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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: The wear-away provisions of the El Paso Corporation cash balance plan did not violate the benefit accrual requirements of Sec. 4(i) of the Age Discrimination in Employment Act (ADEA), because younger and older employees received credits to their accounts in a nondiscriminatory manner, according to the Tenth Circuit Court of Appeals. This was the ruling in Tomlinson, et al., v. El Paso Corporation (No. 10-1385).
In 1996, the El Paso Corporation converted its defined benefit pension plan into a cash balance plan with pay credits based on an employee’s age and years of service and a quarterly interest credit. In various communications, El Paso informed its employees that the new plan was less generous than the old plan.
As part of the conversion, each employee was credited with a cash balance account based on the actuarially equivalent accrued benefit payable under the old plan. A five-year transition period began on Jan. 1, 1997, under which the cash balance account was credited with pay and interest credits. At the same time, participants continued to accrue benefits under the old pension plan. At the end of the five-year transition period, benefit accruals under the old plan ceased, thereby establishing a “minimum” benefit.
An individual who retired after the plan began in 1997 had the choice of the greater of minimum benefit or the cash balance account benefit. “Wear away” occurred because the value of the cash balance account for many older employees would not eclipse the value of their minimum benefit under the old plan for several years. Wear-aways for older employees tended to be longer for than those for younger employees.
The court noted a 1996 letter from El Paso to employees that explained the purpose of the transition period—to allow “employees within five years of retirement…to receive a pension benefit equal to what they would receive under the current plan formula.”
Inputs, Not Outputs
ADEA Sec. 4(i) is concerned with inputs (i.e., benefit accruals) being provided fairly to both younger and older employees rather than with the fairness of the outputs (i.e., accrued benefits). Sec. 4(i) does not use the term “accrued benefit,” but refers to “benefit accrual” instead. El Paso claimed “that the ADEA is satisfied as long as an employer treats older and younger employees equally with respect to credits to their cash balance accounts, even if such treatment results in longer wear-aways for older employees.”
El Paso cited Cooper v. IBM (457 F.3d 636, 638-639, Seventh Circuit, 2006) and Register v. PNC Financial Services (477 F.3d 56, 69, Third Circuit, 2007) that cash balance plan credits are the relevant “input.”
The Tenth Circuit agreed: “As long as younger and older employees receive credits to their accounts in a nondiscriminatory manner, the plan complies with Sec. 4(i).” The Tenth Circuit added, “The only input that varies with age, the pay credit, actually increases as an employee gets older.”
Anti-Backloading Issue
The plaintiffs claimed that the El Paso plan violated the anti-backloading provisions of IRC Sec. 411(b)(1) because it could not pass any of the three accrual rules that are intended to prohibit employers from concentrating benefit accruals in the final years before an employee retires. According to the plaintiffs, “participants in a wear-away period experience zero accrual during the wear-away, then experience years of positive accrual when the wear-away ends. Any positive accrual is more than 133-1/3% larger than zero.”
The Tenth Circuit disagreed. IRC Sec. 411(b)(1)(B)(i) states that “any amendment to the plan which is in effect for the current year shall be treated as in effect for all other plan years.” The Tenth Circuit agreed with the conclusion by the Third Circuit in Register that this language means “once there is an amendment to the prior plan, only the new plan formula is relevant when ascertaining if the plan satisfies the 133-1/3% test. A participant’s election to retain his [benefits under] the old plan is not relevant to this calculation.”
The plaintiffs did not argue that the new plan formula violated the 133-1/3% test if it had been in effect for all years. As a result, the Tenth Circuit dismissed the anti-backloading claim because “under El Paso’s transition, benefit accruals are frontloaded, not backloaded.”
Communications Issues Raised
The Tenth Circuit upheld the dismissal by the district court of the communications issues raised by the plaintiffs.
ERISA Sec. 204(h) requires that participants be given a written notice and either a copy of the plan amendment or a summary of the plan amendment “written in a manner calculated to be understood by the average plan participant.” The notice had to be provided after the adoption of the plan amendment and no less than 15 days before its effective date. The Tenth Circuit pointed out that the “implementing regulations in effect at the time of El Paso’s amendment did not require an employer to ‘explain how the individual benefit of each participant…will be affected by the amendment.’”
After amendments were made to the law in 2001, newer regulations laid out “specific requirements for transitions from a defined benefit plan to a cash balance plan, and mandate that the company give a range of examples illustrating the effects of the new plan.” However, in Jensen v. Solvay Chemicals, Inc. (625 F.3rd 656, Tenth Circuit, 2010), the court concluded that “wear-away periods did not need to be explicitly disclosed provided that the employer’s notice gave sufficient representative examples of the effects of the plan amendment.”
The Tenth Circuit concluded in El Paso that “plaintiffs were explicitly warned that their benefits under the old plan would likely be ‘frozen,’ and that they would receive the greater of the frozen minimum benefit or the new cash balance benefit. The brochure summarizing the plan, combined with the earlier letter which was quite direct about the potential downsides of the transition, provided adequate notice under ERISA Sec. 204(h).”
Finally, the plaintiffs argued that the 2002 summary plan description was inadequate because it did not include information regarding “wear-away periods and benefit reductions.” The Tenth Circuit dismissed this claim, citing its decision in Jensen: “We concluded that a wear-away period is a ‘consequence of the change in plan terms’ that ‘need not be disclosed as a new eligibility requirement.’ Absent a finding of deceit on the part of the employer or a failure on the part of the employer to explain how benefits are calculated, we will not invalidate an SPD that neglects to inform employees of a wear-away period.”
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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