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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
From Spencer's Benefits Reports: A state retirement system did not violate the Age Discrimination in Employment Act (ADEA) by crediting young workers with additional years of service in calculating disability retirement benefits, according to a June 19 Supreme Court decision (Kentucky Retirement Systems et al. v. Equal Employment Opportunity Commission, No. 06–1037).
The case involved the retirement plan administered by the Kentucky Retirement System for certain state and county employees. There are three separate systems covered by the overall retirement plan: the County Employees’ Retirement System, the Kentucky Employees Retirement System, and the State Police Retirement System. The retirement plan distinguishes between “hazardous” positions and “nonhazardous” positions. Pursuant to the terms of the plan, when covered workers become disabled after they become eligible for normal retirement, they receive only normal retirement benefits, which are equal to 2.5% of the employee’s final compensation times the number of years of service.
However, for employees who are not yet eligible for normal retirement (that is, employees younger than age 55 and with fewer than 20 years of service), additional years of service are added to the number of years worked for purposes of calculating disability retirement benefits. The number of years added is the number of years remaining until the worker would have attained either normal retirement age or 20 years of service, but no more than the number of years already worked. Under this provision, disability retirement benefits often are greater than normal retirement benefits for employees with the same number of years of service and the same final compensation. Moreover, disability benefits are greater for workers who become entitled to disability retirement at a younger age with the same number of years of service.
Charles Lickteig, a hazardous position worker in the Jefferson County Sheriff’s Department, became eligible for retirement at age 55, continued to work, became disabled, and then retired at age 61. He filed an age discrimination complaint with the EEOC after the plan based his pension on his actual years of service without imputing any additional years. The EEOC filed suit against Kentucky Retirement Systems, arguing that the plan failed to impute years solely because Lickteig became disabled after age 55. The District Court granted Kentucky Retirement Systems summary judgment, holding that the EEOC could not establish age discrimination, but the Sixth Circuit ultimately reversed on the ground that the plan violated the ADEA.
In its 5-4 decision that reversed the appellate court ruling, the Supreme Court noted that it had to decide whether a plan that lawfully makes age in part a condition of pension eligibility, and treats workers differently in light of their pension status, automatically discriminates because of age.
The EEOC had argued that in calculating the retirement benefits owed to disabled workers, Kentucky Retirement Systems used age as an explicit decisionmaking factor in a way that disadvantages older workers.
The Court cited six circumstances that “convince us that, in this particular instance, differences in treatment were not ‘actually motivated’ by age.”
First, age and pension status remain “analytically distinct” concepts.
Second, several background circumstances eliminate the possibility that pension status, serves as a “proxy for age” in Kentucky’s plan. These systemic rules involve, not wages, but pensions—“a benefit that the ADEA treats somewhat more flexibly and leniently in respect to age,” according to the Court. Every hazardous position worker, when hired, is promised disability retirement benefits should he become disabled prior to the time that he is eligible for normal retirement benefits. The Court added, “Congress has otherwise approved of programs that calculate permanent disability benefits using a formula that expressly takes account of age.”
Third, there is a clear non-age-related rationale for the disparity, said the Court. The manner in which Kentucky calculates disability retirement benefits is in every important respect but one identical to the manner in which it calculates normal retirement benefits. The one significant difference consists of the fact that the plan imputes additional years of service to disabled individuals. But the plan imputes only those years needed to bring the disabled worker’s years of service to 20 or to the number of years that the individual would have worked had he worked to age 55. The disability rules clearly track Kentucky’s normal retirement rules, said the Court.
Fourth, although Kentucky’s plan placed an older worker at a disadvantage in this case, in other cases, it can work to the advantage of older workers. For example, in the case of two disabled workers, one of whom is age 45 with 10 years of service, one of whom is age 40 with 15 years of service, the older worker would actually get a bigger boost of imputed years than the younger worker (10 years would be imputed to the former, while only 5 years would be imputed to the latter). And that fact helps to confirm that the underlying motive is not an effort to discriminate because of age, said the Court.
Fifth, Kentucky’s system does not rely on any of the sorts of stereotypical assumptions that the ADEA sought to eradicate. “It does not rest on any stereotype about the work capacity of ‘older’ workers relative to ‘younger’ workers,” said the Court.
Sixth, the plan’s eligibility requirements mean that, unless Kentucky were to severely cut the benefits given to disabled workers who are not yet pension eligible, Kentucky would have to increase the benefits available to disabled, pension-eligible workers, while lacking any clear criteria for determining how many extra years to impute for those pension-eligible workers who already are 55 or older.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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