A new federal appeals court ruling could set the stage for the U.S. Supreme Court to decide whether contributing equal amounts for young and old pension plan members amounts to age discrimination.

A 3-judge panel of the 7th U.S. Circuit Court of Appeals has ruled in Chicago that International Business Machines Corp., Armonk, N.Y., had a legal right under the Employee Retirement Income Security Act to convert to a “cash balance” pension plan formula, from a traditional formula in the 1990s.

“Replacing a plan that discriminates against the young with one that is age-neutral does not discriminate against the old,” Judge Frank Easterbrook writes in an opinion for the 7th Circuit panel.

Older employers have joined in class-action lawsuits against IBM, arguing that the conversion discriminated against them.

A tradition pension plan formula is designed in such a way that employers contribute more for older employees and less for younger employees. Interest on pension plan assets is supposed to give otherwise identical older employees and younger employees identical pension benefits when they reach the plan retirement age.

A cash balance plan is designed in such a way that an employer contributes identical amounts each year for employees with identical levels, regardless of the employees’ ages or years of service.

Although IBM said it would contribute the same amount for older and younger workers, and set up a transition program to buffer older workers against changes in the plan design, the older employees have argued that the cash balance plan conversion is unfair to them because they will have less time than younger IBM employees to earn interest on their share of IBM’s pension plan assets.

Appeals courts in the 2nd and 9th circuit appeals courts have sided with the older employees.

Easterbrook criticizes that reasoning and says the litigation in the cash balance case, Cooper et al. on behalf of a class v. IBM Personal Pension Plan and IBM Corp., “went off the rails” because of confusion about the term “benefit accrual.”

Section 204(b)1(H)(i) of ERISA says employers funding defined benefit plans may not reduce “benefit accruals” because of an employee’s age, while Section 204(b)(2)(A) of ERISA says sponsors of defined contribution plans can satisfy nondiscrimination requirements by making sure not to reduce the rate at which amounts are allocated to the employee’s account.

Here, Easterbrook writes, “benefit accrual” is the same as “allocation,” or the amount of cash put into a plan each year, not the final benefit.

“Nothing in the language or background of Section 204(b)(1)(H)(i) 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,” Easterbrook writes. “Treating the time value of money as a form of discrimination is not sensible.”

A copy of the opinion is on the Web at Document Link