Fourth Circuit Rules That Retirement Plan Violates ADEA

Just a few weeks ago, the Fourth Circuit weighed in on the question of whether an employee retirement benefit plan maintained by Baltimore County discriminated against employees based on their age by requiring older employees to pay a greater percentage of their salaries based on their ages at the time of enrollment in the plan. In Equal Employment Opportunity Commission v. Baltimore County, No. 13-1106 (4th Cir. March 31, 2014), the Fourth Circuit ruled that such a plan did unlawfully discriminate against workers based on age and thus violated the ADEA.

Baltimore County, Maryland established a mandatory employee retirement system for all county employees in 1945. At the time it was established, the plan provided that employees were eligible to retire and receive pension benefits at age 65, regardless of the length of their periods of employment. The plan was not fully funded, but rather, employees contributed a certain fixed percentage of their annual salaries over the course of their employment. These employee contribution rates were set based on calculations performed by an actuarial firm employed by the County. The County instructed the firm to calculate rates to make sure that employees’ contributions and earnings on those contributions would fund about half of the pension benefits and the County’s contributions (and related earnings) would fund the other half. In order to achieve this goal, the actuarial firm based its calculations for employee contribution rates on the number of years that an employee would contribute to the plan before becoming eligible to retire at age 65. Ultimately, the firm concluded that older employees who enrolled in the plan should contribute more of their salaries because their contributions would earn interest for less time. So, the older an employee at the time of enrollment, the higher his contribution rate.

Although there were a number of changes over the years regarding eligibility and age of retirement, including an amendment allowing retirement based on years of service, the employee contribution rates were only amended one time and did not change the fact that the rates were based on the employee’s age at the time of enrollment.

In 1999 and 2000, two correctional officers working for the County filed discrimination charges with the EEOC, alleging that that the retirement plan discriminated against them based on their ages. The EEOC ultimately filed a lawsuit in 2007, claiming that the plan discriminated against these two employees and a class of similarly situated employees in the protected age group of 40 years of age and older by requiring them to pay higher contribution rates than those paid by younger employees.

Initially, the district court granted the County’s motion for summary judgment, concluding that the employee contribution rates were not motivated by age, but by the number of years remaining until an employee reached retirement age. The Fourth Circuit vacated his judgment, holding that this decision focused only on age-based retirement eligibility and did not consider the plan’s separate provision for service-based eligibility irrespective of age which meant that two employees of different ages could both be eligible for retirement after 20 years of service, but the older of the two would have to contribute more of his annual salary than the other. The Fourth Circuit thus remanded the case to the district court “to determine whether the disparate rates were supported by ‘permissible financial considerations.’” Baltimore County, p. 10. On remand, the district court concluded that the “but-for” cause of the disparate treatment was age and that the County was liable for violating the ADEA.

Last month, the Fourth Circuit then addressed this issue on interlocutory appeal prior to the lower court’s consideration of damages. The County took the position that the time value of money was reasonable justification for the disparate rates and that the ADEA’s safe harbor provision relating to early retirement benefit plans shielded the County from liability. The Fourth Circuit disagreed.

The Fourth Circuit found that the County’s argument that the employee contribution rates were based on a factor other than age, specifically the “time value of money” was without merit. Id, p. 15. As the Fourth Circuit explained, while this may have explained the disparate rates at the inception of the plan, when the only basis for retirement was reaching retirement age, it no longer applied since the County had amended the plan to allow retirement based strictly on years of service. Id. Employees had to contribute in accordance with the age-based rates whether the chose to retire after reaching retirement age or after working the required number of years. Ultimately, “the disparate rates were not motivated by either the ‘time value of money’ or other funding considerations” and, thus, the “plan treated older employees at the time of enrollment less favorably than younger employees ‘because of’ their age. Id., p. 16. Furthermore, the Fourth Circuit concluded, the ADEA’s safe harbor provision allowing the County to subsidize pension benefits awarded based on years of service does not act as a defense to the challenged disparate treatment and is inapplicable. Id., pp. 16-17.