<nobr>Aug 25, 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

The U.S. Court of Appeals for the Ninth Circuit on August 20 joined four other circuit courts in holding that cash balance plans do not violate the Employee Retirement Income Security Act's anti-age discrimination and anti-backloading provisions. ERIC applauded the decision rejecting an Internal Revenue Service interpretation of ERISA's anti-backloading rules. The case is Hurlic v. Southern California Gas Company in which ERIC filed an earlier amicus brief urging that the court uphold the legality of the cash balance conversion.

ERIC has long argued with IRS that their 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 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.

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.


Websites:

Hurlic v. Southern California Gas Company

ERIC's Brief

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