• IBM Settles Portion of Cash Balance Plan Class Action Suit
  • December 1, 2004 | Author: Mark A. Vogel
  • Law Firm: Weil, Gotshal & Manges LLP - New York Office
  • More than a year after the July 2004 judicial decision in Cooper v. IBM that shook the entire pension system, IBM agreed to settle some of the claims brought against it by its current and former employees. Such employees alleged, inter alia, that the company violated ERISA when it converted its traditional defined benefit plan to a cash balance plan. The plaintiffs and IBM also agreed to limit the possible damages IBM would be obligated to pay should it lose its appeal of Judge Murphy's district court decision to the Seventh Circuit Court.

    On September 29, 2004, IBM announced that it reached a settlement with the plaintiff class that provides that the plaintiffs would drop certain claims with respect to the 1995 conversion of IBM's defined benefit plan to a pension-equity plan and agree to limit IBM's liability should it not prevail on the age discrimination claims in the circuit court in exchange for the receipt of an incremental pension benefit worth approximately $300 million from IBM. Although the parties did not settle the age discrimination claims, which will be appealed by IBM to the Seventh Circuit once a final order is issued, they did agree to limit damages should the Seventh Circuit uphold the ruling that cash balance plans are inherently age discriminatory, a decision which would be disastrous for the sponsors of the hundreds of cash balance plans in existence.

    Under the settlement, IBM's liability with respect to the age discrimination claims will be limited to $1.4 billion; $780 million will be paid to affected workers if the cash balance plan is found to have illegally discriminated against older workers on a continuing basis and $620 million will be paid to employees if it is found that IBM violated age discrimination laws by making certain allocations on July 1, 1999 when it converted its pension plan to a cash balance plan.

    IBM also agreed, in the settlement filed on September 17, 2004, to pay $20 million to certain employees who had not been at IBM for the requisite period to be fully vested in their accrued benefit under the traditional defined benefit plan (the partial termination claim).

    It is worth noting that early in 2004, Judge Murphy granted a plaintiffs' motion that the IBM cash balance plan participants could be entitled to both retroactive and prospective relief as a result of the plan's violation of ERISA's age discrimination prohibition. On the narrow underlying issue of retroactive relief, IBM argued that the plaintiffs should not be entitled to such relief because the district court's ruling was a "startling new development in pension law" and therefore the court should "exercise its discretion and grant only prospective relief." Judge Murphy, (noting that the age discrimination laws existed years before cash balance plans came into existence) however, found that it was IBM's response to the law, not the law itself, that had changed, and therefore the plan participants were entitled to retroactive relief.

    On the legislative front, on September 21, 2004, the House passed, by a vote of 237 to 162, an amendment to a 2005 appropriations bill (H.R. 5025) that would prohibit Treasury from using funds to weaken or overturn the district court ruling in IBM. Similar language to prevent the use of Treasury funds to help overturn the IBM decision by issuing any rules or regulations relating to age discrimination in cash balance plans by implementing its proposed regulations from December 2002 (which provided conditions under which cash balance plans could meet the age discrimination requirements under the Internal Revenue Code) was added to a 2004 appropriations bill which was signed into law (P.L. 108-199) by President Bush on January 23, 2004.

    House Committee on Education and the Workforce Chairman, Rep. John Boehner (R-OH) is currently drafting a comprehensive pension reform bill, which would include language to ensure that prospectively cash balance plans remain a viable option for employers to offer their workers, and will introduce such legislation early 2005.

    In summary, the pending appeal by IBM to the 7th Circuit (with a possible appeal of any such decision to the Supreme Court) continues to leave plan sponsors with possible liability on a look back basis, if the decision finds cash balance plans violate the age discrimination laws. While proposed legislation should address the issues raised by the age discrimination cases prospectively, it is unlikely to address the issues retroactively.