Pre-PPA cash balance plan with valid NRA did not violate ERISA’s bar on backloading benefit accruals

A cash balance plan that was in effect prior to the Pension Protection Act of 2006 (PPA) and employed a valid method for determining normal retirement age did not violate ERISA’s ban on “backloading” benefit accruals, the U.S. Circuit Court in Richmond (CA-4) has ruled.

Normal retirement age

From 1998 to 2007, a cash balance plan defined normal retirement age (NRA) as the earlier of age 65, or the date a participant completes five years of service. The employer stated that this definition of NRA in the pre-PPA plan was designed to avoid the “whipsaw” calculation, which required plans calculating a lump-sum distribution to add to the current balance in an employee’s “account” any interest promised through normal retirement age, and then discount that sum back to present value via use of a prescribed interest rate. (The PPA eliminated use of the “whipsaw” calculation.)

The employer further contended that this definition of NRA insulated the plan from allegations of backloading of benefit accruals in violation of ERISA §204(b)(1) because, under the terms of the statute, the ban on backloading doesn’t apply once the employee reaches NRA as specified under the plan.

A group of employees disagreed and filed suit alleging, among other things, that the definition of NRA was invalid under ERISA and the plan terms violated the bar on backloading of benefit accruals.
District court ruling

The district court granted the employer’s motion to dismiss both allegations under Rule 12(b)(6). The definition of NRA fell within ERISA §3(24), even though it coincides with years of service, rather than stating an age certain. The court relied on Fry v. Exelon Corp. Cash Balance Pension Plan, where the Seventh Circuit, faced with a similar definition of NRA, concluded that five years of service is an “age” under ERISA.

With regard to unlawful backloading, the district court noted that the employees’ counsel conceded at oral argument that the employees’ argument regarding backloading would fail if the plan’s definition of NRA were found to be valid.

Appellate court

On appeal, the employees conceded the plan’s definition of NRA was valid under ERISA’s definitional section, but still contended the NRA violated ERISA’s “substantive backloading provisions.” The appellate court rejected this argument. ERISA’s backloading rules do not apply once a participant reaches NRA.

Final count

A remaining count in the employees’ original complaint, which alleged that protected benefits had been eliminated, survived the employer’s motion to dismiss in the district court and was not at issue on appeal.

Source: McCorkle v. Bank of America Corporation (CA-4).

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