Eaton v. Onan Corp.

• Decision Date: 29 September 2000
• Docket Number: No. IP 97-0814-C-H/G.,IP 97-0814-C-H/G.
• Citation: 117 F.Supp.2d 812
• Court: U.S. District Court — Southern District of Indiana
• Parties: James EATON and Steve Seidlitz, on behalf of themselves and all others similarly situated, Plaintiffs, v. ONAN CORPORATION, The Pension Policy Committee of Cummins Engine Company, Inc., Onan Pension Plan, and Onan Profit Sharing Plan, Defendants.

Page 812

117 F.Supp.2d 812

James EATON and Steve Seidlitz, on behalf of themselves and all others similarly situated, Plaintiffs, v. ONAN CORPORATION, The Pension Policy Committee of Cummins Engine Company, Inc., Onan Pension Plan, and Onan Profit Sharing Plan, Defendants.

No. IP 97-0814-C-H/G.

United States District Court, S.D. Indiana, Indianapolis Division.

September 29, 2000.

COPYRIGHT MATERIAL OMITTED

William C. Barnard, Sommer & Barnard, Indianapolis, IN.

William K. Carr, Denver, CO.

Robert F. Hill, Hill & Robbins, Denver, CO.

Arthur P. Kalleres & Marc Sciscoe, Ice Miller, Indianapolis, IN.

ENTRY ON MOTIONS FOR SUMMARY JUDGMENT

HAMILTON, District Judge.

Like many employers in recent years, defendant Onan Corporation converted its defined benefit retirement plan to a design known as a "cash balance" design. In this case, Onan employees and retirees have raised a claim of age discrimination that could result in a finding that cash balance plans are essentially per se illegal. The question is one of first impression in the courts: whether a cash balance defined benefit pension plan violates federal prohibitions on age discrimination in pension plans on the theory that the "rate of benefit accrual" declines with an employee's age. See 29 U.S.C. § 623(i) (for defined benefit plans, prohibiting "cessation of an employee's benefit accrual, or the reduction of the rate of an employee's benefit accrual, because of age") & 29 U.S.C. § 1054(b)(1)(H) (defined benefit plan violates law if "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"). That question has been left unanswered by the Internal Revenue Service and the Equal Employment Opportunity Commission since the relevant statutory language was enacted in 1986. As explained below, the court finds that the cash balance plan at issue here does not violate those prohibitions on age discrimination in terms of the rate of benefit accrual. Plaintiffs have also raised a number of related claims more specific to the particular plan in this case, three of which cannot be resolved as a matter of law on the parties' motions for summary judgment.

I. Background and Summary

Plaintiffs here are participants in the Onan Pension Plan sponsored by defendant Onan Corporation, a wholly-owned subsidiary of Cummins Engine Company, Inc. Plaintiffs assert claims under the Age Discrimination In Employment Act of 1967 (ADEA), 29 U.S.C. § 621 et seq., against defendant Onan Corporation, and under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., against defendants Onan Corporation, the Pension Policy Committee of Cummins Engine Company, Inc., the Onan Pension Plan, and the Onan Profit Sharing Plan.

On December 14, 1994, the Onan board of directors formally amended and "restated" the Onan Pension Plan, retroactive to January 1, 1989, adopting what is known as a cash balance pension plan design. Plaintiffs assert that Onan has violated the ADEA, first by establishing and maintaining a cash balance pension plan that reduces the rate of a participant's benefit accrual because of age, and second by providing alternative formulas for annuities under the Pension Plan without offering an equivalent lump sum payment as an optional form of benefit.

Plaintiffs also contend that the Onan Pension Plan's rate of benefit accrual violates ERISA because a participant's rate of benefit accrual decreases based on a participant's age, because some forms of benefits are payable only as annuities and not as lump sums, because the accrual of benefits is excessively "backloaded," and because defendants failed to use reasonable actuarial factors in determining participants' offset amounts under the Onan Profit Sharing Plan.

Defendants have moved for summary judgment on all of plaintiffs' claims. Plaintiffs have moved for summary judgment as to liability on their age discrimination claims on the rate of benefit accrual issue under both the ADEA and ERISA, and on their claims regarding lump sum distributions under ERISA, 29 U.S.C. §§ 1053 & 1055.

For two reasons, the court finds as a matter of law that the cash balance design of the Onan Pension Plan does not violate the age discrimination provisions on the rate of benefit accrual in the ADEA, 29 U.S.C. § 623(i), or ERISA, 29 U.S.C. § 1054(b)(1)(H). First, the legislative history shows that these specific prohibitions do not apply at all to employees who have not yet reached normal retirement age. Accrual of benefits for these younger employees is regulated by other provisions of ERISA. Second, even assuming these pension age discrimination provisions apply at all to participants who have not reached normal retirement age, when their language is properly applied to cash balance pension plans, the undisputed facts show that the rate of benefit accrual does not depend on age. The court also finds as a matter of law that the Onan Pension Plan does not discriminate on the basis of age by failing to provide for a lump sum payment option for all alternative formulas for calculating an annuity benefit. The court therefore grants summary judgment for defendants on these claims and denies plaintiffs' motion for summary judgment on these claims.

In light of very recent decisions of the Second and Eleventh Circuits interpreting 29 U.S.C. § 1053(e), however, the court denies both sides' motions for summary judgment on the question whether ERISA requires the Onan Pension Plan to offer payment of benefits based on the so-called "minimum annuity" and "grandfather annuity" in the form of a lump sum payment that is the actuarial equivalent of the applicable annuity. See Esden v. Bank of Boston, 229 F.3d 154, 161 (2d Cir.2000); Lyons v. Georgia-Pacific Corp. Salaried Employees Retirement Plan, 221 F.3d 1235, 1251 (11th Cir.2000). These recent decisions may call for the creation of subclasses of plaintiffs based on the effects of 1994 legislation. There are also issues regarding the availability and extent of retroactive relief for participants who have chosen to take benefits in the form of annuities rather than lump sum distributions.

The court also is not persuaded that defendants are entitled to summary judgment on two additional issues. The first is whether the Onan Pension Plan violates the "anti-backloading" benefit accrual requirements of ERISA. The second is whether Onan could properly use two different interest rates when calculating opening account balances for participants who had also participated in the Profit Sharing Plan. Defendants' motion for summary judgment on ERISA claims is denied on those claims.

II. Cash Balance Pension Plans

In general, federal law recognizes two types of pension plans provided by employers: defined benefit plans and defined contribution plans. In a defined benefit plan, a plan participant is entitled to a fixed periodic benefit payment upon retirement. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999), citing Commissioner v. Keystone Consolidated Industries, Inc., 508 U.S. 152, 154, 113 S.Ct. 2006, 124 L.Ed.2d 71 (1993). Benefits are paid to plan participants pursuant to a formula spelled out in the pension plan. Defined benefit plans are usually funded by the employer on an actuarial basis, which is supposed to ensure that the plan will have adequate funds to pay the benefits promised to plan participants when they reach retirement age. Because a defined benefit plan "consists of a general pool of assets rather than individual dedicated accounts," the employer "typically bears the entire investment risk and ... must cover any underfunding as the result of a shortfall that may occur from the plan's investments." Hughes Aircraft, 525 U.S. at 439, 119 S.Ct. 755.

Until recently, the benefit formulas in defined benefit plans typically have been based on a percentage of the participant's salary over the last year or several years before retirement, multiplied by the participant's years of service with the employer. That design assumes that most employees' compensation is highest near the end of their careers, so an employee usually earns the largest share of a retirement benefit near the end of his or her career. Thus, such a plan rewards long-term employment and loyalty. Some pension practitioners refer to this as a "backloaded" accrual of benefits. See generally Alvin D. Lurie, Cash Balance Plans: Enigma Variations, Tax Notes Today (Oct. 25, 1999) (electronic publication).

In contrast, a defined contribution plan establishes an individual account for each participant. The employer may make periodic contributions to the participant's individual plan account (often supplemented by voluntary contributions by the participant). The participant's retirement benefit is determined by the balance in the individual account, which will depend on the contributions plus net investment earnings on the contributions. See 29 U.S.C. § 1002(23)(B) (defining a participant's accrued benefit in a defined contribution account as "the balance of the individual's account"). Because a participant's retirement benefit is not a fixed amount, the participant bears the investment risk. Defined contribution plans generally do not have the "backloading" problem found in many defined benefit plans. The benefits in a defined contribution plan are a function of contributions and investment earnings over an entire career with an employer, not primarily just the last year or last few years. See generally The Controversy Over Cash Balance Plans, 158 N.J.L.J. 652 (Nov. 22, 1999).

Cash balance plans are defined benefit plans that strongly resemble defined contribution plans. See generally Esden v. Bank of Boston, 229 F.3d 154, 176 (2d Cir.2000) (describing cash balance plans). The IRS has described cash balance plans as follows:

In general terms, a cash balance plan is a defined benefit pension...