Eighth Circuit Holds that Stovepipe Model in Target Benefit Plan Did Not Violate ERISA or the ADEA

In Northwest Airlines Inc. v. Phillips, (pdf) an employer/plan sponsor and union sought a declaratory judgment that the following planned contribution scheme for a money purchase plan did not violate ERISA or the ADEA:  The company would make no contribution if the employee is 55 or older, a contribution of 0-17% of pay if the employee is 50-54, up to 25% of pay if the employee is 40-49, and one of 9-21% of pay if the employee is 30-39.  The defendant participants counterclaimed alleging that the scheme violated ERISA, the ADEA and state laws prohibiting age discrimination.  The Eighth Circuit affirmed the district court’s holding that the planned contributions did not violate ERISA or the ADEA.The money purchase plan contribution scheme was developed post-bankruptcy by Northwest Airlines, Inc. (Northwest)  and the Air Line Pilots Association (ALPA) using a “stovepipe” model, which projected a hypothetical career for each pilot in order to determine final average earnings at retirement.  Based on a pilot’s age and years of service, the plan then calculated a “target percentage” of the pilot’s projected final average earnings to be provided as a retirement benefit.  Contributions to the target benefit plan, in combination with the pilot’s benefit under a frozen defined benefit pension plan, were designed to achieve a retirement benefit equal to 50% of projected final average earnings.  Northwest and ALPA sought a determination that ERISA § 204(b)(2)(A) and the parallel provisions of ADEA § 4(i)(1)(B) were not violated.

Defendant participants, generally older pilots, alleged that allocations to their accounts were reduced or ceased because of age.  In their counterclaim they argued that certain of the elements of the contribution formula (seniority, years of service, age) were “inextricably linked to age.” 

The Eighth Circuit acknowledged that projecting final average earnings necessarily involves the use of age, but that any reduction or cessation of contributions was not “because of” age.  The use of years of service was analytically distinct from the use of age.  It noted that nothing in the law indicated that Congress set out to legislate against the fact that younger workers have more time to grow their pension benefit.  Moreover, any offset of the target benefit due to one’s service ratio or one’s frozen pension benefit was due to “pension status” not age. Again, these reductions were not “because of” age and not based upon a stereotype about the work capacity of older workers relative to younger ones which the ADEA sought to eradicate.

Lessons Learned ... 

If your company has undergone dramatic changes, a target benefit plan may be an appropriate means of integrating prior benefit arrangements and providing a benefit that satisfies reasonable benefit expectations and goals of the company and employees.

Courts recognize that retirement plans do not need to be age neutral or age-blind in order to avoid running afoul of the ADEA.  Plan designs can employ age and age-affected elements so long as they are not animated by an intent to discriminate because of age.