457 F.3d 636 (7th Cir. 2006), 05-3588, Cooper v. IBM Personal Pension Plan

Docket Nº:05-3588.
Citation:457 F.3d 636
Party Name:Kathi COOPER, et al., on behalf of a class, Plaintiffs-Appellees, v. IBM PERSONAL PENSION PLAN and IBM CORPORATION, Defendants-Appellants.
Case Date:August 07, 2006
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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457 F.3d 636 (7th Cir. 2006)

Kathi COOPER, et al., on behalf of a class, Plaintiffs-Appellees,



No. 05-3588.

United States Court of Appeals, Seventh Circuit.

August 7, 2006

Argued February 16, 2006

Rehearing and Rehearing En Banc Denied Sept. 1, 2006.[*]

Appeal from the United States District Court for the Southern District of Illinois, No. 99-829-GPM—G. Patrick Murphy, Chief Judge.

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Lee A. Freeman, Jr. (argued), Freeman, Freeman & Salzman, Chicago, IL, for Plaintiffs-Appellees.

Jeffrey G. Huvelle (argued), Covington & Burling, Washington, DC, for Defendants-Appellants.

Kent A. Mason, Davis & Harman, Washington, DC, for Amicus Curiae.

Before Bauer, Easterbrook, and Manion, Circuit Judges.

Easterbrook, Circuit Judge.

The IBM Personal Pension Plan is a cash-balance defined-benefit plan. It is almost, but not quite, a defined-contribution plan. Although each employee in a defined-contribution plan has a fully funded individual account, the personal account in a cash-balance plan is not separately funded. Instead IBM imputes value to the account in the form of "credits": there are pay credits (set at 5% of the employee's gross taxable income) and interest credits (set at 100 basis points above the rate of interest on one-year Treasury bills). A trust holds assets that may (or may not) be enough to fund all of the individual accounts when workers quit or retire. IBM's plan permits an employee who quits or retires after working long enough for pension benefits to vest (a maximum of five years) to withdraw the balance in cash or roll it over into a fully funded annuity. During the time before cash-out the employee takes the risk that IBM will suffer business reverses and be unable to pay the full stated value of the account (if the amount already in trust for participants as a group turns out to be insufficient); otherwise IBM's plan is economically identical to a defined-contribution plan funded the same way and invested in a bond fund that returns 1% above the Treasury rate.

Plaintiffs in this class-action litigation contend that IBM's plan violates a subsection of ERISA (the Employee Retirement Income Security Act) that prohibits age discrimination. The district court ruled in

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plaintiffs' favor, see 274 F.Supp.2d 1010 (S.D. Ill. 2003), and proceedings continued as the parties debated how much IBM owes (and how it must change its plan in future years) as a remedy. That subject has been resolved to mutual satisfaction—contingent on the district judge being right on the merits—so this appeal is limited to the question whether the plan is unlawfully discriminatory.

All terms of IBM's plan are age-neutral. Every covered employee receives the same 5% pay credit and the same interest credit per annum. The basis of the plaintiffs' challenge—and the district court's holding—is that younger employees receive interest credits for more years. The language on which plaintiffs rely was added to ERISA in 1986; Congress also enacted a parallel provision covering defined-contribution plans. Pub. L. 99-509, 100 Stat. 1874, 1975, 1976 (1986). We set these out alongside to facilitate comparison:

Defined-benefit plans: ERISA §204(b)(1)(H)(i), 29 U.S.C. §1054(b)(1)(H)(i) Defined-contribution plans: ERISA §204(b)(2)(A), 29 U.S.C. §1054(b)(2)(A)
[A] defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age. A defined contribution plan satisfies the requirements of this paragraph if, under the plan, allocations to the employee's account are not ceased, and the rate at which amounts are allocated to the employee's account is not reduced, because of the attainment of any age.

These appear to say the same thing, except that the rule for defined-benefit plans tells us what is not allowed, while the rule for defined-contribution plans tells us what works. Either way, the employer can't stop making allocations (or accruals) to the plan or change their rate on account of age. The IBM plan does neither of these things and therefore, one would suppose, complies with the statute. If this were a real, rather than a phantom, defined-contribution plan, that much would be taken for granted. Yet if the 5%-plus-interest formula is non-discriminatory when used in a defined-contribution plan, why should it become unlawful because the account balances are book entries rather than cash? Plaintiffs persuaded the district court, however, that the two subsections are radically different. That difference is attributable to the phrase "benefit accrual," which appears in the subsection for defined-benefit plans but not the one for defined-contribution plans. Neither ERISA nor any regulation defines this phrase, so the district judge went looking for some equivalent elsewhere in the statute. It found the phrase "accrued benefit," which is...

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