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THE ERISA COMMITTEE

<nobr>Aug 20, 2008</nobr>

Ninth Circuit Rejects IRS Interpretation of ERISA's Anti-Backloading Rules

Court Also Joins Sister Circuits in Holding Cash Balance Plans Not Age Discriminatory

Washington, D.C. -- The ERISA Industry Committee (ERIC), a Washington, D.C.-based trade association representing America's major employers, applauded today's decision from the U.S. Court of Appeals for the Ninth Circuit rejecting an Internal Revenue Service (IRS) interpretation of Employee Retirement Income Security Act's (ERISA) anti-backloading rules. The court also joined four other circuit courts in holding that cash balance plans are not age discriminatory. The case is Hurlic v. Southern California Gas Company.

"ERIC has long argued that the IRS's interpretation was inconsistent with the statute and called into question many long-established plan designs that benefit plan participants by providing a benefit that is the greater of two formulas. The Ninth Circuit wisely rejected the IRS's interpretation as flawed," said Mark Ugoretz, ERIC President.

The Ninth Circuit examined IRS Revenue Ruling 2008-7, which was issued earlier this year and suggested that such "greater of" calculations were impermissible. The court found the revenue ruling "unpersuasive" as it "provided little in the way of reasoning." The court noted that the IRS's position would create an illogical result whereby a plan may freeze benefits under the old plan formula, but not provide a more generous transition period under which additional benefits accrue before the old formula is frozen. The court cited the Treasury Department's proposed regulations issued June 18 on the anti-backloading requirement as further suggesting the IRS's revenue ruling is flawed.

"The court recognized what ERIC has long argued, plans that adopt a 'greater of' transition are more generous to participants and do not conflict with the intent of ERISA's anti-backloading provisions," said Ugoretz.

In an important ruling of first impression, the Ninth Circuit also held that "wearaway" in cash balance conversions does not violate federal or state age discrimination rules. The court determined that in a conversion a participant's accruals may temporarily cease until the benefit under the new formula exceeds the benefit calculated under the old formula.

The Ninth Circuit decision also rejected the plaintiff's contention that cash balance plans are inherently age discriminatory. ERIC in October 2006 filed an amicus brief with the Ninth Circuit urging affirmance of the district court's grant of summary judgment rejecting the appellants' contention that cash balance plans violate ERISA's age discrimination provisions. In its decision, the Ninth Circuit agreed with the Seventh Circuit that nothing suggests that "Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year's retirement savings."

The Ninth Circuit now joins the Second, Third, Sixth, and Seventh Circuits in upholding the lawfulness of cash balance plans.

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For more information:
Ted Godbout
Manager, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400
Fax: (202) 789-1120
tgodbout@eric.org
www.eric.org

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The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.

Websites:

Ninth Circuit Decision

ERIC Amicus Brief


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