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Cash Balance Litigation, Hybrids in the Public Sector

March 12, 2012 - As we continue to work with the Treasury Department, IRS, and Congress to enhance the regulatory framework for hybrid plans, we wanted to update you on related developments in cash balance plan litigation and public sector adoption of “hybrid” (DB/DC) and cash balance plans. Developments in both areas bear upon general public policy towards hybrid plans.

Cash Balance Litigation Update

In recent months, litigation surrounding cash balance plan conversions has proved unsuccessful for plaintiffs asserting ERISA and ADEA claims.

On February 21, the Southern District of New York dismissed plaintiffs’ claims against IBM for breach of fiduciary duty under ERISA for converting its defined benefit plan into a cash balance plan; the court held that plan participants who already settled claims in litigation cannot bring those claims again. Murphy v. International Business Machines Corp., S.D.N.Y., No. 10-cv-06055 (Feb. 21, 2012). This is one of the longest-standing challenges to cash balance plans, and this time, the court based its dismissal on grounds that the claims were barred by ERISA’s statute of limitations as well as principles of res judicata (the matter has already been judged, and resulted in a class settlement and release).

Additionally, the court stated that even if the claims were not so barred, the “[p]laintiffs’ allegation that IBM breached its fiduciary duty under ERISA by converting its defined benefits pension plan into a cash balance plan and thereby creating a new benefit formula is not in itself sufficient to state a claim.” Id. (internal quotations omitted).

Also on February 21, the Supreme Court denied certiorari in a request to review the Tenth Circuit’s holding in Tomlinson v. El Paso that a plan conversion from a defined benefit plan to a cash balance plan did not result in a violation under ADEA or ERISA. Tomlinson v. El Paso, No. 1:04-cv-02686 (10th Cir. 2010), cert. denied, U.S., No. 11-795 (2012). The Tenth Circuit had found that there was no evidence of the use of discriminatory plan inputs (pay and interest credits) to support the plaintiffs’ ADEA claim; nor did the plan illegally backload benefits in violation of ERISA. The Supreme Court’s denial leaves the Tenth Circuit precedent intact.

Earlier this year, the Supreme Court also denied a similar certiorari petition in Engers v. AT&T, leaving the decision of the Third Circuit unaffected. Engers v. AT&T, Inc., No. 10-2752, (3d Cir. 2011), cert. denied, U.S., No. 11-590 (2012). As noted in our last update, the Third Circuit affirmed the District Court?s summary judgment for AT&T on all of the ADEA and ERISA claims against AT&T and, specifically, concluded that the plaintiffs? age discrimination ?wear-away? claims are barred by the plain language of ADEA

Finally, we note that the Department of Labor has filed an amicus brief in the federal District Court where CIGNA Corporation v. Amara has been remanded. CIGNA Corporation v. Amara, 131 S. Ct. 1866 (2011). Cigna Corporation v. Amara made headlines last May when the Supreme Court vacated the Second Circuit decision that affirmed an order of a monetary remedy under section 502(a)(1)(B) of ERISA for inconsistencies between a summary plan document and the plan instrument. Now on remand, the DOL?s brief argues for the District Court to reinstate its ?A plus B? remedy as equitable relief under section 502(a)(3) of ERISA. The ?A plus B? remedy would give employees the benefits they had accrued under the traditional defined benefit plan (Part A) and additional benefits going forward under the cash balance plan (Part B). The brief is available on the DOL’s website.

Hybrid and Cash Balance Plans in the Public Sector

Though the majority of state and local governments continue to offer defined benefit plans to their employees, several governments have changed to a plan that combines DB and DC elements. These plans are typically referred to as “hybrid plans” in the public sector (terminology that is somewhat inconsistent with private sector use). Additionally, some state and local governments have adopted, or are considering adopting, cash balance pensions.

States already using a mandatory DB-DC hybrid plan include Georgia, Indiana, Oregon, and Michigan (limited to public school employees). Rhode Island will join the list of mandatory hybrid plans on July 1, 2012, with the enactment of the Rhode Island Retirement Security Act of 2011. Other states that offer or have offered optional hybrid plans include Colorado, Florida (limited to DB plan participants as of 2000), Montana, Ohio, Oregon (limited to education personnel), South Carolina, Utah, and Washington (in the latter, the state legislature is considering legislation to make the hybrid DB-DC plan mandatory for all newly hired state and local employees).

Meanwhile, mandatory cash balance plans are used in Nebraska (county and state) and Texas (municipal, county, and district). San Diego may follow suit in its upcoming June 5 Primary Election, where registered voters will have the opportunity to vote on pension reforms. Currently, only one proposal, which urges a switch from the current DB plan to a 401(k)-style plan, has been approved by the city council for placement on the ballot. Proposals for other alternatives, including a “cap and freeze plan,” are already underway.

Like Nebraska and Texas, a few states that have retained the DB model are now considering switching to a cash-balance arrangement. Louisiana Governor Bobby Jindal recently outlined a plan to reform the state pension system using a cash-balance approach. Kansas is also considering using a cash-balance plan following an in-depth study by its Kansas Public Employees Retirement System Study Commission.

As always, for more information or for any questions, you may contact Derek Dorn (202-662-2290) at Davis & Harman.