the
time value of money.
If this argument is correct and the “rate of benefit accrual” is determined with
reference to the rate at which contributions are made to the employee’s hypothetical
account, then it appears that cash balance plans do not inherently violate the OBRA
language. This is because the rate under the cash balance formula at which
contributions are made to the account over the employee’s years of service is
generally constant or increases if the plan is weighted for age.
Application of the OBRA language. There is also disagreement about
whether the OBRA language applies to plan participants who are younger than
normal retirement age. Opponents of the discrimination claims argue that the
legislative history shows that Congress only intended for the OBRA language to
require benefit accrual for employees who continued working past normal retirement
age. This argument is based on the language of the OBRA conference report,12 the
floor statements of legislators,13 and the heading to IRC § 411(b)(1)(H) that reads
“Continued Accrual Beyond Normal Retirement Age.”
In response, the proponents of the age discrimination claims point out that the
plain language of the OBRA statutes does not limit the provisions to those employees
older than normal retirement age.14 The proponents further note that the intent of the
ADEA is to prohibit age discrimination and it applies to everyone who is at least
11 This argument would treat cash balance plans similar to defined contributions plans,
which also express the benefits as an individual’s account. See ERISA § 3(23)(B), 29
U.S.C. § 1002(23)(B). Defined contribution plans do not violate the age discrimination
provisions so long as “allocations to the employee’s account are not ceased, and the rate at
which amounts are allocated to the employee’s account is not reduced, because of the
attainment of any age.” ERISA § 204(b)(2)(A), 29 U.S.C. § 1054(b)(2)(A); IRC §
411(b)(2)(A); ADEA § 4(j)(1)(B), 29 U.S.C. § 623(i)(1)(B).
12 House Report 99-727.
13 See 131 Cong. Rec. 18868 (July 11, 1985) [statement by Senator Grassley]; 132 Cong.
Rec. 32963 and 32975 (Oct. 17, 1986) [statements by Representative Jeffords, Roukema,
Clay, and Hawkins].
14 The Treasury Department adopted this view in its explanation of regulations that were
proposed in 2002. See 67 Fed. Reg. 76123, 76124 (Dec. 11, 2002). These regulations have
been withdrawn, as discussed in the “Treasury Department” section of this report.

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40,15 and that ERISA gives standing to any plan participant, without reference to
age.16
Claims that Conversions Violate the ADEA
Courts have also considered whether conversions to cash balance plans violate
the ADEA. Under ADEA § 4(a)(1), it is illegal for an employer to “discriminate
against any individual with respect to his compensation, terms, conditions, or
privileges of employment, because of such individual’s age.”17 Here, the argument
is that older workers fare poorly when plans convert to cash balance plans in
comparison to younger workers.18
Under the ADEA, two types of age discrimination claims can be made: disparate
treatment claims and disparate impact claims. A disparate treatment claim requires
an employee to show that the employer intentionally discriminated against the
employee on the basis of age. With a disparate impact claim, an employee must show
that the employer’s actions, while neutral on their face, actually had a
disproportionate adverse impact on older workers. Disparate impact claims arise
more often because of the difficulty of proving intentional discrimination by the
employer in the adoption of or conversion to a cash balance plan.
Disparate treatment claims. Proponents of the discrimination claims argue
that the conversion to a cash balance plan that the employer knows will treat older
workers less favorably than younger workers is evidence of intentional
discrimination.19 Opponents respond that the fact employers may know that older
employees will be treated less favorably under the cash balance plan is not evidence
of individualized discrimination.20 Further, opponents note that employers may
refute the claim by showing there was a reasonable basis for the conversion other
15 ADEA § 12, 29 U.S.C. § 631.
16 ERISA § 502, 29 U.S.C. § 1132.
17 ADEA § 4(a)(1), 29 U.S.C. § 623(a)(1). In the context of a defined benefit plan, ADEA
provides that “it shall be unlawful for an employer . . . to establish or maintain an employee
pension benefit plan which requires or permits . . . in the case of a defined benefit plan, the
cessation of an employee’s benefit accrual, or the reduction of the rate of an employee’s
benefit accrual, because of age . . . .” ADEA § 4(j), 29 U.S.C. § 623(i).
18 Not all conversions face this issue. Some plan designs avoid these problems by, for
example, giving older workers the choice between continuing under the traditional defined
benefit plan or switching to the cash balance plan.
19 It is generally not debatable that employers would be and are aware of the effects of a plan
conversion on older workers. In addition to the fact that the effect on older workers is
commonly known, it would be expected that most employers engage in analysis of what the
conversion would mean to the pension fund, the company, and the employees. Thus, it is
not unexpected that employees could prove the employer knew of the conversion’s effects
on older employees. The issue is whether this is evidence of intentional discrimination.
20 See Goldman v. First Nat’l. Bank of Boston, 985 F.2d 1113, 1119-20 (1st Cir. 1993)
(holding that no inference of age bias exists based on an employer’s decision to convert to
a cash-balance pension plan).

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than age and that there are numerous reasons for an employer to convert to a cash
balance plan, including attractiveness to employees and decreased costs of
administering the plan.21

Disparate impact claims. Proponents of the discrimination claims argue
that while the conversion to a cash balance plan may be facially neutral, it has a
disproportionate adverse impact on older workers. There are two primary claims.
First is that older employees lose the expected benefits of the traditional plan without
gaining the benefits from the new cash balance plan. The formula under a traditional
defined benefit plan is weighted towards longer-serving employees so that employees
accrue significant benefits in their later years of employment. Thus, older employees
may have worked for years under the traditional plan with the expectation that they
would accrue significant benefits in their final years. However, since benefits under
a cash balance plan are accrued at a more constant rate over the employee’s years of
service, these employees lose the opportunity for the increased accrual. At the same
time, because the older workers are near retirement, they are unable to take advantage
of the compounding interest feature of the cash balance plan.
The second argument concerns the issue of “wear-away,” which proponents of
the discrimination claims argue disproportionately impacts older workers. Wear-
away occurs when the value of the employee’s accrued benefits under the traditional
plan exceeds the starting balance of the hypothetical account, which is provided in
the terms of the plan conversion. The employee is guaranteed the benefits that he or
she accrued under the old plan. The employee will not accrue any additional benefits
until he or she earns enough benefits under the cash balance plan so that the value of
the hypothetical account exceeds the value of the benefits earned under the traditional
plan. Thus, the level of the employee’s benefits is basically frozen until that point
is reached. The proponents argue that this “wear-away” hits older employees the
hardest because they are more likely to have high starting balances.
There have been two primary arguments made against disparate impact claims
under the ADEA, both in general and in the context of cash balance plans. First,
opponents have argued that in individual cases, plaintiffs had failed to exhaust the
administrative remedies, specifically, by failing to file a timely complaint with the
Equal Employment Opportunity Commission (EEOC). Second, opponents have
argued that the claims should be dismissed because under the ADEA it is not illegal
for an employer “to take any action otherwise prohibited . . . where the differentiation
is based on reasonable factors other than age . . . .”22 In other words, the argument
is that disparate impact claims cannot be brought under the ADEA. This argument
was supported by the fact that, in cases not dealing with cash balance plans, the
21 See Hazen Paper Co. v. Biggins, 507 U.S. 604, 610-11 (1993) (“In a disparate treatment
case, liability depends on whether the protected trait (under the ADEA, age) actually
motivated the employer’s decision . . . Whatever the employer’s decision making process,
a disparate treatment claim cannot succeed unless the employee’s protected trait actually
played a role in that process and had a determinative influence on the outcome . . . .”).
22 ADEA § 4(f), 29 U.S.C. § 623(f).

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majority of the federal circuits that considered the issue had not recognized disparate
impact claims under the ADEA.23
As seen in the cases discussed below, this second argument, that disparate
impact claims against cash balance plans should be dismissed because such claims
are not recognized under the ADEA, has been successful. However, there has been
a major change in the law. In 2005, the Supreme Court held that disparate impact
claims are allowed under the ADEA.24 In Smith v. City of Jackson, the Court found
that a salary plan which provided proportionately higher raises for employees with
less work experience (who were typically younger in age) than for more experienced
employees did not violate the ADEA. While the Court found that the ADEA claim
failed in this instance, the Court made clear that plaintiffs are not barred under the
ADEA from bringing claims under a disparate impact theory of liability. Since the
Smith case, no case has dealt with whether a cash balance plan violates the ADEA.
Court Cases
Several courts have considered the issue of whether cash balance plans violate
the age discrimination provisions. In a case that received significant attention,
Cooper v. IBM, a U.S. district court held that the IBM plan was discriminatory.
While the court only looked at the IBM plan, it would appear that cash balance plans
are inherently discriminatory under the court’s reasoning. Other courts have held that
cash balance plans do not violate the age discrimination provisions or have dismissed
the cases on procedural grounds.
Cooper v. IBM Pers. Pension Plan
In 1999, IBM amended its pension plan to convert it to a cash balance plan.
Under the new plan, each employee’s hypothetical account was credited with a pay
credit equal to 5% of salary and an interest credit equal to 1% higher than the rate of
return on one-year treasury securities.
In 2003, the U.S. District Court for the Southern District of Illinois held that
IBM’s cash balance plan violated ERISA § 204(b)(1)(H).25 First, the court
determined that “rate of benefit accrual” had to be determined with reference to an
age 65 annuity. The court noted that while ERISA did not explicitly address whether
an age 65 annuity should be used, the term “accrued benefit” was expressed for
defined benefit plans as an age 65 annuity under ERISA § 3(23).26 The court
concluded that since a cash balance plan was a type of defined benefit plan, an age
23 Disparate impact claims under the ADEA were not recognized in the First, Third, Sixth,
Seventh, and Eleventh Circuits, but had been recognized in the Second, Eighth, and Ninth
Circuits. See Smith v. City of Jackson, 125 S. Ct. 1536, n.9 (2005).
24 Smith v. City of Jackson, 125 S. Ct. 1536 (2005).
25 Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 2d 1010 (S.D. Ill. 2003).
26 Id. at 1016.

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65 annuity must be used to express its benefits.27 The court, while noting that the
terms “accrued benefit” in ERISA § 3(23) and “benefit accrual” in ERISA §
204(b)(1)(H) were not identical, reasoned that since the term “accrued benefit” was
used in the subsection immediately prior to ERISA § 204(b)(1)(H) [ERISA §
204(b)(1)(G)],28 “[t]he best interpretation of ‘rate of benefit accrual’ is that it also
refers to an employer’s age 65 annual benefit and the rate at which that age 65 annual
benefit accrues.”29 The court stated that the use of the different terms “accrued
benefit” and “benefit accrual” reflected grammatical usage — i.e., that it was
grammatically correct to say “rate of benefit accrual” as opposed to “rate of accrued
benefit.”30
The court found that when the age 65 annuity was used to determine whether
the rate of benefit accrual decreased on account of age, the plan violated ERISA
because of the interest credit component.31 This was because the interest credit
would be more valuable to younger employees than older employees.32 The court
explained:
IBM’s own age discrimination analysis illustrates the problem: a 49 year old
employee with 20 years of service accrues an age 65 annuity of $ 8,093 in the
year 2000. The following year, he accrues an additional $ 622, and by 2010, his
additional annual accrual is only $ 282. This 49 year old employee’s benefit
accrual has been reduced for each year he has aged, and this reduction violates
ERISA § 204(b)(1)(H).33
IBM has appealed the decision to the Seventh Circuit Court of Appeals, but has
also reached a partial settlement with the employees. The settlement requires IBM
to pay $320 million in payments to current and former IBM employees for claims
concerning retirement benefits.34 These payments will be distributed to employees
through their retirement plan as additional pension benefits. The settlement did not
resolve two of the employee’s claims, including the issue of whether cash balance
plans are inherently age discriminatory. If the appeals court finds that IBM’s plan
does violate the age discrimination provisions, the settlement calls for a $1.4 billion
27 Id. at 1021.
28 ERISA § 204(b)(1)(G) also prohibits discrimination on the basis of age. It reads, in part,
“a defined benefit plan shall be treated as not satisfying the requirements . . . if the
participant’s accrued benefit is reduced on account of any increase in his age or service.”
29 Cooper, 274 F. Supp. 2d at 1016.
30 Id. at 1016, 1022.
31 Id. at 1021.
32 Id.
33 Id. at 1021-22.
34 See David Cay Johnson, IBM Employees Get $320 Million in Pension Suit, N.Y. Times,
Sept. 30, 2004, at A6.

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cap on damages.35 IBM has closed its cash balance plan to new hires and now offers
them a 401(k) plan that matches 100% of contributions up to 6% of salary.36 The
employees who remain in the cash balance plan continue to accrue benefits at a rate
of 5% of pay plus the interest credit.37
Other Cases
While the district court in Cooper v. IBM held that the cash balance plan
discriminated on the basis of age, several other courts have either held that the plans
are not discriminatory or dismissed the claims for procedural reasons. While the
Cooper case only addressed whether the plan violated the OBRA language (i.e.,
decreased the participant’s “rate of benefit accrual” on account of age), these other
cases have also examined whether the OBRA language is applicable to participants
under age 65 and whether participants may bring disparate treatment or impact claims
under the ADEA. The following cases are arranged chronologically.
It is important to note that these cases were all decided before the Supreme
Court’s recent ruling in Smith v. City of Jackson. To the extent that these cases are
decided based on the idea that a disparate impact claim is not available under the
ADEA, this reasoning is inconsistent with the Smith decision.
Engers v. AT&T. In 1997, AT&T converted its traditional defined benefits
plan to a cash balance plan. Under the new plan, employees were credited with a
percentage of their pay and an interest credit. Employees were assigned an initial
account that in some cases was worth less than the value of the accumulated benefits
under the old plan, thus creating a situation with “wear-away.” Because of the
change in benefit formula and the wear-away issue, the plaintiffs alleged the
converted plan violated ERISA and the ADEA.
In Engers v. AT&T, the U.S. District Court for the District of New Jersey
dismissed the plaintiffs’ disparate treatment claim but allowed the claim dealing with
the “rate of benefit accrual” issue to proceed.38 First, the court dismissed the
plaintiffs’ claim that the conversion to the cash balance plan violated the ADEA
under a disparate treatment theory. The court noted that it had dismissed the
plaintiffs’ disparate impact claim in their original complaint (this was the plaintiffs’
amended complain) because such claims were not allowed under the ADEA.39 The
35 Id.
36 Tom Anderson, IBM, SBC Retirement Plans May Give Glimpse of Future, Employee
Benefit News (2005), available at [http://www.benefitnews.com/retire/detail.cfm?id=7312]
as visited on June 27, 2005.
37 Id.
38 Engers v. AT&T Corp., 2000 U.S. Dist. LEXIS 10937 (N.J. 2000).
39 Id. at 17.

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court then dismissed the disparate treatment claim because the plaintiffs had not
alleged any factual claims of deliberate discrimination.40
Second, the court refused to dismiss the plaintiffs’ claim that the cash balance
plan violated ERISA and the ADEA because it reduced the rate of benefit accrual on
account of age. The court did not rule on the substantive issue of whether the plan
violated the statutory language, but rather found that the plaintiffs’ claim had alleged
sufficient facts to survive the motion to dismiss.41
Eaton v. Onan. The Onan Corporation had a defined benefit pension plan
which it converted to a cash balance plan.42 The cash balance formula adopted by
Onan provided annual pay-based credits for each year of employment and interest
credits. Pay based credits were calculated as 2.5% of an employee’s eligible
compensation up to the Social Security wage base, and 4.5% of compensation above
the wage base. Interest credits were based on whether the employee was currently
employed by Onan. Former employees received interest credits at the same rate as
the average of the one-year Treasury bill and the 30-year U.S. government bond
yields for the preceding fiscal year. Active employees received an interest credit rate
2.5% higher than the rate for former employees.
In an attempt to protect the rights and expectations of employees who
participated in the defined benefit plan, Onan had a provision in its plan document
which stated that prior accrued benefits were protected under the amended cash
balance plan. Also, the cash balance plan provided optional annuities which would
keep benefit amounts comparable to what employees would have been entitled to
under the former defined benefit plan. Plaintiffs, employees of the Onan
Corporation, claimed that the cash balance plan was age discriminatory because the
cash balance plan reduced the rate of benefit accrual because of the participant’s age.
The U.S. District Court for the Southern District of Indiana held that the cash
balance plan did not violate the age discrimination provisions for two reasons. First,
legislative history indicated that the age discrimination provisions were not intended
to protect workers until after they reached normal retirement age.43 Looking at the
legislative background of OBRA, the court concluded that Congress intended the
provisions “to ensure that employees who decided to work beyond normal retirement
age would continue to accrue additional retirement benefits from such service.”44
Second, the court found that if the age discrimination provisions were applied to cash
balance plans, the rate of benefit accrual would not depend on age.45 The court
explained that the phrase “rate of an employee’s benefit accrual” did not clearly
indicate that the benefit had to be measured in terms of an annual benefit beginning
40 Id. at 17-18.
41 Id. at 27.
42 Eaton v. Onan Corporation, 117 F. Supp. 2d 812 (S.D. Ind. 2000).
43 Id. at 815.
44 Id. at 827.
45 Id. at 815-16.

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at normal retirement age.46 The court found no statutory or public policy reason for
interpreting the rate of benefit accrual in terms of the value of the annuity, and after
considering the legislative history of the age discrimination provisions, along with
the practical effects of defining rate of benefit accrual in terms of the value of annuity
at normal retirement age, the court indicated that the age discrimination provisions
may permit, but do not require this standard.47 The court also asserted that the rate
of benefit accrual in the context of cash balance plans “should be the employee’s cash
balance account from one year to the next.”48
Campbell v. BankBoston. In 1989, BankBoston converted its defined
benefit plan to a cash balance plan.49 Under the terms of the new plan, future
retirement benefits would accrue under a cash balance formula, while prior accruals
would remain based on the older annuity-based formula. The plan also contained a
“Benefit Safeguard Minimum Benefit” provision which guaranteed long-term
employees that the benefits they would receive under the new plan would be no less
than the benefits they would have received under the defined benefit plan. Several
years later, BankBoston switched entirely to a cash balance system and removed the
benefit safeguard provision. Employees then maintained opening account balances
based on the present value of their accrued benefits at the time of the switch.
Campbell, an employee of BankBoston and its predecessors, claimed that
BankBoston’s conversion from a traditional defined benefit plan to a cash balance
plan violated age discrimination provisions of both ERISA and ADEA.
BankBoston argued that Campbell’s ADEA claim failed both procedurally and
on the merits.50 According to BankBoston, Campbell’s claim was an adverse impact
claim under the ADEA and these claims were not actionable in the First Circuit.51
Campbell argued that there was no basis for barring his claim for procedural reasons,
and that the claim should be characterized as a disparate treatment claim, since
BankBoston had specifically targeted older employees when changing the benefits
system.52
The U.S. District Court for the District of Massachusetts agreed with
BankBoston that Campbell’s claim was procedurally defective.53 Even though the
court did not have to continue its analysis of the case because of the procedural
defects, the court chose to explain that the claim also failed on the merits.54 The
court found that no disparate impact claim was permissible based solely on the fact
46 Id. at 825.
47 Id. at 827-30.
48 Id. at 832-33.
49 Campbell v. BankBoston, 206 F. Supp. 2d 70 (Mass. Dist. Ct.)(2002).
50 See id. at 77.
51 Id.
52 Id.
53 Id. at 78.
54 Id.

CRS-13
that older workers would have less time to accrue interest on their retirement
accounts than younger workers.55 Campbell’s disparate treatment claim, the court
opined, failed due to the insufficiency of the evidence.56

The First Circuit Court of Appeals affirmed the Campbell decision and held that
the ADEA claim was barred on procedural grounds.57 The Court of Appeals found
the claim that the cash balance plan violated the age discrimination provision of
ERISA was waived since Campbell did not raise this argument before the district
court.58 Still, the Court of Appeals acknowledged that the issue would likely be
adjudicated in the future and discussed the controversy.59 The court mentioned that
it was uncertain whether the age discrimination provision of ERISA applied to
workers younger than normal retirement age.60 Assuming that the provision did
apply, the court brought up the opinion of critics who argued that it was unclear
whether comparing the amount of the annuity workers of different ages received
when they reached retirement age was the only permissible way to determine benefit
accrual.61 The court concluded that none of these issues had to be addressed in the
case since the question was first raised on appeal.62
Godinez v. CBS. In 1999, CBS converted its traditional defined benefit plan
to a cash balance plan. Employees who were closest to retirement were kept in the
old plan, employees under the age of 41 were put in the cash balance plan, and
employees who were in between the two groups were put in the cash balance plan
and received transitional pay credits. Employees in this middle group sued, alleging,
among other things, that the conversion had a disparate impact on them under the
ADEA.
In Godinez v. CBS Corp.,63 the U.S. District Court for the Central District of
California found that the plaintiffs had not produced evidence to show a prima facie
case of age discrimination and granted the defendants’ motion for summary
judgment.64 Specifically, the court stated that the plaintiffs had not provided
evidence to show the plan’s negative impact on older employees or statistical
55 Id. at 78.
56 Id.
57 Campbell v. BankBoston, 327 F.3d 1 (1st Cir. 2003).
58 Id. at 9.
59 Id.
60 Id. at 10.
61 Id.
62 Id.
63 Godinez v. CBS Corp., 2002 U.S. Dist. LEXIS 27161 (C.D. Cal. 2002), aff’d by 81 Fed.
Apx. 949 (9th Cir. 2003).
64 Id. at 8-9.

CRS-14
evidence to show that any negative impact was due to the employee’s age.65 The
court noted that, in fact, it appeared the plaintiffs were receiving better treatment than
younger employees under the cash balance plan because of the transitional pay
credits.66
The plaintiffs appealed the decision to the U.S. Court of Appeals for the Ninth
Circuit. In an unpublished decision, the court affirmed the district court’s decision.67
Tootle v. ARINC. In 1999, ARINC converted its traditional defined benefit
plan to a cash balance plan. Under the plan, the pay credit increased according to the
employee’s age (e.g., employees under age 25 received a 3% pay credit while those
over age 60 received a 16% pay credit). Employees were credited with a lump sum
representing the value of their accrued benefits under the old plan. Additionally,
employees were credited with transition credits that were structured to be more
favorable to older employees. Employees who had vested in the prior plan and were
either at least 55 years old or had 25 years of service in the plan were allowed to
choose whether to continue under the traditional plan or switch to the cash balance.
All other employees were required to switch to the cash balance plan.
Tootle qualified to choose between plans and chose to switch to the cash
balance plan. He was terminated in 2002 and took a lump-sum distribution of his
accrued benefits. This amount was approximately $14,000 more than his benefits
would have been if he had remained under the old plan. Most of this increase was
due to the transition credit.
After his termination, Tootle sued, alleging various claims of age
discrimination. In Tootle v. ARINC, Inc., he sought class certification for several
claims, including the claim that the conversion to the cash balance plan was
discriminatory because it favored younger workers.68 It appears he had originally
made this claim under the ADEA, and it had been dismissed because he had not filed
a complaint with the EEOC.69 He then amended his complaint to make the claim
under ERISA. This case considered the amended complaint.
The U.S. District Court for the District of Maryland denied the motion for class
certification and dismissed the amended complaint for failure to state a claim upon
which relief can be granted. The court began by looking at the different conclusions
that the courts in Cooper, Eaton, and Campbell had reached on whether cash balance
plans caused a decrease in the “rate of benefit accrual” and said that it agreed with
the Eaton analysis.70 First, the court agreed with the Eaton court that the ERISA
65 Id. at 7.
66 Id. at 7-8.
67 Godinez v. CBS Corp., 81 Fed. Appx. 949 (9th Cir. 2003).
68 Tootle v. ARINC Inc., 222 F.R.D. 88 (D. Md. 2004).
69 Id. at 91.
70 Id. at 93.

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provision was not applicable to individuals younger than normal retirement age.71
For support, the court noted that the “beyond normal retirement age” statutory
headings in the IRC and the OBRA language’s legislative history.72 The court went
on to say that even if the provision did apply, it did not make sense to use an age 65
annuity for determining the rate of benefit accrual for cash balance plans because this
did not take into account the way that the plans are structured.73 The court noted that
doing so could lead to illogical results, such as in this case where the plan was
actually structured to favor older workers.74 Instead, the court stated it made more
sense to look at how defined contribution plans were tested for age discrimination
and then use a similar testing method for cash balance plans.75 The court looked at
the rate that amounts were allocated to the cash balance account and how the account
balance changed over time.76 Using that method, the court found that the ARINC
plan did not violate the age discrimination provisions.77
Treasury Department
Moratorium. In 1999, the Department of the Treasury responded to the
growing controversy over cash balance plans by placing a moratorium on approving
the plans as meeting ERISA and IRC requirements. It is still in effect.
Treasury regulations. In December 2002, the Treasury Department
proposed regulations that would, among other things, address the age discrimination
issue.78 Under the proposed regulations, cash balance plans would not have been
discriminatory so long the pay credits for older workers were at least equal to those
for younger workers. Additionally, a conversion to a cash balance plan would not
have been discriminatory so long as the conversion either did not result in wear-away
(i.e., the employee’s benefit under the plan was not less than the sum of his or her
accrued benefits under the traditional plan plus the cash balance account) or the
employee’s opening account balance was not less than the actuarial present value of
his or her accrued benefit under the traditional plan, using reasonable actuarial
assumptions. In 2004, the Treasury Department withdrew the regulations in response
to congressional activity, which is discussed below in the “Legislation” section.79
71 Id.
72 Id.
73 Id. at 93-94.
74 Id. at 94.
75 Id. at 93-94.
76 Id. at 94.
77 Id.
78 67 Fed. Reg. 76123 (Dec. 11, 2002).
79 IRS Announcement 2004-57 (June 15, 2004).

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Treasury proposal. Also in 2004, the Treasury Department announced a
legislative proposal that addresses the issue of cash balance plans.80 For purposes of
this report, the proposal does two things. First, it would clarify that a cash balance
plan does not violate the age discrimination provisions if the pay credits for older
employees are at least equal to those for younger employees.
Second, it would address some of the reasons why conversions are said to
disproportionately harm older workers. First, it would create a five year “hold
harmless” period. This means that for the first five years after a conversion, the
benefits earned under the cash balance plan would have to at least equal the benefits
that would have been earned under the old plan. Second, the proposal would prohibit
wear-away of normal or early retirement benefits, either during or after the five year
“hold harmless” period. A plan that violated either provision would be subject to
a penalty tax that would equal 100% of the difference between the benefits required
under the proposal and the benefits actually provided. The tax would be limited to
the greater of the plan’s surplus assets at the conversion or the plan sponsor’s taxable
income. There would be no penalty if participants were given a choice between the
two plans or if current participants were grandfathered under the old plan’s formula.
The proposal would apply prospectively and would not be intended to create an
inference as to the status of cash balance plans or conversions under current law.
The proposal has been included in the revenue provisions of the
Administration’s budget proposals for fiscal years 2005 and 2006.81 For FY2006, it
is estimated that the changes would increase revenue by $1,096,000 between 2006
and 2015.
Summary of Current Law

Currently, the question of whether cash balance plans are inherently age
discriminatory remains unanswered. While a few courts have found cash balance
plans not to violate the age discrimination provisions of ERISA, the IRC, and the
ADEA, one district court has concluded to the contrary. Proposed regulations
concerning cash balance plans were introduced but have been withdrawn, and the
Department of Treasury’s moratorium on approving cash balance plans remains in
effect.
80 Treasury Department Press Release JS-1132 (Feb. 2, 2004), which is available at
[http://www.treas.gov/press/releases/js1132.htm].
81 The proposal for FY2006, found in the General Explanations of the Administration’s
Fiscal Year 2006 Revenue Proposals
on pages 81-84, is available at
[http://www.treas.gov/offices/tax-policy/library/bluebk05.pdf].

CRS-17
Legislation
Prior Congresses
In the 107th and 108th Congresses, several measures were introduced that
addressed the issue of cash balance plans and age discrimination. This section will
discuss only those provisions that passed the House and/or Senate.
107th Congress. In 2001, the House passed the Comprehensive Retirement
Security and Pension Reform Act of 2001 (H.R. 10) that included a provision that
would have required the Treasury Department to prepare a report that examined the
effects of conversions of traditional defined benefit plans to hybrid plans, including
the effects on older employees. The bill passed by a vote of 407 to 24 (Roll Call 96,
107th Cong. 1st Sess.). The Senate passed a version of H.R. 10 that was markedly
different from the House version and did not include the cash balance provision.
In 2002, Representative Sanders introduced an amendment to the Treasury and
General Government Appropriations Act, 2003 (H.R. 5120, 107th Congress) that said:
None of the funds appropriated by any Act may be used by the Internal Revenue
Service for any activity that is in contravention of Internal Revenue Service
Notice 96-8 issued on January 18, 1996, section 411(b)(1)(H)(i) or section
411(d)(6) of the Internal Revenue Code of 1986, section 204(b)(1)(G) or
204(b)(1)(H)(i) of the Employee Retirement Income Security Act of 1974, or
section 4(i)(1)(A) of the Age Discrimination in Employment Act of 1967.
The amendment was approved by a vote of 308-121 (Roll Call 339, 107th Cong. 1st
Sess.). The provision was not included in the final appropriations bill.
108th Congress. In 2003, shortly after the Cooper v. IBM decision,
Representative Sanders introduced an amendment to the Transportation, Treasury,
and Independent Agencies Appropriations Act, 2004 (H.R. 2989, 108th Congress) that
said:
None of the funds appropriated by this Act may be used to assist in overturning
the judicial ruling contained in the Memorandum and Order of the United States
District Court for the Southern District of Illinois entered on July 31, 2003, in the
action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim,
Individually and on Behalf of All Those Similarly Situated vs. IBM Personal
Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
The amendment was approved by a vote of 258 to 160 (Roll Call 485, 108th Cong.
1st Sess.). The Senate later approved a similar amendment to its version of H.R. 2989
by voice vote. That amendment was introduced by Senator Harkin and it said:
None of the funds made available in this Act may be used by the Secretary of the
Treasury or his delegate to issue any rule or regulation which implements the
proposed amendments to Internal Revenue Service regulations set forth in
REG-209500-86 and REG-164464-02, filed December 10, 2002, or any
amendments reaching results similar to such proposed amendments.

CRS-18
In conference, the amendment was changed to:
Within one hundred and eighty days of enactment, the Secretary of the Treasury
shall present to the Congress a proposal for legislation which would provide
transition relief for older and longer-service participants affected by conversions
of their employers’ traditional pension plans to cash balance pension plans:
Provided, That none of the funds made available in this Act may be used by the
Secretary of the Treasury, or his designee, to issue any rule or regulation which
implements the proposed amendments to Internal Revenue Service regulations
set forth in REG-209500-86 and REG-164464-02, or any amendments reaching
results similar to such proposed amendments.
H.R. 2989 was then incorporated into the Consolidated Appropriations bill, H.R.
2673 (108th Congress). The House approved H.R. 2673 by a vote of 242 to 176 (Roll
Call 676, 108th Cong. 1st Sess.) and the Senate approved it by a vote of 65-28 (Roll
Call 3, 108th Cong. 2nd Sess.).
In 2004, Representative Sanders introduced an amendment to the Treasury
appropriations bill (H.R. 5025, 108th Congress) that related to cash balance plans and
the Cooper decision. It read:
None of the funds appropriated by this Act may be used to assist in overturning
the judicial ruling contained in the Memorandum and Order of the United States
District Court for the Southern District of Illinois entered on July 31, 2003, in the
action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim,
Individually and on Behalf of All Those Similarly Situated vs. IBM Personal
Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
The amendment was approved by a vote of 237-162 (Roll Call 458, 108th Cong., 2nd
Sess.). The provision was not included in the final appropriations bill.
109th Congress
H.R. 2831. In June of 2005, Congressmen John Boehner, Sam Johnson, and
Bill Thomas introduced H.R. 2830, the Pension Protection Act of 2005, to update
several areas of pension law.82 While it was indicated that one goal of the legislation
was to ensure the viability of cash balance plans, the Pension Protection Act as
introduced did not contain any cash balance plan provisions. This omission was
remedied by H.R. 2831, the Pension Preservation and Portability Act, which is to be
included in the more comprehensive H.R. 2830 when it passes through Committee.83
The Pension Preservation and Portability Act would establish an age
discrimination standard for defined benefit plans and revise the existing age
discrimination provisions of ERISA and the IRC. More specifically, the act states
that a plan would not be considered age discriminatory if “a participant’s entire
82 For information on H.R. 2380, see CRS Report RS22179, H.R. 2830: The Pension
Protection Act of 2005
, by Patrick Purcell.
83 Pension Preservation & Portability Act: Preserving the Portable Benefits of Cash Balance
Pension Plans for American Workers (BNA) No. 111 (June 9, 2005).

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accrued benefit, as determined . . . under the formula for determining benefits as set
forth in . . . the plan documents, would be equal to or greater than that of any
similarly situated, younger individual.” The act would define “similarly situated” to
mean an individual that is “identical to such participant in every respect (including
period of service, compensation, position, date of hire, work history, and any other
respect) except for age.” The act also includes a provision which states that a plan
would still comply with the age discrimination standard even if it allowed for
pre-retirement indexing of accrued benefits (pre-retirement indexing provides for
adjustments in accrued benefit based on an index or methodology which protects the
value of benefits against inflation).
H.R. 2233; S. 991. The Pension Fairness and Full Disclosure Act of 2005
addresses the age discrimination issue with a provision intended to protect older
workers in a plan conversion. It does not address whether cash balance plans violate
the age discrimination provisions.
The act would require certain treatment for a covered deferred compensation
plan of the employer’s executives and directors if the employer converted the
traditional defined benefit plan of its rank-and-file employees to a cash balance plan.
The act would define “cash balance plan” as any defined benefit plan under which
the accrued benefit is expressed to participants and beneficiaries as an amount other
than an annual benefit commencing at normal retirement age. The special rules
would apply if the conversion resulted in a significant reduction in the rate of future
benefit accrual for participants with at least 10 years of service or if those participants
were not allowed to choose to remain under the old plan. In such a case, the
converting plan sponsor’s directors and executives generally could not accrue
benefits in their nonqualified deferred compensation plan during the five-year period
after the conversion or, in certain circumstances, receive distributions from the plan
during that period. If these rules were violated by a plan sponsored by a corporation,
the corporation would be taxed in the amount equal to the impermissible accruals or
distributions.