The prevalence of pensions has decreased markedly in recent years as more and more employers have turned to defined-contribution plans, such as 401(k)s. When the County of Baltimore stuck by its pen- sion plan, the government entity eventu- ally found itself on the receiving end of a lawsuit.

In EEOC v. Baltimore County, the U.S. Court of Appeals for the Fourth Circuit scrutinized whether the county discrimi- nated against older employees by requir- ing them to pay higher plan contribu- tion rates than younger participants.

Rates remained the same

The county’s pension provided that employees were eligible for retirement at age 65 and would receive pension benefits regardless of the length of their employment. Each participant’s contri- bution rate was determined by the person’s age when he or she joined the plan. This method was adopted because older employees’ contributions would earn interest for fewer years than those of younger participants.

The pension was amended a few times, decreasing the retirement age for certain employees and allowing others to retire after a specific number of service years, regard- less of age. But participants’ contribution rates remained the same.

In 1999 and 2000, two county correctional officers filed charges of discrimination with the EEOC, alleging that the pension discriminated against them in violation of the Age Discrimination in Employment Act (ADEA). The plan, the plaintiffs contended, required them to pay higher contribution rates than younger employees. The EEOC filed a complaint against the county on behalf of the correctional officers and other similarly situated employees who were in the protected age group of 40 years and older when they enrolled in the pension.

Court examines claim

For plaintiffs to prevail on an age discrimination claim, they must establish that the employer in question engaged in disparate treatment because of the employees’ age. They also need to show that termination wouldn’t have occurred “but for” the discriminatory motive.

In this case, the district court initially determined that the plan didn’t violate the ADEA. The court held that the dis- parate rates were based on permissible financial objectives involving the number of years an employee would work before reaching retirement age. On remand following an earlier appeal, however, the district court found that the plan did violate the ADEA.

Motivation determined

The county filed an interlocutory appeal arguing that age wasn’t the “but for” cause of the discriminatory treat- ment. Rather, the county argued, the difference was based on the reasonable factor of the “time value of money.” The county contended that older employees’ contributions earned less interest because they were invested for less time, so the pension justifiably required higher contribu- tion rates for older employees.

The Fourth Circuit affirmed the district court’s deci- sion. The appellate court held that, if the only possible basis for retirement was reaching a certain age, the plan may have been justified. Because the county amended the retirement plan to allow certain employees to retire based solely on years of service, however, there was no longer a reasonable factor other than age for the differ- ent contribution rates. After all, the court pointed out, an older worker who retired after five years of service would have contributed more because of his or her age than a younger worker who also retired after five years of service.

The Fourth Circuit found that the number of years until an employee reached retirement age wasn’t the basis of the disparate rates. Thus, the rates weren’t motivated by the “time value of money” but by age.

Mind the details

Whether you offer a pension or a defined-contribution plan, regularly and carefully review your plan’s details  to ensure it doesn’t discriminate on the basis of age. Also verify that any age-based differences are related to actual financial variations in benefits received.