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The aftermath of the cash balance controversy: applying the contribution-based test for age discrimination to traditional defined benefit pensions.

                   TABLE OF CONTENTS

I.     INTRODUCTION                                          2

II.    A BRIEF TYPOLOGY OF RETIREMENT PLANS                  5

III.   THE STATUTES                                          9

IV.    THE CASES                                            12

V.     APPLYING THE CONTRIBUTION-BASED TEST FOR AGE         12
       DISCRIMINATION TO TRADITIONAL DEFINED BENEFIT PLANS

VI.    IS THERE A WAY OUT?                                  22

VI.    SHOULD THERE BE A WAY OUT?                           25

VIII.  CONCLUSION                                           28


I. INTRODUCTION

While the once dominant, annuity-paying defined benefit pension plan is no longer the mainstay of the private retirement savings system, (1) the legal issues pertaining to such plans remain important. Even as these traditional pensions continue their long-term decline in the private sector, defined benefit plans "cover 20 million active participants and pay benefits to millions of retirees." (2) After the market losses caused by the Crash of 2008, private sector defined benefit pensions still hold almost two trillion dollars in retirement assets. (3) Hence, for the foreseeable future, the legal questions relative to the classic defined benefit pension will be consequential.

Recent decisions of the U.S. courts of appeals have, inadvertently but decisively, created an important legal issue for traditional, annuity-paying defined benefit pensions, namely, whether such pensions should test for age discrimination on the basis of the benefits they pay or the contributions they receive. Five federal appeals courts have now held that cash balance pension plans (4) do not age discriminate for purposes of the relevant statutes and that the proper measure for pension age discrimination is the inputs employers contribute rather than the ultimate outputs such plans distribute. As a textual matter, the controlling statutes bar all defined benefit arrangements from reducing "the rate of an employee's benefit accrual ... because of the attainment of any age" by the employee. (5) In sustaining cash balance arrangements against the claim of age discrimination, these appeals courts have all held that the presence of discrimination vel non is, as a matter of statutory interpretation, determined by looking at employers' contributions to such plans, not at amounts ultimately paid at retirement. (6)

In reaching this conclusion, these courts have uniformly and unreservedly told us that the statutory term "benefit accrual" is unrelated to the statutory term "accrued benefit." The former refers to inputs, namely, the employer's contributions to the plan. The latter term, we have been instructed, refers to outputs, that is, the deferred annuity purchased for the plan participant at age sixty-five. The statutes, these courts have unanimously held in the cash balance context, require nondiscrimination as to employer contributions ("benefit accrual") rather than ultimate plan outputs ("accrued benefit").

This contribution-based test of age discrimination, when applied to traditional, annuity-paying defined benefit pension plans, produces results which many would consider problematic, indeed, which will disappoint the reasonable pension expectations of many older workers. Yet, without intending to, these courts, by embracing the contribution-based theory of age discrimination, have made it easier for employers sponsoring traditional defined benefit pensions to maintain such plans by permitting employers to control their pension costs for older workers. The contribution approach to age discrimination allows employers to reduce the rates at which older employees accrue additional benefits, thereby enabling such employers to stabilize their pension contributions for such older employees.

The first section of this article summarizes the differences among traditional, annuity-style defined benefit pension plans, defined contribution plans such as 401 (k) arrangements, and cash balance pensions, defined benefit plans which imitate in important respects defined contribution plans. The second section then outlines the statutory provisions which prohibit age discrimination in the pension context and describes the controversy about the application of those provisions to cash balance plans. The third section of this article discusses the five court of appeals' decisions holding that cash balance arrangements do not discriminate on the basis of age within the meaning of these statutes. Critical to these five decisions is the conclusion that the statutory term "benefit accrual" means inputs, that is, employers' contributions to defined benefit plans, rather than outputs, namely, the annuity-type benefits to which participants are entitled at retirement.

The fourth section of this article applies to the classic, annuity-paying defined benefit pension the contribution-based test for age discrimination which emerges from these five cash balance decisions. Under this input-measuring test, a defined benefit pension may decrease pension outputs as participants age as long as the employer's contributions for such decreasing outputs stay steady. This conclusion produces results which many would consider problematic, indeed, which contradict the Treasury's earlier construction of the pension age discrimination statutes. The fifth section of this article concludes that, short of statutory amendment, there is no principled way around this interpretation of the statutes in light of the five appellate decisions holding that, for age discrimination purposes, "benefit accrual" means employer contributions to defined benefit plans, rather than the benefits paid by such plans.

The sixth and final section suggests that, as a matter of pension policy, this interpretation has its advantages since the contribution-based definition of age discrimination helps employers to control the costs of their traditional defined benefit plans as their work forces age. Specifically, the input-theory of pension age discrimination enables employers to reduce the annual growth of accrued benefits as participants age. This ability to control costs encourages employers to stay with their traditional defined benefit plans rather than switch to the cash balance format or 401(k). On the other hand, subduing costs by reducing the rates at which older employees accrue additional benefits will disappoint the reasonable pension expectations of some, perhaps many, of those older workers.

In short, while the appellate decisions in Cooper, Register, Drutis, Hirt, and Hurlic are unconvincing as a matter of statutory construction, they nevertheless reach the proper result as a matter of pension policy. These decisions read the statutory term "benefit accrual" as meaning employer contributions for purposes of measuring for age-based pension discrimination in the defined benefit context. However unpersuasive this reading may be as a textual matter, it reaches a sound outcome in terms of pension policy. In particular, this reading of the pension age discrimination statutes enables employers sponsoring traditional, annuity-paying defined benefit pensions to control their costs by decreasing the annual growth of the accrued benefits earned by older employees. This ability to constrain costs will encourage employers to remain with their traditional defined benefit plans rather than move to the cash balance format or 401(k) arrangements. On the other hand, controlling costs by reducing the rates at which older workers accrue additional benefits will disappoint the reasonable pension expectations of some, perhaps many, of those older workers.

II. A BRIEF (7) TYPOLOGY OF RETIREMENT PLANS

In the world of retirement savings, the most fundamental distinction is between defined benefit plans and defined contribution plans. A defined benefit plan, as its name implies, defines benefits, i.e., promises participants outputs in the form of retirement income. The employer sponsoring a defined benefit pension guarantees these promised payments. In contrast, a defined contribution arrangement specifies inputs in the form of contributions during the participants' working careers. Because it prescribes inputs rather than outputs, defined contribution plans do not guarantee participants the level to which those inputs will grow. Once an employer sponsoring a defined contribution plan contributes its input to the plan, the employer's funding role (8) is over since the plan (and thus the employer) makes no promise as to the ultimate investment growth of those contributions or as to the retirement income the participant will eventually receive.

In its classic form, the output a defined benefit plan promises takes the form of annuity-style payments commencing at retirement. These periodic payments are typically based upon the participant's compensation and years of service working for the employer that sponsors the plan. For example, a defined benefit plan might state that, starting at age sixty-five, a participant receives an annual payment equal to 1% of the employee's average income earned in the employee's three highest paid years, multiplied by the employee's years of service with the sponsoring employer. Suppose, to continue this example, that, in the three years before his retirement at age sixty-five, an employee obtains annual salaries of $49,000, $50,000, and $51,000 respectively. Suppose further that this employee worked for the employer for twenty years. If so, at retirement, this employee receives an annuity-style pension benefit of $10,000 per year for the remainder of the employee's lifetime. (9) As its moniker ("defined benefit") indicates, this traditional pension plan defines a benefit for the employee, a yearly payment starting at retirement. (10) Funding those promised outputs is the sponsoring employer's responsibility.

In contrast is the defined contribution arrangement, today exemplified by the ubiquitous 401(k) plan. (11) Such a plan grants each participating employee inputs to an individual account maintained under the plan for the employee. Such inputs may take the form of employer contributions, employee contributions, or some combination of employer and employee contributions. These contributions are earmarked for each employee's respective account under the defined contribution plan. In that account, these contributions are invested, often with the employee directing the investment of the amounts held by his or her account. When employees leave employment, they typically receive a lump sum distribution of the balance in their separate accounts. That balance will reflect the cumulative contributions to the account, increased by investment gains and decreased by investment losses. The employer, having made its contributions to the employee's account under a defined contribution plan, has no further funding obligation and makes no promises as to the level to which those contributions will grow by the time the employee leaves.

To take another example, let us assume that an employer sponsors a 401(k) arrangement, that an employee reduces his or her salary over the years to contribute to this plan, that the employer matches these contributions, and that, at retirement, the employee's account in this 401(k) plan has grown to a balance of $100,000. This balance represents the cumulative total of the employer's and the employee's contributions to this account, increased by investment gains earned by these contributions and decreased by investment losses.

No benefit is specified for this 401(k) participant ex ante; rather, the 401(k) plan pays the participant his or her account balance, whatever it may be at the time of distribution. That individual account balance is typically paid as a lump sum--in this example, a single payment of $100,000. Often, that balance is paid when the employee leaves employment with the sponsoring employer, even if that occurs many years before the employee's retirement. This contrasts with the classic defined benefit pension, which usually defers the commencement of its annuity-style payments until the employee attains his retirement age, normally sixty-five. (12)

In sum, defined contribution plans specify inputs--the amounts contributed to the employees' respective accounts. Such plans do not guarantee outputs. When employees leave employment with the sponsoring employer, they are entitled to the balances of their respective accounts, whatever those balances may be. If an account has had favorable investment experience, its balance will be larger than if the account's investment performance has been less robust. No employer guarantee stands behind these accounts.

A cash balance plan (13) is a defined benefit device because it defines a benefit, that is, it promises participants outputs guaranteed and funded by the employer sponsoring the plan. However, cash balance plans mimic in important respects defined contribution arrangements. Cash balance plans specify their benefits as if each participant had an individual account in the plan. That theoretical account is increased annually by a so-called "pay credit," typically formulated as a percentage of the participant's current annual compensation. That notional account further earns an assumed rate of return, usually labeled by the plan as the "interest credit." The accumulation of successive pay credits and interest credits defines a benefit in a fashion that imitates the individual accounts of defined a benefit in a fashion that imitates the individual accounts of defined a benefit in a fashion that imitates the individual accounts of defined contribution plans but which is guaranteed by the employer.

Suppose, for example, that a cash balance pension provides that participants will be granted under the plan an annual pay credit of five percent of their yearly salary. Suppose further that the employer's contributions under the plan will be imputed with an interest credit (i.e., assumed earnings) of ten percent yearly. Suppose further that a cash balance participant earns $40,000 in the current year.

Under these assumptions, the cash balance participant will be credited with $2,000 to his or her notional account under the cash balance plan. (14) This theoretical account will be further credited with assumed earnings in the current year of $200. (15) Since a cash balance pension is a defined benefit plan, the resulting amount ($2,200) is funded and guaranteed by the employer. The cash balance plan thus formulates the participant's defined benefit in a way that mimicks an individual account, though that theoretical account balance is a promised output which the employer is obligated to fund rather than the true individual account of a defined contribution plan--an account which falls or rises with actual investment performance.

When the participant in a cash balance plan leaves employment with the employer sponsoring the plan, the participant's benefit (defined as the hypothetical balance in his notional account) is typically paid to him as a lump sum at that time. This contrasts with the annuity-type payments distributed periodically by traditional defined benefit plans over the lifetime of the retired participant, starting at retirement age.

While a cash balance pension imitates defined contribution arrangements through its notional account balances and lump sum distributions, it is a defined benefit pension since the amounts promised by a cash balance pension are funded and guaranteed by the employer sponsoring the cash balance plan.

III. THE STATUTES

Central to the legal regulation of pensions is the concept of a participant's "accrued benefit," i.e., the amount of the participant's retirement benefit that the participant has earned to date. For these purposes, the relevant statutes state that the accrued benefit of a defined benefit participant is "expressed in the form of an annual benefit commencing at normal retirement age." (16) "Normal retirement age" (17) is generally defined as sixty-five. These definitions reflect the design of the traditional, annuity-paying defined benefit plan that pays benefits as yearly distributions upon retirement.

In 1986, Congress legislated against age discrimination by pension plans. In particular, Congress provided that a defined benefit plan violates federal law "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." (18) Thus, under the relevant statutes in the defined benefit context, the presence vel non of age discrimination turns on whether the participant's "benefit accrual" ceases or declines because of the participant's "benefit accrual" ceases or declines because of the participant's age.

Much controversy swirled around the application of these statutory provisions to cash balance pension plans. (19) Such plans, mimicking 401(k) arrangements, typically pay their guaranteed benefits as lump sum payments upon termination of employment, rather than as "annual benefit(s) commencing at normal retirement age." One reading of the relevant statutes is that, to test for age discrimination, the annual addition to the notional account balance of a cash balance participant must be translated into an "accrued benefit," the annuity-style payments such contribution will purchase upon the participant's retirement. From this perspective, the statutory term "benefit accrual" refers to the annual increase in each employee's "accrued benefit" understood as a deferred annuity payment starting at normal retirement, i.e., age sixty-five. Consequently, the annual increments in these annuity-style accrued benefits determine whether age discrimination exists or not.

Consider, under this interpretation of the statutes, a cash balance pension plan under which the annual pay credit for the participants' notional accounts is five percent of their respective salaries. Suppose further that there are two employees, ages forty and sixty, who each earn $100,000 in the current year. Under this cash balance plan, the guaranteed notional account balance of each employee for the current year increases by $5000 plus the rate of assumed interest for the year.

Converted into an "accrued benefit," i.e., an annuity at age sixty-five, that $5000 pay credit represents a projected annual retirement payment of $638 yearly for the sixty-year-old (20) and a projected annual retirement payment of $1693 yearly for the forty-year-old. (21) The larger anticipated annuity of the younger participant reflects the extra twenty years until retirement during which the nominal account balance of this participant will accrue additional annual earnings at the assumed rate of 5% per year.

Specifically, the $5000 credited to the notional account of the forty-year-old cash balance participant will, at the guaranteed rate of 5% annually, become $16,932 dollars in twenty-five years when the forty-year-old turns age sixty-five. (22) In contrast, the sixty-year-old is only five years away from his sixty-fifth birthday. Consequently, the $5000 earmarked for him has only five pre-retirement years to grow and thus will only become $6381 when it is distributed to him. (23) When these differing lump sums are converted into "annual benefits" starting for each participant at age sixty-five, the $5000 accrued by the forty-year-old cash balance participant grows into a substantially larger annual benefit than the $5000 accrued by his older co-worker.

From this output-oriented vantage, the rate of "benefit accrual" differs for these two employees because one is younger and, being younger, his notional account balance has more time to grow, which in turn leads to a larger accrued benefit at retirement measured in annuity terms. Under this understanding of the relevant statutes, the typical cash balance pension age discriminates because the annual pay credit for a young employee becomes a larger "accrued benefit" payable as an annuity at retirement. Conversely, the identical pay credit, projected as an annuity at retirement, produces a smaller output for the older (but otherwise similar) employee, as there are fewer years for interest to accumulate before retirement. Thus, the "rate of" the older "employee's benefit accrual," measured as a deferred annuity, "is reduced, because of the attainment of any age." (24) "Benefit accrual," under this reading of the statute, means the annual increase of the participant's "accrued benefit."

The alternative interpretation of these statutes (which, as we shall see, prevailed in the federal courts) denies any linkage between the statutory terms "accrued benefits" and "benefit accrual" and instead reads the term "benefit accrual" as synonymous with the employer's contributions to its cash balance pension. Under this contribution-based approach, our hypothetical employer currently funds and guarantees the same pay credit for these two employees--$5000--and thus no age discrimination occurs since the input for these two employees is the same. It is irrelevant that, at retirement, this contribution will provide a larger annuity for the forty-year-old than for the sixty-year-old. From this vantage, the typical cash balance pension plan does not discriminate on the basis of age since the employer's pay credits for the older and younger employees are identical. It does not matter that the contribution for the younger employee has longer to grow and thus will be greater in toto when that employee turns sixty-five. "[B]enefit accrual" from this perspective refers to inputs contributed ex ante, not outputs paid at retirement.

The Pension Protection Act of 2006 (PPA) amended the relevant statutes prospectively to mandate that cash balance pension plans be assessed for age discrimination in terms of their inputs, that is, the employer's contributions, rather than their outputs, namely, the annuities which those contributions will provide for each participant at age sixty-five. (25) Nevertheless, Congress explicitly made the PPA amendments applicable only "to periods beginning on or after June 29, 2005." (26) Hence, for periods prior to that date, the question whether cash balance pensions discriminate on the basis of age is controlled by the original, pre-PPA versions of the statutes. Moreover, the PPA leaves intact for traditional defined benefit pensions the original version of the pension age discrimination statutes.

IV. THE CASES

The first court of appeals decision addressing the pre-PPA status of cash balance plans was Cooper v. IBM Personal Pension Plan. (27) In Cooper, the Seventh Circuit held that IBM's cash balance pension did not discriminate "on account of age." In so holding, the Seventh Circuit read "benefit accrual" to mean the sponsoring employer's contribution to its cash balance pension, not the eventual output projected for the cash balance participant at age sixty-five. Critical to the Cooper court's reading of the pension age discrimination statutes was the court's conclusion that the statutory term "benefit accrual" has no relation to the term "accrued benefit." (28)

The plan at issue in Cooper was typical of many cash balance arrangements. Every year, each participant in the IBM plan is granted a pay credit equal to five percent of the participant's compensation in that year. This credit is allocated to a notional account for the participant as is an annual interest credit, i.e., assumed earnings on the balance in the participant's notional account. When the participant leaves employment with IBM, this balance, funded and guaranteed by IBM, is distributed to the participant as a lump sum.

The arithmetic of this typical cash balance arrangement is beyond cavil: the employer's pay credit contribution for each participant is the same percentage of each participant's salary. As a percentage of salary, that employer contribution (5%) does not vary with the participant's age. If each year's contribution is converted into the deferred annuity it will fund at age sixty-five, the contribution for a younger participant purchases a greater "annual benefit commencing at normal retirement age" (29) since that contribution has more time to accrue assumed earnings until the participant reaches normal retirement.

Hence, if "benefit accrual" means IBM's contributions to its cash balance plan, those contribution to its cash balance plan those contribution (5% of salary) are unaffected by the participants' respective ages. If, however, "benefit accrual" refers to the accrued benefit purchasable by cash balance participants in the form of deferred annuities starting at age sixty-five, these annuities decline with the participants' ages since the contributions for older participants have fewer years to accumulate investment earnings until age sixty-five.

In Cooper, Judge Easterbrook emphatically emphatically the theory that "benefit accrual" means the employer's contributions to the cash balance plan, and that the statutory terms "benefit accrual" and "accrued benefit" are unrelated:
  The phrase "benefit accrual" reads most naturally as a reference to
  what the employer puts in (either in absolute terms or as a rate of
  change), while the defined phrase "accrued benefit" refers to outputs
  after compounding. That's where this litigation went off the rails: a
  phrase dealing with inputs was misunderstood to refer to outputs. As
  long as we think of "benefit accrual" as referring to what the
  employer imputes to the account-an understanding reinforced by the
  use of the word "allocation" in the subsection addressing
  defined-contribution plans-there is no statutory difference between
  the treatment of economically equivalent defined-benefit and
  defined-contribution plans. (30)


Since the IBM cash balance plan awarded the same annual pay credit contribution for each participant--5% of the participant's salary--there was no age discrimination as to the plan's "rate of ... benefit accrual." (31) Pension age discrimination, for the Cooper court, is a matter of contributions made, not of benefits ultimately to be paid.

Judge Easterbrook's contribution-based reading of the pension age discrimination statutes was confirmed when the Third Circuit became the next court of appeals to consider whether cash balance pensions discriminate on the basis of age. In Register v. PNC Financial Services Group, Inc., (32) the Third Circuit similarly concluded that cash balance pensions do not discriminate on the basis of age because the statutory term "benefit accrual" means the employer's contribution to the plan, not the plan output denoted statutorily as the plan's "accrued benefit" and measured as an annuity payable at normal retirement.

In its design, the PNC cash balance pension is more intricate than the IBM plan challenged in Cooper. Unlike the IBM cash balance plan, which grants all participants the same pay credit as a percentage of salary, the PNC plan varies pay credits depending upon each participant's combined age and years of service. (33) The following chart summarizes the PNC plan's pay credit formula:
If a participant's age
and service totals(in years):                  His pay credit is:

Less than 40                                   3%
40 to 49                                       4%
50 to 59                                       5%
60 to 69                                       6%
70 or more                                     8%


Consider, for example, two participants in the PNC plan, both earning $50,000 in the current year. One participant is thirty-two years old and has worked for PNC for eight years. The other is forty-five years old and has worked for PNC for four years. Both receive a pay credit under the PNC cash balance plan of $2,000, that is, 4% of their current salaries. (34)

In contribution terms, these two participants are treated equally despite their age difference; each receives a pay credit of $2,000. However, measuring the annuity-style output each would receive on a deferred basis at age sixty-five, the thirty-two-year-old does better because he is younger and thus has thirteen more years to accrue interest payments before his retirement. This again presents the question: Does this increased deferred annuity at retirement represent age discrimination for purposes of the relevant statutes?

The Third Circuit, like the Seventh, said no, reading the statutory term "benefit accrual" to mean the employer's contributions to the cash balance plan, rather than the projected annuity income such contributions could purchase for each participant at age sixty-five. "In applying the anti-discrimination provision in the context of cash balance plans, which defines the benefit in terms of the cash balance account, we are concerned with what PNC puts into an employee's account, not what the employee eventually may obtain from the plan on retirement." (35)

Again, the terms "accrued benefit" and "benefit accrual" were read as unrelated, indeed, as unrelated, indeed, as opposites, the former referring to the plan's output formulated as a deferred annuity starting at age sixty-five, and the latter describing the employer's current contributions to the plan. The latter, the Third Circuit held, do not discriminate on the basis of age, and that, the appeals court concluded, is what matters under the pension age discrimination statutes.

The Sixth Circuit then decided Drutis v. Rand McNally & Co., (36) against the backdrop of two circuits that had already held cash balance pensions nondiscriminatory on the ground that the statutory term "benefit accrual" describes the employer's contributions to the plan and has nothing to do with the participant's "accrued benefit" which refers to the ultimate output purchasable as a deferred annuity at age sixty-five. Relying heavily on Cooper and Register, the Sixth Circuit similarly concluded "that the term 'benefit accrual' as used in" the controlling federal statutes "refers to the employer's contribution to the defined benefit plan." (37) Consequently, there is no age discrimination in the cash balance context because the employer's contributions do not decline with age--even though the plan's projected outputs, "accrued benefits" in the form of deferred annuities commencing at normal retirement, decrease as participants age and thus have fewer years for their respective contributions to grow.

Next came the Second Circuit's decision in Hirt v. The Equitable Retirement Plan (38) By this point, it was unsurprising that a fourth panel of appeals judges would align itself with its peers or that it would endorse the contribution-based reading of the pension age discrimination statutes under which the terms "benefit accrual" and "accrued benefit" are unrelated, the former referring to employers' inputs to their defined benefit plans, the latter referring to the projected output of plan benefits.

Finally, the Ninth Circuit, in Hurlic v. Southern California Gas Co., (39) agreed with the other four circuits by emphatically rejecting the argument that the "rate of benefit accrual" (which cannot be reduced on account of a participant's age) has anything to do with the participant's accrued benefit.

In short, five courts of appeals have now held that cash balance plans do not age discriminate. All five courts came to this conclusion in the same way, by denying a connection between the statutory terms "benefit accrual" and "accrued benefit." Benefit accrual, we are told, means employers' contributions to their defined benefit plans, not their plans' ultimate outputs. Hence, cash balance pension plans which grant the same pay credits to employees of different ages do not discriminate on the basis of age even though those credits grow to greater eventual outputs for younger workers. The ultimate economic discrepancy between younger and older workers is a matter of their respective "accrued benefits," the plan output each will receive at age sixty-five measured as annual annuity payments starting at that point. Age discrimination, however, is tested statutorily by the rate of "benefit accrual," i.e., the employer's contribution for each employee. Cash balance arrangements do not discriminate on the basis of age even though an employer's contribution for a younger participant ultimately grows to a greater accrued benefit for him at age sixty-five than does the same contribution for an older participant who is closer to retirement and thus has fewer years for the contribution to accrue additional interest.

The PPA amendments (which apply prospectively) together with these five appellate decisions (which apply to pre-PPA years) establish as a legal matter that cash balance pensions do not discriminate on account of age. (40) However, as to traditional defined benefit plans, questions persist, largely as a result of these appellate decisions.

V. APPLYING THE CONTRIBUTION-BASED TEST FOR AGE DISCRIMINATION TO TRADITIONAL DEFINED BENEFIT PLANS

While the pre-PPA version of the pension age discrimination statutes no longer applies to cash balance plans, that version of the statutes still controls as to traditional, annuity-paying defined benefitpensions. In the context of such traditional pensions, the contribution-based test for age discrimination embraced in Cooper, PNC, Drutis, Hirt, and Hurlic creates results many would consider problematic. Under this reading of the statutes, a traditional pension does not discriminate on the basis of age simply because each year it provides progressively smaller increments to a participant's accrued benefit. As long as the employer's contribution for each participant at least stays steady, there is no age discrimination since such discrimination is a function of contributed inputs ("benefit accrual") rather than projected outputs ("accrued benefit").

Consider in this setting a traditional, annuity-style defined benefit plan under which the participant each year earns a smaller accrued benefit than in the year before. Under this hypothetical plan, the participant each year obtains an additional benefit based on his salary for that year. (41) Under this plan, the ultimate benefit to which the participant is entitled is an annuity starting at retirement, consisting of the cumulative total of the benefits the participant has acquired in each previous year.

Suppose in particular that this hypothetical plan provides that the accrued benefit a participant earns each year is one-tenth of one percent (.1%) less than in the immediately preceding year. For participants in this plan between the ages of twenty-five and thirty, the following accrued benefit formula applies:
Participant's Age  Participant's Accrued Benefit

        25                      4%
        26                      3.9%
        27                      3.8%
        28                      3.7%
        29                      3.6%
        30                      3.5%


Each year, as a participant ages, the rate of the accrued benefit earned in that particular year drops by another one-tenth of one percent (.1%) from the rate of the prior year. Thus, for example, a forty-year-old participant earns an incremental pension benefit equal to 2.5% of her salary in that year.

Assume that a twenty-five-year-old participant in this hypothetical plan earns an annual salary of $50,000. Consequently, for that year, the participant accrues a benefit of $2,000, payable as an annuity starting at age sixty-five. (42) Suppose further that, in the following year, the now twenty-six-year-old participant again receives an annual salary of $50,000. For that year, the participant accrues a lower benefit of $1,950, payable as an annuity starting at age sixty-five. (43) The participant's total benefit commencing at normal retirement ($3,950 annually) (44) grew in year two but at a slower rate because the participant was older in year two and thus, under the hypothetical plan's declining accrued benefit schedule, earned a smaller accrued benefit in year two on the same salary.

This pattern continues each year as the participant in this annuity-paying defined benefit plan ages. His total accrued benefit, measured as a deferred annuity commencing at age sixty-five, increases each year; however, the rate of the additional benefit obtained in that year decreases because the participant is older and, under this hypothetical accrued benefit formula, the percentage benefit earned annually also declines annually as the participant ages.

Before Cooper, Register, Drutis, Hirt, and Hurlic, most pension lawyers would have said that this theoretical plan discriminates on the basis of age since "the rate of [this] employee's benefit accrual," (45) "expressed in the form of an annual benefit commencing at normal retirement age," (46) "is reduced" each year "because of the attainment of [that year's] age." (47) After Cooper, Register, Drutis, Hirt, and Hurlic, however, the pension age discrimination statutes can no longer be read this way. These decisions state that the statutory term "benefit accrual" does not refer to the employee's accrued benefits, but rather to the employer's contributions. And, in this example, the employer's contributions for the participant increase each year even as the additional benefit the participant earns each year declines, measured as a deferred annuity starting at age sixty-five.

Using straightforward assumptions, (48) it costs the employer sponsoring this defined benefit plan $2,841 to fund the benefit attained by the employee in the year he is twenty-five years old, (49) while it costs the employer $2,908 to finance the output acquired by the employee in the subsequent year when the employee is twenty-six years old. (50) While the latter benefit is smaller measured as a deferred annuity payable at normal retirement, there is one less year for the employer's contribution funding that smaller benefit to accumulate interest. Accordingly, the employer must put slightly more into the plan to finance the somewhat smaller benefit earned in this second year.

Cooper, Register, Drutis, Hirt, and Hurlic instruct us that, in assessing the presence vel non of age discrimination under the pre-PPA version of the statutes, the relevant measure ("benefit accrual") is the employer's contributions, not the ultimate outputs ("accrued benefit") those contributions purchase at normal retirement age. Hence, per these decisions, this traditional defined benefit plan does not discriminate within the meaning of the statutes because the sponsoring employer's contributions ("benefit accrual") increase annually as the participant grows older, even as the benefit the participant accrues each year, measured as a deferred annuity, declines "on account of" the participant's age.

The impact of Cooper, Register, Drutis, Hirt, and Hurlic upon traditional defined benefit pensions comes into particular focus when set against the regulations proposed by the Treasury interpreting the tax version of the pension age discrimination statutes. (51) For traditional defined benefit plans, (52) those proposed regulations (now withdrawn) rejected the premise of the five appellate decisions and explicitly linked the statutory term "benefit accrual" to the term "accrued benefit:"

[A] participant's rate of benefit accrual for any plan year that ends before the participant attains normal retirement age is the excess (if any) of--

(A) The participant's accrued normal retirement benefit at the end of the plan year; over

(B) The participant's accrued normal retirement benefit at the end of the preceding plan year. (53)

The first example of the proposed regulations leaves no doubt as to the implication of this linkage: For traditional, annuity-paying defined benefit plans, the "rate of ... benefit accrual" for age discrimination purposes is the rate at which the participant earns "accrued benefits," pension outputs determined as annuity payments starting at normal retirement:
  Example 1. Plan L is a defined benefit plan under which the normal
  form of benefit is a monthly straight life annuity commencing at
  normal retirement age (or the date of actual retirement, if later)
  equal to $30 times the participant's years of service. For purposes
  of this section, a participant's rate of benefit accrual for any
  plan year is $30. (54)


Under these proposed regulations, this theoretical plan improperly discriminates on the basis of age since the "benefit accrual" of a twenty-five-year-old earning $50,000 ($2,000) is greater than the "benefit accrual" of a twenty-six-year-old earning the same annual compensation ($1,950). Under these regulations, "benefit accrual" means the annual increase in the participant's "accrued benefit." The regulations thus measure age discrimination by traditional defined benefit pensions in terms of projected outputs.

However, under Cooper, Register, Drutis, Hirt, and Hurlic, this theoretical plan does not discriminate on account of age since, according to those decisions, the "benefit accrual" of the twenty-six-year-old (an employer contribution of $2,908) is greater than the "benefit accrual" of the twenty-five-year-old (an employer contribution of $2,841). Under the relevant statutes, these benefit accruals, i.e., employer contributions, determine the presence or absence of age discrimination.

This conclusion likely disappoints the reasonable pension expectations of many participants in traditional defined benefit pensions. Of course, most participants in such plans have, at best, crude understandings of the often complex formulas used by such plans. An often-advanced argument for cash balance arrangements is that participants more easily understand such arrangements, mimicking individual accounts, than they do traditional defined benefit plans.(55) Nevertheless, even if the typical defined benefit participant understands his traditional, annuity-paying pension imperfectly, many such participants will perceive the design of this hypothetical plan as discriminating against them on the basis of age since the annual accrued benefit they earn each year declines as participants get older.

Consider in this context a fifty-year-old participant in this theoretical plan who is starting to think about retirement. When she examines the plan's accrued benefit formula, she will discover that, in the current year, she will earn a benefit payable as an annuity at age sixty-five equal to 1.5% of her current yearly compensation. In contrast, a twenty-five-year-old participant will accrue in that year an incremental benefit equal to 4% of her annual compensation. Many, likely most, fifty-year-olds will perceive that difference as constituting age discrimination.

A defender of Cooper, Register, Drutis, Hirt, and Hurlic can plausibly debunk this perception on the ground that the employer pays more to provide the current year's accrued benefit to the fifty-year-old ($3,608) (56) than it costs the employer to finance the current year's accrued benefit for the twenty-five-year-old ($2,841). (57) Since the fifty-year-old is only fifteen years from her normal retirement age, there is less time for pension contributions funding her benefit to accumulate interest, compared to her younger colleague. Hence, the employer must contribute more to the plan currently to provide the smaller annuity-style benefit currently obtained by the fifty-year-old.

To reframe this defense, when discounted to present value, the benefit earned by the fifty-year-old under this theoretical formula, while smaller when expressed as a percentage of current compensation, is more valuable economically than is the benefit earned by the twenty-five-year-old. The latter's benefit will not be distributed for forty years while the former's benefit is payable in a mere decade and a half. Thus, while there appears to the unsophisticated to be age discrimination (a current accrued benefit of 4% of salary for the younger employee versus a current accrued benefit of 1.5% of salary for her older co-worker), there is not, once we examine the underlying economics. The present value of the fifty-year-old's pension accrual for the year is actually greater.

This present value phenomenon reflects what commentators often describe as the "backloaded" nature of traditional defined benefit plans: The benefits accrued by older participants under such plans are more valuable economically than are the benefits earned by their younger colleagues since, among other reasons, (58) benefits will be distributed sooner to the older participants. Consequently, benefit formulas which appear to disfavor older participants when expressed in annuity terms actually bestow more largesse upon such older participants when discounted to present values.

Some fifty-year-olds will find this line of argument persuasive. However, I suspect that many will not, viewing the relevant issue as the discrepancy between 1.5% and 4.0%, a discrepancy apparently making them the victims of age discrimination. (59)

VI. IS THERE A WAY OUT?

Some, perhaps many, observers will find disconcerting the conclusion that a traditional, annuity-paying defined benefit plan does not discriminate on the basis of age when the annual growth rate of its participants' respective accrued benefits continuously declines as the participants grow older. These observers will attempt to find a way to construe the pension age discrimination statutes to avoid this contribution-based conclusion.

The first argument such observers may assert is that the contribution-based theory of age discrimination advanced in Cooper, Register, Drutis, Hirt, and Hurlic is merely dicta. If so, this theory can be disregarded in the context of traditional, annuity-paying defined benefit pensions which then would, notwithstanding these appellate decisions, be tested for age discrimination on the basis of pension outputs, that is, accrued benefits defined in terms of deferred annuity payments starting at age sixty-five, rather than the employer's contributions to the plan.

However, read fairly, the appellate courts' uniform constructions of the statutory term "benefit accrual" are not dicta, mere asides unnecessary to the conclusion that, under the pre-PPA statutes, cash balance pensions pass muster under the pension age discrimination statutes. Rather, the input-based theory of age discrimination is "an integral part" (60) of the courts' reasoning, "fully measured judicial pronouncement[s]" (61) that, under the relevant statutes, "benefit accrual" means the sponsoring employer's contributions to the plan, not the ultimate output ("the accrued benefit") payable to participants in annuity form at retirement.

A second approach, while conceding the centrality to Cooper, Register, Drutis, Hirt, and Hurlic of the contribution-based theory of pension age discrimination, would limit that theory to cash balance pensions. From this vantage, "benefit accrual" means inputs when a defined benefit plan takes the cash balance form, but means outputs when a defined benefit plan is a traditional, annuity-paying pension.

This argument finds no significant support in either the language of the statutes or in the five appellate decisions construing that language. The pre-PPA pension age discrimination statutes do not distinguish among various subtypes of defined benefit plans. (62) Rather, they propound a single definition of age discrimination applicable to all defined benefit plans. Such plans improperly discriminate "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." (63)

There is no warrant in this language for treating defined benefit plans differently because some formulate their outputs as notional account balances while others promise outputs in the form of deferred annuities starting at age sixty-five. If, for age discrimination purposes, "benefit accrual" means the sponsoring employer's contributions to defined benefit plans utilizing the cash balance format, it also means such contributions to traditional defined benefit pensions which formulate their outputs as deferred retirement annuities.

A skilled polemicist, parsing the five appeals decisions, will find in some of them isolated language which can be construed as limiting to cash balance pensions the theory that "benefit accrual" means the inputs contributed to such pensions. That, however, is not the thrust of these opinions. Rather, these opinions uniformly acknowledge that cash balance arrangements are defined benefit plans and construe the statutory term "benefit accrual" to mean the contributions to such defined benefit plans. These opinions do not justify a different reading of "benefit accrual" for any subcategory of defined benefit plans, namely, traditional, annuity-paying pensions.

Finally, those opposing a contribution-based theory of age discrimination for traditional defined benefit pensions can urge the Treasury to embody in its final regulations the approach taken in its now withdrawn 2002 proposal. (64) Those proposed regulations link "benefit accrual[s]" to the "accrued benefit" outputs of traditional plans while simultaneously interpreting "benefit accrual[s]" to mean the inputs contributed to cash balance arrangements. Those regulations, were they to acquire the force of law, would repudiate the contribution-based theory of pension discrimination for traditional defined benefit plans in favor of an output-based theory of discrimination for such plans.

It is, however, too late in the day for the Treasury to disavow Cooper, Register, Drutis, Hirt, and Hurlic in this fashion. I doubt that, prior to these decisions, the Treasury had the authority to interpret "benefit accrual" one way for traditional defined benefit plans, i.e., as outputs, and another way, i.e., as contributed inputs, for other defined benefit arrangements using the cash balance format. The language of the pre-PPA statutes propounds a single standard ("benefit accrual") for all defined benefit plans.

In any event, today, the Treasury cannot disregard the five unanimous appellate interpretations of the pre-PPA pension age discrimination statutes: For defined benefit plans, age discrimination is assessed in terms of contributions, not accrued benefit outputs. This version of the statutes still controls as to traditional defined benefit pensions.

There is no more controversial topic in the contemporary tax community than the legal status of Treasury regulations and the judicial deference due to such regulations. (65) However, under even the broadest understanding of the Treasury's regulatory authority, the Treasury cannot ignore statutory terminology and cannot disregard the unanimous, unequivocal construction of that terminology by five courts of appeals. The pre-PPA pension age discrimination statutes use the singular term "benefit accrual." The courts have declared that, as to defined benefit plans, "benefit accrual" means inputs, not outputs. If that contribution-based interpretation of the statutes is to be reversed, it must be by Congress amending the statutes.

VII. SHOULD THERE BE A WAY OUT?

This leads to a final question: Should, as a matter of policy, Congress overturn Cooper, Register, Drutis, Hirt, and Hurlic by explicitly defining "benefit accrual" for traditional defined benefit plans as the annual increase of the annuity-style "accrued benefit" promised by such plans rather than the employers' inputs to such plans? My vote is "no." I would retain the contribution-based theory of age discrimination for classic defined benefit pensions.

That may seem paradoxical since I argued (and continue to believe) that the proper construction of the pre-PPA pension age statutes was the output theory, namely, the statutory term "benefit accrual" means the annual increase of the participants' "accrued benefits" payable as annuities at retirement. (66) That, however, was an argument based on statutory terminology, not retirement policy.

Having lost that argument in the courts, the issue today is whether, as a matter of policy, to let stand under the statutes the contribution test for age discrimination now established by Cooper, Register, Drutis, Hirt, and Hurlic, despite the weak statutory underpinnings for that test. This approach would permit traditional defined benefit plans to decrease incremental accrued benefit outputs with age as long as the contributions funding those outputs do not decline as participants get older.

Three considerations lead me to favor from a policy perspective the contribution-based test for age discrimination, thereby permitting employers to control the costs of their traditional defined benefit plans by decreasing the rate at which benefits accrue for older participants. First, as we have seen, for an older participant closer to retirement than his younger co-worker, it costs the employer more to fund $1 payable annually at retirement than it costs the employer to fund a $1 annuity commencing at the younger participant's normal retirement, farther away in time. This makes traditional pension plans more expensive as workers age.

Second, this increasing, age-driven expense is a major reason why employers freeze and terminate their traditional defined benefit plans in favor of cash balance and 401(k) arrangements which do not entail escalating, backloaded costs as participants grow older.

Third, the traditional annuity-paying defined benefit plan has many advantages as a retirement savings device. In contrast to 401(k) and other defined contribution arrangements, classic defined benefit plans impose funding, investment, and longevity risks on employers, who are better positioned to handle such risks than are most employees. (67) Unlike defined benefit plans using the cash balance format, which typically distribute benefits as single, lump sum payments, traditional, annuity-paying pensions place longevity risk on employers who are, on the whole, better positioned to cope with that risk than are most employees. (68)

The contribution-based theory of pension age discrimination enables employers to control their pension costs by reducing the added annual accrued benefits earned by older employees. This ability to control costs should encourage employers to stay with their traditional annuity-paying pensions rather than shift to 401(k) and cash balance plans to subdue their retirement-related expenses.

Consider again the theoretical defined benefit plan with a declining, age-based schedule of accrued benefits. If, instead, that plan accrues a deferred retirement benefit of 4% of salary continuously for each year of plan participation, the employer's cost for a fifty-year-old participant earning $50,000 yearly is $9,620(69) (rather than $3,608).(70) Such higher costs for older participants explain in important part why so many employers have switched their defined benefit pensions to the cash balance format or have abandoned the defined benefit motif altogether for 401(k): These alternatives are cheaper for employers with aging work forces.

The now pronounced, long-term decline of the traditional defined benefit plan is inevitable. There is, however, no reason for the federal age discrimination statutes to accelerate that decline by impeding employers' ability to control their costs for their older employees.

The choice is not between permitting employers to constrain the expense of their traditional pensions or rejecting cost control measures. The choice is between allowing employers to control the costs of their traditional plans or watching employers shift to the cash balance and 401(k) formats to curb their retirement savings outlays. As a matter of pension policy, it is better to prolong the lifetimes of traditional pensions if we can, thereby extending the period during which employers absorb funding, investment, and longevity risk rather than pass those risks to their employees. The contribution-based theory of age discrimination, by enabling employers to control their costs, helps to stretch the life of traditional defined benefit pensions.

VIII. CONCLUSION

While the contribution-based approach to pension age discrimination propounded in Cooper, Register, Drutis, Hirt, and Hurlic is unpersuasive as a matter of statutory construction, that approach reaches the proper result as a matter of pension policy. These appellate decisions read the statutory term "benefit accrual" as meaning employer contributions for purposes of determining the existence vel non of age-based pension discrimination in the defined benefit context. However unnatural this contribution-based reading may be as a textual matter, it reaches a sound result as a matter of policy. In particular, this reading of the pension age discrimination statutes permits employers maintaining traditional, annuity-paying defined benefit pensions to control their costs by decreasing the annual growth of the accrued benefits earned by older employees. This ability to subdue costs should encourage employers to remain with their traditional defined benefit plans rather than switch to the cash balance format or 401(k). On the other hand, controlling costs by reducing the rates at which older workers accrue additional benefits will disappoint the reasonable pension expectations of some, perhaps many, of those older workers.

In this area, there are, alas, no easy answers.

* Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of THE ORIGINS OF THE OWNERSHIP SOCIETY: HOW THE DEFINED CONTRIBUTION PARADIGM CHANGED AMERICA (2007) published by Oxford University Press. For comments on prior drafts, Professor Zelinsky thanks Attorneys Alvin D. Lurie and Abby Natelson.

(1) On the decline of the traditional, annuity-paying defined benefit pension plan, see EDWARD A. ZELINSKY, THE ORIGINS OF THE OWNERSHIP SOCIETY: HOW THE DEFINED CONTRIBUTION PARADIGM CHANGED AMERICA 31-37 (2007); see also Teresa Ghilarducci, When I'm Sixty-Four 58-115 (2008) (discussing the decline in defined benefit pension plans); Roger Lowenstein, While America Aged 9-79 (2008) (discussing the history of the General Motors defined benefit plan).

(2) Alicia H. Munnell, Jean-Pierre Aubry & Dan Muldoon, The Financial Crisis and Private Defined Benefit Plans, ISSUE IN BRIEF 8-18, CENTER FOR RETIREMENT RES. AT B.C., Nov. 2008, at 2.

(3) Id.

(4) On cash balance plans, defined benefit plans designed to mimic in important respects 401(k) and other defined contribution arrangements, see ZELINSKY, supra note 1, at 71-78.

(5) I.R.C. [section] 411(b)(1)(H)(i); ERISA [section] 204(b)(1)(H)(i), 29 U.S.C. [section] 1054(b)(1)(H)(i).

(6) The five opinions sustaining cash balance plans against the claim of age discrimination are Cooper v. IBM Pers. Pension Plan, 457 F.3d 636 (7th Cir. 2006), Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3d Cir. 2007), Drutis v. Rand McNally & Co., 499 F.3d 608 (6th Cir. 2007), Hirt v. Equitable Ret. Plan, 533 F.3d 102 (2d Cir. 2008), and Hurlic v. Southern Cal. Gas Co., 539 F.3d 1024 (9th Cir. 2008).

(7) Since much has been written about defined benefit, defined contribution, and cash balance plans, I provide here a brief discussion of the major differences among these retirement savings arrangements. For those seeking greater detail and nuance, see ZELINSKY, supra note 1, at 1-30, 71-78.

(8) Though the employer may have nonfunding responsibilities as to the plan. For example, an employer sponsoring a defined contribution plan may have fiduciary liability in the capacity of plan administrator. Employee Retirement Income Security Act (ERISA) of 1974 [section] 3(16)(A)(ii), 29 U.S.C. [section] 1002(16)(A)(ii) (designating the sponsoring employer as plan administrator in the absence of an alternative designation); ERISA [section] 3(21)(A)(iii), 29 U.S.C. [section] 1002(21)(A)(iii) (classifying as a fiduciary any person with "any discretionary authority or discretionary responsibility in the administration of the plan"); ERISA [section] 404(a)(1), 29 U.S.C. [section] 1104(a)(1) (outlining duties of plan fiduciaries).

(9) This participant's average annual salary for his high three years is $50,000: ($49,000 + $50,000 + $51,000)/3 = $50,000. When that average salary is multiplied by 1% for each of the employee's twenty years of employment, the result is an annuity payable at age 65 of $10,000 per year: $50,000 x 1% x 20 = $10,000. This type of defined benefit formula is often denoted as a "final average" formula since the participant's benefit is a function of his compensation during his highest paid years of employment which typically are his final years of employment. DAN M. MCGILL, KYLE N. BROWN, JOHN J. HALEY & SYLVESTER J. SCHIEBER, FUNDAMENTALS OF PRIVATE PENSIONS 235-42 (8th ed. 2005); LAWRENCE A. FROLIK & KATHRYN L. MOORE, LAW OF EMPLOYEE PENSION AND WELFARE BENEFITS 22 (2d ed. 2008).

(10) If a retired participant is married, federal law may require that his annuity be paid in the form of a joint-and-survivor annuity. See I.R.C. [section][section] 401(a)(11), 417; ERISA [section] 205, 29 U.S.C. [section] 1055 (2006).

(11) These plans are named after the provision of the Internal Revenue Code (Code), section 401(k), which condones and regulates the "cash or deferred arrangements" which are central features of such plans. See also ZELINSKY, supra note 1 at 49-52.

(12) Defined benefit plans may specify normal retirement ages younger than sixty-five and often pay early retirement benefits when a participant satisfies certain age and service requirements. On early retirement benefits, see ZELINSKY, supra note 1 at 34-35.

(13) See ZELINSKY, supra note 1 at 71-78. Cash balance plans, defined benefit pensions which in important respects mimic defined contribution plans, are often described as "hybrid" retirement arrangements. While that term is useful in certain contexts, it should not obscure the legal status of cash balance plans. For purposes of the Code, ERISA and the Age Discrimination in Employment Act (ADEA), 29 U.S.C. [section][section] 621-634, cash balance plans are defined benefit pensions since the employer funds and guarantees a specified output. See I.R.C. [section] 430; ADEA [section] 4(i), 29 U.S.C. [section] 623(i) (2006); ERISA [section] 204, 29 U.S.C. [section] 1054 (2006).

(14) $40,000 x 5% = $2,000.

(15) $2,000 x 10% =$200.

(16) I.R.C. [section] 411(a)(7)(A)(i); ERISA [section] 3(23)(A), 29 U.S.C. [section] 1002(23)(A) (2006).

(17) I.R.C. [section] 411(a)(8); ERISA [section]3(24),29 U.S.C. [section] 1002(24) (2006).

(18) I.R.C. [section] 411(b)(1)(H)(i); ERISA [section] 204(b)(1)(H)(i), 29 U.S.C. [section] 1054(b)(1)(H)(i); see also ADEA [section] 4(i)(1)(A), 29 U.S.C. [section] 623(i)(1)(A) (A defined benefit plan may not "require[] or permit[] ... the cessation of an employee's benefit accrual, or the reduction of the rate of an employee's benefit accrual, because of age.").

(19) See ZELINSKY, supra note 1 at 75-77; JOHN H. LANGBEIN, SUSAN J. STABILE & BRUCE A. WOLK, PENSION AND EMPLOYEE BENEFIT LAW 879-881 (4th ed. 2006).

(20) $5,000 x (1.05)caret 5 = $6,381.41; $6,381.41/10 = $638.14. For this calculation, I have assumed that it costs $10 to purchase a single premium annuity paying $1 starting at age sixty-five.

(21) $5,000 x (1.05)caret 25 = $16,931.77; $16,931.77/10 = $1,693.18. For this calculation, I have assumed that it costs $10 to purchase a single premium annuity paying $1 starting at age sixty-five.

(22) $5,000 x (1.05)caret 25 = $16,931.77.

(23) $5,000 x (1.05)caret 5 = $6,381.41.

(24) See sources cited supra note 18.

(25) Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, [section] 701, 120 Stat. 780, 981-92.

(26) PPA [section] 701(e)(1).

(27) 457 F.3d 636 (7th Cir. 2006).

(28) Id. at 638.

(29) I.R.C. [section] 411(a)(7)(A)(i): ERISA [section] 3(23)(A), 29 U.S.C. [section] 1002(23)(A) (2006).

(30) Cooper, 457 F.3d at 639.

(31) I.R.C. [section]411(b)(1)(H)(i): ERISA [section]204(b)(1)(H)(i), 29 U.S.C. [section] l054(b)(1)(H)(i) (2006): ADEA [section] 4(i)(1)(A), 29 U.S.C. [section] 623(h)(i)(1)(A) (2006).

(32) 477 F.3d 56 (3d Cir. 2007).

(33) Register v. PNC Fin. Servs. Group, Inc., 2005 U.S. Dist. LEXIS 29678 at *6 n.4 (E.D. Pa. Nov. 21,2005), aff'd, 477 F.3d 56 (3d Cir. 2007).

(34) As to the younger participant, 32 + 8 = 40, giving him a pay credit of 4%. As to the older participant, 45 + 4 = 49, also giving him a pay credit of 4%.

(35) Register, 477 F.3d at 70.

(36) 499 F.3d 608 (6th Cir. 2007).

(37) Id. at 615.

(38) 533 F.3d 102 (2d Cir. 2008).

(39) 539 F.3d 1024 (9th Cir. 2008).

(40) Unsurprisingly, district courts in circuits in which the appeals courts have not spoken defer to the consensus established in Cooper, PNC, Drutis, Hirt, and Hurlic, supra note 6, that cash balance pensions do not discriminate on the basis of age. See Rosenblatt v. United Way of Greater Houston, 590 F. Supp. 2d 863, 870 (S.D. Tex. 2008) ("The Court agrees with the holdings of the five circuit courts previously addressing this issue ... "); Tomlinson v. EI Paso Corporation, 2007 WL 891378 (D.Colo. Mar. 22,2007).

(41) Defined benefit formulas of this sort are often denoted "career average" formulas since the participant's benefit is a function of his compensation earned over his entire career. See McGill ET AL., supra note 9, at 237-38; FROLIK & MOORE, supra note 9, at 22-23.

(42) $50,000 x 4% =$2,000.

(43) $50,000 x 3.9% =$1,950.

(44) $2,000 + $1,950 = $3,950.

(45) I.R.C. [section]411(b)(1)(H)(i) (2009); ERISA [section] 204(b)(1)(H)(i), 29 U.S.C. 1054(b)(1)(H)(i) (2009); ADEA [section] 4(i)(1)(A), 29 U.S.C. [section] 623(i)(1)(A) (2009).

(46) I.R.C. [section] 411(a)(7)(A)(i) (2009); ERISA [section] 3(23)(A), 29 U.S.C. [section] 1002(23)(A) (2009).

(47) I.R.C. [section] 411(b)(1)(H)(i) (2009); ERISA [section] 204(b)(1)(H)(i), 29 U.S.C. [section] 1054(b)(l)(H)(i) (2009); see also ADEA [section] 4(i)(l)(A), 29 U.S.C. [section] 623(i)(1)(A) (2009).

(48) In particular, I have assumed that it costs $10 to purchase a single premium annuity paying $1 starting at age sixty-five and have assumed a discount rate of 5% per annum. While altering these assumptions would change the details of this example, it would not change the substance.

(49) ($2,000 x $10)/(1.05)caret 40 = $2,840.91.

(50) ($1,950 x $10)/(1.05)caret 39 = $2,908.39.

(51) Reductions of Accruals and Allocations because of the Attainment of any Age; Application of Nondiscrimination Cross-Testing Rules to Cash Balance Plans, 67 Fed. Reg. 76,123, 76,131 (Dec. 11, 2002) (revising Income Taxes; Continued Accruals Beyond Normal Retirement Age, 53 Fed. Reg. 11,876 (Apr. 11, 1988)). These proposed regulations were withdrawn in 2004. See I.R.S. Announcement 2004-57, 2004-2 C.B. 15.

(52) The proposed regulations defined "benefit accrual" differently for cash balance pensions than for traditional, annuity-paying pensions plans. There is no statutory basis for treating these differently since both are defined benefit plans.

(53) Prop. Treas. Reg. [section] 1.411(b)-2(b)(2)(i), 67 Fed. Reg. 76,123, 76,131 (Dec. 11, 2002). Both the parenthetical and the semicolon are in the original.

(54) Prop. Treas. Reg. [section] 1.411(b)-2(b)(2)(v), example 1, 67 Fed. Reg. 76,123, 76,132 (Dec. 11,2002). Both the parenthetical and the italics are in the original.

(55) Edward A. Zelinsky, The Cash Balance Controversy, 19 Va. Tax Rev. 683, 730-31 (2000). It is true that, in an defined contribution culture, participants more easily understand cash balance plans which, with their notional individual accounts, mimic defined contribution arrangements. I am, however, ultimately skeptical of this defense of cash balance plans since the accrued benefits of traditional annuity-paying pensions can be translated for participants into present values also mimicking individual accounts. Id. at 753-54.

(56) ($750 x $10)/(1.05)caret 15 = $3,607.63.

(57) ($2,000 x $10)/(1.05)care 40 = $2,840.91.

(58). ZELINSKY, supra note 1, at 26-27, 35-37.

(59). Some are likely to dismiss these older pension participants as succumbing to a framing effect when they ignore the present values of the annuities promised to them and to younger participants. I am not inclined to agree since there is a substantive difference between an annuity and a lump sum of equivalent present value, i.e., the annuity protects the recipient from longevity risk in a way a lump sum distribution does not. On framing effects, see Edward A. Zelinsky, Do Tax Expenditures Create Framing Effects? Volunteer Firefighters, Property Tax Exemptions, and the Paradox of Tax Expenditure Analysis, 24 VA. TAX REV. 797 (2005). On longevity risk, see ZELINSKY, supra note 1, at 5,15-23,114.

(60). United States v. Crawley, 837 F.2d 291,292 (7th Cir. 1988).

(61) Id. at 293.

(62). The post-PPA statutes do provide for cash balance plans different age discrimination rules than for other defined benefit plans. See Pension Protection Act of 2006 [section] 701, Pub. L. No. 109-280,120 Stat. 780 (2006).

(63) I.R.C. [section] 411(b)(1)(H)(i); ERISA [section] 204(b)(1)(H)(i), 29 U.S.C. [section] 1054(b)(1)(H)(i) (2006); see also ADEA [section] 4(i)(1)(A), U.S.C. [section] 623(i)(1)(A) (2006).

(64) Prop. Treas. Reg. [section] 1.411(b)-2(b)(2)(i), (iii),67 Fed. Reg. 76123, 76131 (Dec. 11,2002).

(65) For recent discussions, see Mark E. Berg, Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments, 61 TAX LAW 482 (2008); Vorris J. Blankenship, The Validity of Tax Regulations--The Third Circuit Adrift, 121 TAX

NOTES 454 (Oct. 27, 2008); Randall Jackson, Courts' Deference to IRS Regulations Elicits Strong Reaction, 2008 TNT 180-8 (Sept. 15, 2008).

(66). ZELINSKY, supra note 1; Edward A. Zelinsky, Cooper v. IBM Personal Pension Plan: A Critique, in 1 NEW YORK UNIVERSITY REVIEW OF EMPLOYEE BENERITS AND EXECUTIVE COMEPENSATION (Alvin D. Lurie, ed.) (chapter one), reprinted in 14(2) J. OF PEN. BEN. 15 (2007); Edward A. Zelinsky, The Cash Balance REV. 557 (2001); Edward A. Zelinsky, Cash Plans and Age Discrimination, 101 TAX NOTES 907 (NOV. 17, 2003).

(67) ZELINSKY, supra note 1 at 5-30.

(68) Id. at 72-73. Since they are defined benefit pensions, cash balance plans must provide annuities to their participants. I.R.C. [section]401(a)(11)(B)(i); ERISA [section] 205(b)(1)(A), 29 U.S.C. [section] 1055(b)(1)(A) (2006). In practice, however, most cash balance plans also provide for lump-sum distributions and most cash balance participants elect to receive such lump-sum distributions, rather than annuity payments.

(69) ($2,000 x $10)/(1.05) [caret]15 = $9,620.34.

(70) ($750 x $10)/(1.05)[caret]15 = $3,607.63.
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