Recent Court Decision Could Affect Public Pension Plans
On March 31, 2014, the United States Court of Appeals for the Fourth Circuit ruled that a Maryland public employee retirement plan violated the Age Discrimination in Employment Act (ADEA) by requiring greater contributions for participants that enrolled at later ages. The case, EEOC v. Baltimore County, has significant implications for some public employee pension plans, which may want to obtain legal guidance regarding the effect of this ruling on their plan.
Since 1945, Baltimore County has provided a defined benefit retirement plan to its employees. The original terms of the plan provided for normal retirement at age 65. Employees hired at older ages were required to make greater contributions than employees who were younger when they were hired. The plan actuary recommended this structure because the plan would earn interest on contributions for fewer years for older employees than younger employees. The requirement to make contributions based upon age at hire was eliminated in 2007 so that all employees contributed the same percentage of their salaries regardless of their age.
The ADEA generally prohibits employers from discriminating against employees over the age of 40 on the basis of age when determining compensation (which includes employee pension benefits). However, the law provides a safe harbor from this prohibition for defined benefit plans with respect to subsidized early retirement benefits.
The United States Equal Employment Opportunity Commission (EEOC) brought this action against Baltimore County regarding its practice of requiring greater contributions for older employees. The Fourth Circuit agreed that the practice was discriminatory in its opinion issued on March 31, 2014.1 The court rejected the argument that the disparate contribution rates were permissible due to the lower expected returns on contributions from older workers because employees could retire based solely on years of service,2 regardless of age, so that the number of years of contributions would be the same. The court also found that other funding considerations did not provide a nondiscriminatory justification for the disparate contribution rates. In addition, the court further rejected the plan's reliance on the ADEA's safe harbor for early retirement benefits, reasoning that the safe harbor is not applicable to employee contribution rates, but only to early retirement subsidies.
Cheiron Observation: The Fourth Circuit encompasses Virginia, West Virginia, North Carolina, South Carolina and Maryland. Accordingly, plan sponsors in those jurisdictions that vary member contributions by age or age at hire may want to carefully review the terms of their plans in light of the decision. Because much of the opinion was grounded in the fact that employees could retire after a stated number of years of service that did not depend on age, the court's decision may not apply to a situation where employees can retire only after attaining a certain age. In addition, it is not clear whether other circuits will follow the Fourth Circuit in similar cases.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.
1 The 4th Circuit affirmed a district court decision, which was reached after the 4th Circuit had remanded an earlier appeal for further consideration.
2 General employees could retire after 30 years, and correctional employees after 20 years. The ability to retire after a stated number of years was not part of the original plan, but was added later.