Amicus Curiae Brief — Cooper v. IBM Personal Pension Plan, 127 S. Ct. 1143 (2007) (No. 06-760)

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No. 06-760

INTHE | ¢

SUPREME COURT OF THE UNIFED STATES

KATHY COOPER, BETH HARRINGTON AND

MATTHEW HILLSHEIM,

Petitioners,

THE IBM PERSONAL PENSION PLAN AND

IBM CORPORATION,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF AMICUS CURIAE OF AARP

IN SUPPORT OF PETITIONERS

MARY ELLEN SIGNORILLE*

AARP FOUNDATION LITIGATION

MELVIN RADOWITZ

AARP

601 E Street, NW

Washington, DC 20049

(202) 434-2060

Counsel for Amicus Curiae AARP

*Counsel of Record

="

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF INTEREST

REASONS FOR GRANTING THE PETITION

OLDER WORKERS HAVE EXPERIENCED

GREATER LOSSES OF EXPECTED BENEFITS

IN CASH BALANCE CONVERSIONS THAN

ROR WOM ence vicccunsetcecs ve’ 5

CASH BALANCE PLANS MUST COMPLY

WITH THE RULES FOR DEFINED BENEFIT

The Nearly Decade-Long Advocacy Effort

Was Successful in Ensuring Older Workers’

Benefit Accruals Were Neither Eliminated

Nor Reduced Because of Age. ........... 9

After More than Seven Years of Debate,

Congress Recently Revised the Tests

Only on a Prospective Basis to Determine

Whether Benefit Accruals Decline on

Account of Age

“The Rate of an Employee’s Benefit

Accrual” is Based On the Annual Change

in the Value of an Annuity at Normal

Retirement Age Expressed in Annuity

= OPP PET TET PET rere eth eto ee 13

-ii-

D. Employee Benefit Plan Provisions May

Result in Age Discrimination. .......... 17

CONCLUSION

iii-

TABLE OF AUTHORITIES

FEDERAL CASES

AARP vy. EEOC, 655 F. Supp. 228 (D.D.C.),

rev'd in part, 823 F.2d 600 (D.C. Cir. 1987) ...

AARP vy. Farmers Group, Inc.,

700 F. Supp. 1052 (C.D. Cal. 1988),

aff'd, 943 F.2d 996 (9th Cir. 1991)

Arizona Comm. for Deferred Compensation

Plans v. Norris, 463 U.S. 1073 (1983)

Arnett v. CalPERS, 179 F.3d 690 (9th Cir. 1999),

vacated and remanded on other grounds,

528 U.S. 1111 (2000)

Auerbach v. Board of Educ. of Harborfields

Cent. Sch. Dist., 136 F.3d 104 (2d Cir. 1998) .... 10

Bell v. Trustees of Purdue Univ.,

975 F.2d 422 (7th Cir. 1992)

Berger v. Xerox, 338 F.3d 755 (7th Cir. 2003) ... 10,14, 15

Campbell v. BankBoston, 327 F.3d 1 (1st Cir. 2003)

Central Laborers’ Pension Fund v. Heinz,

541 U.S. 739 (2004)

City of Los Angeles Dep’t of Water & Power v. Manhart,

435 U.S. 702 (1978)

Cooper v. IBM, 274 F.Supp. 2d 1010 (S.D. Ill. 2003)

-jvV-

Cooper v. IBM, 457 F.3d 637 (7th Cir. 2006)

Eaton v. Onan, 117 F. Supp.2d 812 (S.D. Ind. 2000) ... 5, 6

Engers v. AT&T Corp., 2000 U.S. Dist. LEXIS 10937

(D.N.J. 2000) (unpublished)

Esden v. Bank of Boston,

229 F.3d 154 (2d Cir. 2000)

Firestone Tire & Rubber Co. v. Bruch,

489 U.S. 101 (1989)

Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993)

Hirt v. Equitable Retirement Plan,

441 F.Supp. 2d 516 (S.D.N.Y. 2006)

Hughes Aircraft Co. v. Jacobson,

525 U.S. 432 (1999)

Hurlic v. Southern California Gas Co.,

No. 2:05-cv-05027-R-MAN

(C.D. Cal. March 23, 2006), appeal docketed,

Case No. 06-55599 (9th Cir. April 21, 2006)

In re Citigroup Pension Plan ERISA Litig.,

2006 WL 3613691 (S.D.N.Y. Dec. 12, 2006)

In re J.P. Morgan Chase Cash Balance Litig.,

2006 WL 3063424 (S.D.N.Y. Oct. 30, 2006)

Kimel v. Florida Bd. of Regents, 528 U.S. 62 (2000) ....

Lockheed Corp. v. Spink, 517 U.S. 882 (1996)

-\V-

Lyons v. Georgia-Pacific Corp.,

221 F.3d 1235 (11th Cir. 2000)

Maki v. Allete, Inc., 383 F.3d 740 (8th Cir. 2004)

Miller v. Xerox Corp. Retirement Income

Guarantee Plan, 447 F.3d 728

(9th Cir. 2006)

Public Employees Retirement Sys. v. Betts,

492 U.S. 158 (1989)

Register v. PNC, 2005 WL 3120268 (E.D.Pa. 2005),

appeal docketed, Case No. 05-5445

(3rd Cir. December 16, 2005)

Richards v. FleetBoston Fin. Corp.,

2006 WL 3000768 (D. Conn. Oct. 16, 2006)

Richards y. Fleetboston Financial Corp.,

427 F. Supp. 2d 150 (D. Conn. 2006)

Snair v. City of Clearwater, 817 F. Supp. 108

(M.D. Fla. 1993)

Solon. v. Gary Cmty. Sch. Corp.,

180 F.3d 844 (7th Cir. 1999)

Sosa v. Alvarez-Machain,

542 U.S. 692 (2004)

Von Aulock v. Smith,

720 F.2d 176 (D.C. Cir. 1983)

-Vi-

FEDERAL STATUTES, REGULATIONS

AND LEGISLATIVE HISTORY

Age Discrimination in Employment Act (ADEA),

§4(f)(2), 29 U.S.C. §623(f(2)

§4(f)(2)(B)(i), 29 U.S.C. §623(f)(2)(B)(i)

§4(i)(1), 29 U.S.C. §623(i)(1)

Employment Retirement Income Security Act

(ERISA) of 1974,

§3(23)(B), 29 U.S.C. §1002(23)(B)

§204(b)(1), 29 U.S.C. §1054(b)(1)

§204(b)(1 (A), 29 U.S.C. §1054(b)(1)(A) 14

§204(b)(1)(H), 29 U.S.C. §1054(b)(1)(H) . 10, 15, 16

§204(b)(2), 29 U.S.C. §1054(b)(2)

Internal Revenue Code (IRC),

IRC §415(a)

IRC §411(6)(1)(H)

IRC §411(b)(2)

29 C.F.R. §1625.7(c)

29 C.F.R. §1625.10

67 Fed. Reg. 76123 (December 11, 2002)

Announcement 2004-57, 2004-27 I.R.B.

(July 6, 2004)

Agriculture, Rural Development, Food and Drug

Administration, and Related Agencies

Appropriations Act, H.R. 2673,

108th Cong. (2004)

-Vii-

Older Workers Benefit Protection Act,

PuB. L. NO. 101-433, 104 STAT. 978 (1990) ...

Omnibus Budget Reconciliation Act of 1986,

Pus. L. No. 99-509, 100 STAT. 1874 (1986)

Omnibus Budget Reconciliation Act of 1990,

PuB. L. No. 101-508, 104 STAT. 1388 (1990) ....

_

Pension Protection Act,

PuB. L. No. 109-280, 120 STAT. 780 (2006) . passim

Pension Protection Act,

H.R. 2830, 109th Congress (2006)

Pension Security and Transparency Act, S. 1783,

109th Congress (2006)

Retirement Equity Act,

PuB. L. NO. 98-397, 98 STAT.1426 (1984)

H.R. CONF. REP. 93-1280, reprinted in

1974 U.S.C.C.A.N. 5038

H.R. CONF. REP. 99-1012, reprinted in

1986 U.S.C.C.A.N. 3868

House Education and the Workforce Committee Press

Release, 4/6/2006, available at

http://www.house.gov/apps/list/press/

ed31_democrats/rel4606c.html. ............... 13

-Viii-

MISCELLANEOUS

AARP Magazine, July-Aug 2003, available at,

http://www.aarpmagazine.org/lifestyle/

Articles/a2003-05-21-mag-justice age.html. ... 19

Dan M. McGill, et. al., FUNDAMENTALS OF

PRIVATE PENSIONS (7th ed. 1996)

E. Schultz, Actuaries Become Red-Faced Over Recorded

Pension Talk, available at

http:/Awww.careerjournaleurope.com/

columnists/edchoice/19990505-schultz.html . . 2, 7, 8

Edward Zelinsky, Cash Balance Controversy,

19 VA. TAX. REV. 683 (2000)

EEOC Compliance Manual, Section 3, Employee

Benefits (issued October 27, 2000)

GAO, PRIVATE PENSIONS: INFORMATION ON CASH

BALANCE PENSION PLANS

(GAO/HEHS-06-42, October 2005)

Jeanne Sahadi, COURT: IBM CASH-BALANCE PENSION IS

OKAY (Aug. 7, 2006), available at

http://money.cnn.com/2006/08/07/pf/

retirement/ibm_pension_ruling/index.htm

Price Waterhouse Coopers, Survey of Cash Balance

Conversions, BENEFITS QUARTERLY, Ist Quarter

STATEMENT OF INTEREST”

AARP is a nonpartisan, nonprofit membership

organization of more than 37 million persons age 50 or older,

working or retired, thai is dedicated to addressing the needs

and interests of older Americans. Approximately half of

AARP’s members are working. AARP fosters the economic

security of individuals as they age by seeking to increase the

availability, security, equity, pension and other employee

benefits. AARP and its members have a substantial interest

in ensuring that participants have access to pension plans that

provide adequate retirement income and that the benefits

accrued under a plan are not reduced because of a

participant’s age. Indeed, AARP has been advocating on the

issue of age-based reductions in benefit accruals for over

twenty years.

As part of its advocacy efforts, AARP was actively

involved in supporting the passage of the Omnibus Budget

Reconciliation Act of 1986, PuB. L. No. 99-509, 100 STAT.

1874 (1986), and the Older Workers Benefit Protection Act,

PuB. L. No. 101-433, 104 STAT. 978 (1990). AARP

challenged age-based denial of pension contributions and

accruals in court. See, e.g., AARP v. Farmers Group, Inc.,

700 F. Supp. 1052 (C.D. Cal. 1988), aff'd, 943 F.2d 996 (9th

Cir. 1991); AARP v. EEOC, 655 F. Supp. 228 (D.D.C.), rev'd

in part, 823 F.2d 600 (D.C. Cir. 1987); Snair v. City of

Clearwater, 817 F. Supp. 108 (M.D. Fla. 1993). AARP also

has participated as amicus curiae in Supreme Court cases

' No counsel for any party authored any portion of this

brief. No person other than amicus curiae, its members, or

its counsel made a monetary contribution to the preparation

~ and submission of this brief. The written consents of the

parties have been filed with the Clerk of the Court pursuant

to Sup. CT. R. 37.2(a).

2

deciding pension and employee benefits issues under the Age

Discrimination in Employment Act (ADEA) and the

Employee Retirement Income Security Act (ERISA). See,

e.g., Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739

(2004); Lockheed Corp. v. Spink, 517 U.S. 882 (1996);

Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993); Public

Employees Retirement Sys. v. Betts, 492 U.S. 158 (1989);

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).

Since the late 1990's, AARP began receiving

complaints from its members about the loss of their benefits

during conversions of traditional defined benefit pension

plans to cash balance plans. This came as no surprise

inasmuch as commentators generally agree that mid-life and

older workers -- AARP’s members -- fare the worst in cash

balance conversions. £.g.,GAO, PRIVATE PENSIONS:

INFORMATION ON CASH BALANCE PENSION PLANS 6, 36-38

(GAO/HEHS-06-42, October 2005); E. Schultz, Actuaries

Become Red-Faced Over Recorded Pension Talk, available at

http://www.careerjournaleurope.com/columnists/edchoice/19

990505-schultz.html.

Due to the tremendous negative impact cash balance

conversions have had on AARP’s members’ retirement

security, AARP vigorously advocated in Congress on

numerous bills concerning cash balance plans including the

recently enacted Pension Protection Act (PPA), PuB. L. No.

109-280, 120 STAT. 780 (2006), and the provision in the

Agriculture, Rural Development, Food and Drug

Administration, and Related Agencies Appropriations Act,

H.R. 2673, 108th Cong. (2004) (H.R. 2673) which blocked

implementation of Treasury’s proposed regulations and

required Treasury to propose legislation providing for

transition relief for older and longer-service participants

affected by cash balance conversions. See Announcement

3

2004-57, 2004-27 LR.B. (July 6, 2004). AARP also

submitted extensive comments presenting our views on,

among other issues, the application of age discrimination __

statutory provisions to cash balance plans to the Treasury and

the Internal Revenue Service on proposed regulations. Even

more directly relevant to the question presented here, AARP

has participated as amicus curiae in cases specifically

concerning case balance plans. Cooper v. IBM, 457 F.3d 637

(7th Cir. 2006); Lyons v. Georgia-Pacific Corp., 221 F.3d

1235 (11th Cir. 2000);-Hurtic v. Southern California Gas

Co., No. 2:05-cv-05027-R-MAN (C.D. Cal. March 23,

2006), appeal docketed, Case No. 06-55599 (9th Cir. April

21, 2006); Register v. PNC, 2005 WL 3120268 (E.D.Pa.

2005), appeal docketed, Case No. 05-5445 (3rd Cir.

December 16, 2005); Hirt v. Equitable Retirement Plan, 441

F.Supp. 2d 516 (S.D.N.Y. 2006); Engers v. AT&T Corp.,

2000 U.S. Dist. LEXIS 10937 (D.N.J. 2000) (unpublished).

In light of the significance of the issues presented by

this case and the impact on AARP members and other older

workers, AARP respectfully submits this brief to facilitate a

full consideration by the Court of the questions presented.

REASONS FOR GRANTING THE PETITION

A writ of certiorari is appropriate because there is a

substantial conflict between the Seventh Circuit’s decision in

this case and decisions in the Second, Ninth and Eleventh

Circuits on the questions presented by the petitioners.

Compare Cooper v. IBM, 457 F.3d at 639 (7th Cir. 2006)

with Miller v. Xerox Corp. Retirement Income Guarantee

Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of Boston,

4

229 F.3d 154 (2d Cir. 2000); Lyons v. Georgia-Pacific

Corp., 221 F.3d 1235 (11th Cir. 2000). More specifically,

this conflict undermines ERISA’s objective of national

uniform administration of employee benefit plans because

many companies with cash balance plans have offices in

numerous states in different circuits; indeed, IBM has offices

in every state. Moreover, a writ of certiorari is appropriate

because the Seventh Circuit’s decision completely ignores

ERISA’s statutory scheme which Congress again affirmed

most recently with the enactment of the Pension Protection

Act (PPA), Pus. L. No. 109-280, 120 STAT. 780 (2006).

Even though there are more than 1,500 cash balance plans

covering over 8.5 million workers whose retirement security

is being dramatically affected, Jeanne Sahadi, COURT: IBM

CASH-BALANCE PENSION IS OKAY (Aug. 7, 2006), available at

http://money.cnn.com/2006/08/07/pf/retirement/ibm_pension

_Tuling/index.htm, in the PPA, Congress decided to address

only prospectively the issue of benefit accruals under cash

balance plans. Thus, the issue presented by petitioners

affects both a substantial number of plans and their covered

participants.

? With the issuance of three recent district court decisions,

In re Citigroup Pension Plan ERISA Litig ., 2006 WL

3613691 (S.D.N.Y. Dec. 12, 2006); In re J.P. Morgan

Chase Cash Balance Litig ., 2006 WL 3063424 (S.D.N.Y.

Oct. 30, 2006); Richards v. FleetBoston Fin. Corp ., 2006

WL 3000768 (D. Conn. Oct. 16, 2006), the conflict

between the Seventh and Second Circuits has become even

more apparent.

5

ARGUMENT

OLDER WORKERS HAVE EXPERIENCED

GREATER LOSSES OF EXPECTED BENEFITS

IN CASH BALANCE CONVERSIONS THAN

YOUNGER WORKERS.

While the first cash balance plan was designed for

Bank of America in 1985, cash balance plans were largely

unheard of outside of the benefits consulting profession until

the second half of the 1990’s. Cash balance conversions have

since become known as a means by which companies reduce

the future pension benefits of their employees, especially

older ones. A survey by Price Waterhouse Coopers found

benefit reductions of 20% or more for some employees in

59% of cash balance conversions. PriceWaterhouse Coopers,

Survey of Cash Balance Conversions, BENEFITS QUARTERLY,

Ist Quarter 2001, at 22.

Cash balance conversions have had their most adverse

impact on older workers. In late 2005, the U.S. Government

Accountability Office released a report on cash balance

conversions, finding that older employees experience both

greater reductions in future rates of benefit accruals than

younger employees, and much lower benefits even though the

benefits of younger employees remain roughly comparable to

their previous benefits. GAO, PRIVATE PENSIONS:

INFORMATION ON CASH BALANCE PENSION PLANS

(GAO/HEHS-06-42, October 2005). The plain fact is that

the benefits of older employees were reduced more than the

benefits of younger employees. /d. at 6 and 36-38. Court

rulings have also recognized this undeniable fact. Eaton v.

Onan, 117 F. Supp.2d 812, 818, 831 n.9 and 832 (S.D. Ind.

2000) (older workers have “been getting the worst of both

worlds as a result of these [cash balance] conversions”

6

because they “were too young to derive much benefit from

the traditional “final average pay” design, but [were] too old

to have gotten an early start in their careers on the benefits of

a cash balance plan.”); Campbell v. BankBoston, 327 F.3d 1,

5 and 8 (Ist Cir. 2003) (“pension benefits stop[ped] accruing”

in his “final years of service”).

The cost savings that companies reap from cash

balance conversions are achieved principally by the reduction

in the benefits of older workers who are at a point in their

careers where they cannot make up this loss of benefits. The

cost savings are structured in three ways. First, a conversion

changes the benefit formula from one based on final average

pay to a formula based on each year’s pay (which means that

benefits from prior years are no longer adjusted as salaries

increase). Eaton v. Onan, 117 F. Supp.2d at 818, 831 n.9 and

832; Campbell v. BankBoston, 327 F.3d at 5 and 8. Second,

to the extent the plan may have provided “subsidized” early

retirement benefits, the conversion ends these valuable

benefits just before these workers would become eligible for

them. Third, and most significantly, most conversions, like

IBMs, are characterized by declining rates of benefit accrual

for older employees. The Treasury Department finds that

cash balance formulas generally produce a “larger accrual for

younger employees when measured as the increase in the

benefit payable at normal retirement age.” 67 Fed. Reg.

76123, 76126 (December 11, 2002). Professor Edward

Zelinsky explains:

Consider, for example, a participant who, at

ages thirty-five, forty-five, and fifty-five

receives in each year a theoretical contribution

of $1000 to her hypothetical cash baiance

account. As of age sixty-five, the earliest

contribution will, in annuity terms, represent

7

an annual income of $1094 per year; the

$1000 contributed ten years later at age forty-

five will constitute at retirement an annuity of

$507 per year; and the last $1000 contributed

at age fifty-five will, at retirement, represent

an annuity of $225 per year. Thus, even

though the employee, in defined contribution

terms, has been accruing contributions at a

steady pace (i.e., $1000 per year), the

employee has been earning benefits at a

decreasing rate in defined benefit terms.

The Cash Balance Controversy, 19 VA. TAX. REV. 683, 722-

23 (2000).

Indeed, actuaries who proposed cash balance plans

were well aware of the amount of benefit reductions and who —

were most affected. E. Schultz, Actuaries Become Red-

Faced Over Recorded Pension Talk, supra at 2. This Wall

Street Journal article quotes an October 1998 Society of

Actuaries’ meeting where consulting actuaries joked about

the benefit reductionis:

Amy Viener, an actuary at William M. Mercer

Inc., noted: “You switch to a cash-balance

plan where the people are probably getting

smaller benefits, at least the

older-longer-service people; but they are really

happy, and they think you are great for doing

yg

An actuary with Watson Wyatt Worldwide

who spoke on Ac panel called “Introduction to

Cash Balance/Pension Equity Plans” alongside

Ms. Viener, is heard saying on a tape: “It is

8

not until they are ready to retire that they

understand how little they are actually

getting.” “Right, but they're happy while

they're employed,” responded Ms. Viener of

Mercer.

Id.

Cash balance plans are designed to reduce the amount

older workers earn under cash balance formulas. Not only

are older workers earning much less than under the prior

defined benefit formulas, but most significantly, they are

earning much less than younger workers who are similarly

situated in every respect except age. Given the demographics

of the United States, this means that these older workers will

have less to make ends meet to maintain a secure retirement

in their old age, which is the very problem that the 1986

reform was designed to address. See Argument II.A, infra.

IBM and other corporations that converted to cash

balance pension plans “proceeded with eyes wide open and

[were] fully informed of the consequences of litigation that

was sure to come.” Cooper v. IBM, 274 F.Supp. 2d 1010,

1022 (S.D. fl. 2003). With over 8.5 million workers

participating in cash balance plans, Jeanne Sahadi, COURT:

IBM CASH-BALANCE PENSION IS OKAY (Aug. 7, 2006), supra

at 4, the issue of the legality of cash balance plan benefit

accruals is still significant for all workers, since everyone

ages.

9

CASH BALANCE PLANS MUST COMPLY

WITH THE RULES FOR DEFINED BENEFIT

PLANS.

A. The Nearly Decade-Long Advocacy Effort

Was Successful in Ensuring Older

Workers’ Benefit Accruals Were Neither

Eliminated Nor Reduced Because of Age.

Starting in the late 1970's, AARP and others engaged

in a nearly decade-long advocacy effort to obtain new rules

on benefit accruals for older workers. See, e.g., Von Aulock

v. Smith, 720 F.2d 176, 182-84 (D.C. Cir. 1983); AARP v.

EEOC, 823 F.2d. 600, 601-602 (D.C. Cir. 1987). Congress,

business, and employee organizations were all aware that

defined benefits cost more for older workers than for younger

workers if the funding of defined benefit obligations is

viewed on a per capita basis. See, e.g., H.R. CONF. REP. 99-

1012, 379; 1986 U.S.C.C.A.N. 3868, 4024 (“repeal” of the

present law exclusion of older workers from defined benefit

participation “may have the effect of increasing an

employer’s minimum funding requirements significantly for

employees hired within five years of normal retirement age”).

Indeed, a respected authority in this field shows how,

on a per capita basis, the “normal cost” of delivering a $100

per year benefit at age 65 to employees who are currently age

30 can be less than 1/30th of the normal cost of delivering an

additional $100 per year benefit to employees when they

approach age 65. Dan McGill, FUNDAMENTALS OF PRIVATE

PENSIONS at 528 (7th ed. 1996). Defined benefit plans are,

however, funded on a group basis. See Solon v. Gary Cmty.

Sch. Corp., 180 F.3d 844, 854 n.4 (7th Cir. 1999) (“Broadly

speaking, a defined benefit plan is one consisting of a general

pool of assets (rather than individualized accounts) from

ay

which an employee, upon retirement, is periodically paid a

fixed amount’). There are no actual accounts and no separate

individual contributions in defined benefit plans for older

versus younger workers. See Berger v. Xerox, 338 F.3d 755,

758 (7th Cir. 2003).

When Congress enacted ERISA §204(b)(1)(H) in

1986, with parallel provisions in the ADEA and the Internal

Revenue Code, Congress regulated the benefits that defined

benefit plans offer and did not make the “bona fide plan”

exception a part of its age discrimination standard. See, e.g.,

ADEA §4(f)(2), 29 U.S.C. §623(f)(2) (bona fide plan

exception applies to actions otherwise prohibited under

sections (a), (b), (c) or (e), not actions prohibited under

section (i)); Bell v. Trustees of Purdue Univ., 975 F.2d 422,

423-24 (7th Cir. 1992) (before 1986 amendments,

discontinuing pension benefits after certain ages was not

prohibited if the provision was part of a bona fide plan).

However, the ADEA safe harbor only applies where the

actual amount of payment or the actual cost incurred on

behalf of an older worker is not less than that incurred on

behalf of a younger person (equal cost or equal benefit rule).

See, e.g.,29 U.S.C. §623(f)(2)(B)(i); 29 C.F.R. §1625.10;

Auerbach v. Board of Educ. of Harborfields Cent. Sch. Dist.,

136 F.3d 104, 112 (2d Cir. 1998).” Finally, Congress did not

qualify its regulation of benefits in any other way based on

the hypothetical “costs” of benefits from a per capita or other

non-group perspective.

> Cooper’s application of an imputed cost analysis conflicts

with Congress’ express rejection of such a defense for age

discrimination in defined benefit plans. Cooper, 457 F.3d

at 640.

il

The legislation that came out of the Conference

Committee in October 1986 was unquestionably broader in

two critical respects than the Senate bill. The Conference

understood that if Congress restricted the protection against

ceasing of accruals to “after normal retirement age,” a plan

could decrease an employee’s rate of accruals before that age,

which is usually age 65. The new law would not be violated

because the cessation in accruals occurred prior to age 65.

The Conference Committee also understood that the law

needed to protect against “reductions” in the rate of accruals

before 65. Because at least one of ERISA’s “anti-

backloading” rules permits “unlimited frontloading” of

benefit accruals, no other provision of ERISA would

necessarily be violated by such reductions. See H.R. CONF.

REP. 93-1280, at 274, reprinted in 1974 U.S.C.C.A.N. 5038,

5055-56. r

Accordingly, the Conference bill provided that “a

defined benefit plan shall be treated as not satisfying the

requirements of this paragraph [§204(b)(1)] 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.” It is this language which is at issue in

this case.

B. After More than Seven Years of Debate,

Congress Recently Revised the Tests Only

on a Prospective Basis to Determine

Whether Benefit Accruals Decline on

Account of Age.

Until the enactment of the Pension Protection Act,

Congress never specifically authorized the concept of a

“hybrid” plan like a cash-balance plan; instead the “rigidly

binary” statutory scheme Congress established regulated

12

these plans. Esden v. Bank of Boston, 229 F.3d 154. Indeed,

Cooper improperly relied on interpretive regulations the

Treasury Department had issued even though Congress made

it clear that it disagreed with Treasury’s interpretation. F.g.,

H.R. 2673.

On September 15, 1999, the Internal Revenue Service

placed a moratorium on the issuance of tax qualification

determination letters involving defined benefit plans that

were converted to cash balance plans because Congress had

such issues under consideration. Announcement 2004-57,

2004-57 I.R.B. The moratorium is still in effect.

At various times since 1999 Congress refused to

legitimize cash balance plans. In 2004, Congress prohibited

the implementation of Treasury’s proposed regulations which

would have retroactively legitimize cash balance plans. H.R.

2673. Instead, Congress required Treasury to propose

legislation providing for transition relief for older and longer-

service participants affected by cash balance conversions. Id.

Treasury withdrew its proposed regulations and proposed

legislation that would require a five-year “hold harmless”

period for current employees following a cash balance

conversion, would ban “wearaway” and clarify the legal

status of cash balance plans. Announcement 2004-57, 2004-

222 3 Sige

Congress addressed many issues in its recently

enacted Pension Protection Act (PPA), PuB. L. No. 109-280,

120 STAT. 780 (2006). The provisions of the PPA addressing

cash balance plans were heavily debated, with business

pushing for legitimizing cash balance plans both

prospectively and retroactively. Indeed, the bill voted out of

the House provided retroactive relief. Pension Protection

Act, H.R. 2830, 109" Cong. (2006). The Senate rejected

13

such broad relief, and instead provided relief for cash balance

plans solely on a prospective basis. Pension Security and

Transparency Act, S. 1783, 109th Cong. (2006). Congress

adopted the Senate bill. House Education and the Workforce

Committee Press Release, 4/6/2006, available at

http://www.house.gov/apps/list/press/ed31_democrats/rel460

6c.html. The PPA provides relief for cash balance plans that

are converted from a traditional defined benefit plan

exclusively on a prospective basis and, then if, and only if,

certain protections are put in place for participants. Section

701(b) of the PPA, PuB. L. No. 109-280, 120 STAT. 780

(2006). If the cash balance plan does not meet the PPA’s

requirements, it will fail the age discrimination rules for

benefit accruals. Jd. Congress took no position regarding the

legality of cash balance pension plans retroactively.

Congress specifically stated that the amendments in the PPA

should not give rise to any inference about whether cash

balance plans were age discriminatory prior to the PPA’s

enactment. Section 701(d) of the PPA, PuB. L. No. 109-280,

120 STAT. 780 (2006). Consequently, the issue of whether

benefit accruals are reduced on account of age for the more

than 1500 cash balance plans and 8.5 million participants is

still unsettled. -

C. “The Rate of an Employee’s Benefit

Accrual” is Based On the Annual Change

in the Value of an Annuity at Normal —

Retirement Age Expressed in Annuity

Form.

In Cooper, the court stated, without support, that:

“there is no statutory difference between the treatment of

economically equivalent defined-benefit and defined-

contribution plans.” 457 F.3d at 639. By this statement, the

14

Cooper court implicitly rejected the rationale of the decisions

in Miller, Lyons, Berger and Esden.

There are significant differences between defined

benefit and defined contribution plans in funding, the nature

of the benefits provided, how their benefits are computed,

whether they are insured by the PBGC, and how Congress

decided to regulate them. Esden, 229 F.3d at 158 (“the

regulatory consequences of this [defined benefit plan}

classification are wide-reaching.”); Lyons, 221 F.3d at 1251.

Cooper blatantly ignores the admonition by the Court in

Hughes Aircraft, that “it is essential to recognize the

difference between defined contribution plans and defined

benefit plans.” Hughes Aircraft Co. v. Jacobson, 525 U.S.

432, 439 (1999).

By ignoring their essential differences as

“whimsical,” it was very easy for the Seventh Circuit to make

the jump to the conclusion that the rates of benefit accrual for

both types of plans should be measured by the same method.

However, this ignores the fundamental distinction between

the plans concerning the definition of “accrued benefit.” As

the Court explained, “accrued benefit” in a defined

contribution plan is the “balance of the individual’s account.”

ERISA §3(23)(B), 29 U.S.C. §1002(23)(B); Hughes Aircraft,

525 U.S. at 439. Thus, age discrimination should be found in

defined contribution plans if “the rate at which amounts are

allocated to employee’s account . . .is reduced, because of the

attainment of any age.” ERISA §204(b)(1)(A), 29 U.S.C.

§1054(b)(1)({A). In contrast, in a defined benefit plan, the

“accrued benefit” is defined as “the individual’s accrued

benefit determined under the plan...[and ordinarily is]

expressed in the form of an annual benefit commencing at

normal retirement age.” ERISA §3(23)(B); 29 U.S.C.

§1002(23)(B); Hughes Aircraft, 525 U.S. at 440. Thus, age

15

discrimination should be found in defined benefit plans 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.” ERISA §204(b)(1)(H), 29 U.S.C.

§1054(b)(1)(H).

Like other tests under ERISA and the Code for

defined benefit plans, e.g., IRC §415(a) (to test for top-heavy

discrimination, use of benefits in defined benefit plans

compared with allocations in defined contribution plans), the

defined benefit test focuses on the amount of benefits the

employee will receive beginning at normal retirement age;

contributions or allocations are irrelevant because there is no

individual account to which they may be added. Berger, 338

F.3d at 758; Miller, 447 F.3d at 735 (“interest credits are

defined benefit entitlements specified by the plan terms and

are not analogous to the investment growth of a defined

contribution plan’”’).

Following Miller, Berger and Esden, the rate of an

employee’s benefit accrual under a cash balance plan is

determined by converting the contents of the Plan’s

hypothetical “account” into an annuity at normal retirement.’

“(T]he benefits attributable to interest credits are accrued

benefits” and as such “must be valued in terms of the annuity

that [they] will yield at normal retirement age.” Esden, 229

F.3d at 163 and 166; Berger, 338 F.3d at 761 (“pension

entitlement” is the “pension at age 65 based on his cash

balance as increased by future interest credits”); Miller, 447

F.3d at 733. It is the benefit commencing at retirement that

* In contrast, the PPA amendments permit an accrued

benefit to be expressed in one of three ways includiag as

the balance of a hypothetical account. Section 701(b)(1) of

the PPA, PuB. L. No- 109-280, 120 STAT. 780 (2006).

16

serves as the yardstick for determining compliance with

ERISA § 204(b)(1)(H). —

_ The Treasury Department recognizes, and no one

seriously disputes, that cash balance formulas generally offer

a “larger accrual for younger employees when measured as

the increase in the benefit payable at normal retirement age.”

67 Fed. Reg. 76123, 76126. Designed with flat pay credits,

or with graded pay credits that flatten out sometime after age

40, many cash balance plans accrue retirement benefits at

rates that decrease with advancing age. In terms of an

annuity at age 65, the interest credits will always be more

valuable for a younger employee as opposed to an older

employee. Richards v. Fleetboston Financial Corp., 427 F.

Supp. 2d 150, 163 (D. Conn. 2006).

The statutory text shows that Congress purposefully

adopted two separate tests for age discrimination under

pension plans. The test for a defined benefit plan is based on

“the rate of an employee’s benefit accrual,” whereas the test

for a defined contribution plan is based on “the rate of

allocations to the employee’s account.” ERISA

§§204(b)(1)(H) and 204(b)(2).% When Congress “uses

certain language in one part of the statue and different

language in another, the court assumes different meanings

were intended.” Sosa v. Alvarez-Machain, 542 U.S. 692, 712

n. 9 (2004). The Cooper decision flouts this assumption hy

construing the phrase “rates of benefit accrual” to mean the

same as the term “allocations.” In ERISA, Congress showed

that it understood the difference between “rate of benefit

accrual” and “allocations.” E.g., IRC §415(a); see Richards,

at 164.

> See also ADEA §4(i)(1); IRC §§411(b)(1)(H) & (b)(2).

17

Moreover, if Congress wanted to offer plan sponsors a

cost-based testing alternative for defined benefit plans based

on imputed individual costs, it could have done so by

modifying the defined contribution test or the EEOC’s equal-

benefit or equal-cost regulations to allow companies to

impute individual costs for the retirement benefits for

younger and older workers. 29 C.F.R. §1625.10. However,

the legislative history shows that Congress was aware that

repeal of the exclusion of older workers from benefit accruals

would be costly. It is unthinkable that Congress purposefully

enacted two statutory tests, but intended, without enactment,

a third test to be implemented depending on a defined benefit

plan sponsor’s contractual definition of the plan’s benefits.”

D. Employee Benefit Plan Provisions May

Result in Age Discrimination.

Not surprisingly, employee benefit plan provisions

have often been found to result in sex or age discrimination.

In City of Los Angeles Dep’t of Water & Power v. Manhart,

° Indeed, Congress has shown it is quite capable of

changing pension rules to respond to problems with the

Statute when it believes it is appropriate. E.g., Older

Workers Benefit Protection Act, PUB. L. No. 101-433, 104

STAT. 978 (1990) (codifying the EEOC’s “equal benefit or

equal cost” principle for age-based benefit reductions); —

Omnibus Budget Reconciliation Act of 1990, Pus. L. No.

101-508, 104 STAT. 1388 (1990) (raised excise tax on

pension plan reversions and permitted asset transfers from

_ over funded pension plans to health care accounts for

retiree health benefits); Retirement Equity Act, PUB. L.

No. 98-397, 98 STAT.1426 (1984) (requiring plans to pay

survivor’s benefits to spouses, unless waiver is obtained, to

protect spouses).

18

435 U.S. 702, 716 (1978), the Court held that a plan

provision, which was ubiquitous at that time, requiring

women to contribute more to a pension plan than men

because of women’s longevity was a pattern or practice of

discrimination. See also Maki v. Allete, Inc., 383 F.3d 740,

745 (8th Cir. 2004) (reversing dismissal of complaint where

women alleged that bridging provisions in a pension plan

“were adopted in a discriminatory manner”). Reducing

benefits based on age, or proxies for age, has also been held

to be discriminatory. See, e.g., Arnett v. CalPERS, 179 F.3d

690, 695 (9th Cir. 1999), vacated and remanded on other

grounds, 528 U.S. 1111 (2000) (disability benefits reduced

based on potential years to retirement are age discriminatory);

Solon v. Gary Community Sch. Corp., 180 F.3d 844, 852-53

(7th Cir. 1999) (early retirement incentives that are reduced

for each month employee is over age 58 are discriminatory).

Courts have specifically held that discrimination is

not eliminated by framing it in “neutral” economic terms that

necessarily correspond with sex or age. In Arizona Comm.

for Deferred Compensation Plans v. Norris, 463 U.S. 1073

(1983), an employer contended that lower monthly retirement

benefits for women employees resulted from a factor other

than sex, namely, “longevity.” Following Manhart, the Court

ruled that “one cannot say that an actuarial distinction based

entirely on sex is based on any other factor than sex.” Jd. at

1081. Similarly, the Court rejected the alternative contention

that the lower monthly payments for women were not

discriminatory because they have “approximately the same

present actuarial value” as the higher monthly payments for

men. /d. at 1082-3.

The same principles apply in age discrimination. A

“Reasonable Factor Other than Age” cannot be a factor that

uses age, directly or indirectly, as a “limiting criterion.” 29

19

C.F.R. §1625.7(c). In Arnett v. CalPERS, 179 F.3d at 695,

the State of California based disability benefits on 2% of pay

multiplied by “potential years of service” to retirement. The

Ninth Circuit held that the “practical application” of the

formula “leaves no doubt that age at hire ... is the sole basis

for lower benefits.”"2 See also EEOC Compliance Manual,

Section 3, Employee Benefits (issued October 27, 2000)

(formula that bases benefits on “potential years” to retirement

is a proxy for age because it gives younger workers more

“constructive years” than older workers).

Like the benefits in Norris which could not be

calculated without knowing the participant’s sex or in Arnett

which could not be calculated without knowing the

participant’s age, benefits under a cash balance plan may only

be calculated by knowing the participants’ age. Thus, the

result in Cooper contradicts the reasoning underlying Norris

and its progeny like Arnett.’ Quite simply, in all of these

cases the benefit calculation is inseparable from the protected

characteristic of age.

” The Court vacated Arnett because Kimel v. Florida Bd. of

Regents, 528 U.S. 62 (2000), ruled that public employees

cannot sue State governments under federal age

discrimination law. However, the EEOC subsequently

refiled the suit and obtained the largest recovery in EEOC

history. See AARP Magazine, July-Aug 2003, available at,

http://www .aarpmagazine.org/lifestyle/ Articles/a2003-05-2

l1-mag-justice_age.html.

* Unlike the benefits under a cash balance plan, benefits

under a flat dollar plan are calculated using participants’

years of service; their ages are irrelevant.

20

CONCLUSION

For these reasons, the petition for a wnt of certiorari

should be granted.

Dated: December 2006 Respectfully submitted,

Mary Ellen Signorille

(Counsel of Record)

AARP Foundation Litigation

Melvin Radowitz

AARP

601 E Street, NW

Washington, DC 20049

(202) 434-2060

Counsel for Amicus Curiae

AARP