In Hurlic v. Southern California Gas Company, (— F.3d —, 2008 WL 3852685, C.A.9 (Cal.), Aug. 20, 2008), a United States Court of Appeals considered whether “cash balance” pension plans violated the anti-age discrimination and anti-backloading provisions of the Employee Retirement Income Security Act (“ERISA”). The Court of Appeals concluded that “cash balance” pension plans do not violate the anti-age discrimination and anti-backloading provisions of ERISA, and further held that ERISA preempted the employees’ California Fair Employment and Housing Act (“FEHA”) claim. However, the court did find that the employer violated ERISA’s notice requirement when the employer implemented the new “cash balance” pension plan.
Facts
In July, 1998, the Southern California Gas Company (“SCGC”) amended the SCGC Pension Plan (“the Plan”) from calculating benefits based on a “pre-conversion formula” to a “cash balance formula.” Under the old pre-conversion formula, participants were entitled to a single-life annuity, payable monthly, beginning at normal retirement age. Under the new cash balance formula, participants are assigned a retirement account that calculates a participant’s accrued benefit, though no real money is actually deposited into the individual’s account. The initial balance of each participant’s retirement account is the actuarial equivalent of the participant’s accrued benefit under the Plan prior to the July 1998 amendment. After July 1998, the cash balance formula credits, on a monthly basis, each participant’s retirement account with “retirement credits.”
The Plan, as amended, also provides a five-year “grandfather” provision which allows eligible participants to continue receiving benefits under the old pre-conversion formula. After five years the account is frozen. If an eligible participant begins receiving benefit distributions during the five-year grandfather period, the participant can receive benefits under the pre-conversion formula or the cash balance formula, whichever is greater, until the participant’s termination. If a participant does not receive benefit distributions during the five-year grandfather period, the participant’s accrued benefit is determined by a “wear-away provision.” The wear-away provision provides that a participant’s accrued benefit is an age 65 single-life annuity equal to the greater of the retirement account under the cash balance formula, or the frozen pre-conversion formula.
David Hurlic, who is 53 years old, has worked at SCGC since 1983 and is a Plan participant. Susanna Selesky, who is 56 years old, has worked at SCGC since 1977 and is also a Plan participant. Both Hurlic and Selesky were eligible for the grandfather provision and elected to continue accruing benefits under the pre-conversion formula until it expired in June 2003. Hurlic’s estimated payments based on his frozen pre-conversion formula benefits are greater than under the cash balance formula until 2015. Selesky’s pre-conversion formula benefits are greater until 2009. Therefore, Hurlic and Selesky would not accrue any additional benefits during these respective periods of time.
On July 8, 2005, Hurlic and Selesky filed suit against SCGC and the Plan and alleged: 1) the Plan, as amended, violated the age discrimination provision of the ERISA; 2) the Plan, as amended, violated the anti-backloading provisions of the ERISA; 3) the wear-away provision of the Plan disproportionately affected SCGC employees aged 40 and older in violation of FEHA; and 4) when executed the Plan did not provide advance notice as required under the ERISA. After a number of dismissals from the trial court for failure to state a claim on all counts, Hurlic and Selesky appealed to the Court of Appeals.
Decision
The Court of Appeals began by discussing cash balance plans generally, in addition to specifically addressing Hurlic and Selesky’s claim of age discrimination in violation of the ERISA. First, the court said the ERISA provides for two types of pension plans, defined contribution plans and defined benefit plans. Cash balance plans are defined benefit plans. The court explained that under ERISA, defined benefit plans “promise to pay employees, upon retirement, a fixed benefit under a formula.” Defined benefit plans have a general pool of assets, rather than individually dedicated accounts. The pool of assets can be funded by the employer, employee, or both. Under defined benefit plans, the employer usually bears the entire risk of investment, and “must cover any under funding that might occur as a result of the plan’s investments.”
ERISA “prohibits a defined benefit plan from ceasing an employee’s benefit accrual or reducing the rate of any employee’s benefit accrual . . . because of the attainment of any age.” 29 U.S.C. § 1054(b)(1)(H)(i). Hurlic and Selesky argued the Plan violated ERISA because under the Plan interest credits were guaranteed regardless of continued employment with SCGC. Thus, a younger SCGC employee who does the “same job and earns the same salary as an older employee will always have a greater benefit at retirement age.” The Court of Appeals disagreed with Hurlic and Selesky’s interpretation of the relevant ERISA provisions. The court said the ERISA proscribes the reduction of rate at which a participant’s benefit accrues, not the total accrued benefit. To further clarify, the court explained, “based on the time value of money, a younger participant’s total accrued benefit at retirement will be greater because the younger participant has more time before retirement in which interest will compound.” The Plan does not reduce the rate of benefit accrual due to the attainment of any age, and therefore does not violate the ERISA.
The Court of Appeals then addressed Hurlic and Selesky’s claim that the Plan violated the anti-backloading provisions of ERISA. There are three anti-backloading provisions of ERISA, and plans need to only comply with one of them. The 133-1/3 percent rule “provides that benefits accrued in any one year may not exceed 133-1/3 percent of the benefit accrued in any prior year.” 29 U.S.C. § 1054(b)(1)(B). Hurlic and Selesky argued that the Plan violated the 133-1/3 percent rule because Treasury Regulation section 1.411(b)-1(a) requires the application of two different formulas to the rule. Specifically, to “the pre-conversion formula while the[e] frozen benefits are greater and [to] the cash balance formula once th[e] cash balance account exceeds th[e] frozen benefits.” Again, the court was not persuaded and found “the Plan, as amended, does not determine a participant’s benefits by aggregating two formulas.” The court explicated, “Congress has directed us to treat the amended plan as if it was in effect for all other plan years,” and therefore, “we must assume that, for purposes of applying the 133-1/3 percent rule, there was never a prior plan under which [Hurlic and Selesky] accrued benefits.”
Next, the Court of Appeals discussed SCGC’s argument that ERISA preempts Hurlic and Selesky’s state law FEHA claim for age discrimination. The court noted that ERISA contains a broad preemption clause which preempts “any and all State laws insofar as they . . . relate to any employee benefit plan.” 29 U.S.C. §1144(a). Hurlic and Selesky conceded FEHA relates to employee benefit plans, but argued “the joint state/federal enforcement scheme of the Age Discrimination in Employment Act (“ADEA”) would be impaired if [the court] h[el]d that ERISA preempts their FEHA claim.” In other words, Hurlic and Selesky argue that the ADEA, a federal statutory scheme, would be undermined if their FEHA claim was preempted. The court agreed the ADEA provides for a joint state/federal enforcement scheme. However, the court found the “FEHA does not provide a means of enforcing the ADEA’s commands such that preemption would ‘impair’ the joint state/federal enforcement scheme of the ADEA.” Moreover, the court said the FEHA proscribes practices that are lawful under the ADEA. Consequently, the court concluded Hurlic and Selesky’s FEHA claim was preempted.
Finally, the court addressed Hurlic and Selesky’s argument that SCGC violated ERISA’s notice requirement. ERISA provides when a pension plan is amended so there is a reduction in the rate of future benefit accrual, written notice is required “not less than 15 days before the effective date of the plan amendment.” 29 U.S.C. § 1054(h). SCGC admits adequate notice was not provided, but argues Hurlic and Selesky did not sufficiently allege they suffered harm. The complaint alleges that Hurlic and Selesky were deprived of the opportunity to file for injunctive relief, and the pursuit of alternative retirement strategies. The court said Hurlic and Selesky were not harmed by their inability to file injunctive relief because the court has found the amended Plan does not violate ERISA. However, the court did find Hurlic and Selesky were deprived of the opportunity to alter their retirement strategies based on SCGC’s failure to provide adequate notice.
In conclusion, the Court of Appeals held cash balance plans do not violate ERISA’s anti-age discrimination and anti-backloading provisions. In addition, the court held ERISA preempted Hurlic and Selesky’s state law FEHA claim. Consequently, the court affirmed the trial court’s dismissal of these claims. However, the court held the complaint adequately alleged that SCGC did violate ERISA’s notice requirement, and therefore reversed the district court’s dismissal of Hurlic and Selesky’s notice claim.