IVINS, PHILLIPS & BARKER H. STEWART DUNN, JR. CHARTERED JAMES S.Y. IVINS (1885-1960) CARROLL J. SAVAGE PERCY W. PHILLIPS (1892-1969) ERIC R. FOX 1700 PENNSYLVANIA AVENUE, N.W., SUITE 600 RICHARD B. BARKER (1906-1988) LESLIE JAY SCHNEIDER WASHINGTON, D.C. 20006-4723 ROBERT H. WELLEN OF COUNSEL KEVIN P. O'BRIEN TELEPHONE (202) 393-7600 JAY W. GLASMANN PATRICK J. SMITH FACSIMILE (202) 393-7601 STEPHEN N. SHULMAN ROBERT B. STACK IPB@IPBTAX.COM CLIFTON B. CATES III JEFFREY B. COHEN WWW.IPBTAX.COM LISA MILOT MICHAEL R. HUFFSTETLER DAVID D. SHERWOOD LAURIE E. KEENAN JEFFREY E. MOELLER STEVEN H. WITMER ROSINA B. BARKER LOS ANGELES OFFICE WILLIAM L. SOLLEE, JR. 1875 CENTURY PARK EAST, SUITE 600 JODI H. EPSTEIN LOS ANGELES, CALIFORNIA 90067 ROBIN M. SOLOMON TELEPHONE (310) 551-6633 H. CARTER HOOD FACSIMILE 551-1188 JOSHUA T. BRADY JENNIFER J. FINN DANIELLE E. ROLFES
*NOT ADMITTED IN THE DISTRICT OF COLUMBIA ALEXANDER N. CLARK JONATHAN ZIMMERMAN VICTOR S. CHANG NICOLE OCCHUIZZO JOHN D. BATES* MATIE B. LITTLE* JOHN LOVELACE* Fry v. Exelon: How Will the IRS React?
In Fry v. Exelon Corporation Cash Balance Plan, 571 F.3d 644 (7th Cir. 2009)
(Easterbrook, J.), the Seventh Circuit affirmed a district court’s conclusion that an employer
may define the “normal retirement age” of employees participating in the company’s
pension plan as the completion date of a stated number of years of service rather than
attainment of a specified age such as “age 62.” This came as welcome news to cash balance
plan sponsors who had adopted service-based retirement ages as a means of complying with
IRS Notice 96-8. However, significant risk and uncertainty remains.
The problem is that the IRS does not agree with, and is unlikely to follow, the
Seventh Circuit’s holding. Following publication of the Fry district court decision in 2007,
the IRS continued its practice of challenging cash balance plans identified on audit that
define normal retirement age by reference to years of service. Revenue agent reports issued
in connection with these audits made it clear that field agents were following an IRS
National Office directive on the issue. For instance, take the following IRS audit report
issued to a cash balance plan sponsor in June 2008, challenging the validity of a normal
retirement age defined as the earlier of 2 years of service or age 65:
The Government believes that the Plan does not contain a valid “normal retirement age” [and] therefore does not meet the requirements of IRC
I V I NS, P HILL IP S & BARK ER
411(a)(8) and IRC 401(a)(7). In Laurent v. Price Waterhouse Coopers LLP the court ruled a normal retirement age “cannot be defined in reference to years of service.” [T]he Plan’s reference to only “two years of service” cannot be held to be a valid retirement age. Revenue Ruling 78-120 also requires that a participant must reach a “certain specified age.” This Plan does not require such and therefore does not contain a valid retirement age. We believe the [district] court in Fry v. Exelon erred.
Revenue Agent’s Report (Form 886-A), June 2008.
There is little reason to believe that the Seventh Circuit’s affirmance of the Fry
district court decision will cause the IRS to change its position. The IRS has never felt itself
bound by a single Circuit Court decision, and is particularly unlikely to defer to a decision
that did not take into account – because the court no doubt was not aware of – the IRS’s
In fact, the IRS seemingly has little choice but to stand by its position that Fry was
wrongly decided. The Seventh Circuit held that the ERISA statute imposes no constraints
on the manner in which a plan sponsor may define “normal retirement age” under the plan.
Yet the IRS has issued regulations that condition tax qualification under Code § 401 on a
pension plan’s agreement to use a normal retirement age that is “not earlier than the earliest
retirement age that is reasonably representative of the typical retirement age for the industry
in which the covered workforce is employed.” See Treas. Reg. § 1.401(a)-1(b)(2)(i). If
Judge Easterbrook is correct that the statute does not include any constraints on the manner
in which a plan may define “normal retirement age,” these regulations are invalid – even
prospectively. See, e.g.,Nat’l Cable & Telecom. Ass’n v. Brand X Internet Servs., 545 U.S.
967, 982 (2005) (“A court’s prior judicial construction of a statute trumps an agency
construction otherwise entitled to Chevron deference . . . if the prior court decision holds
that its construction follows from the unambiguous terms of the statute and thus leaves no
1. The Borel transform in Euclidean φ44, Local existence for Re ν < 4, avec E. Speer, Commun. Math. Phys. 72, 293 (1980). 2. Lieb’s correlation inequality for plane rotors, Commun. Math. Phys. 77, 1453. Renormalization in the complete Mellin representation of Feynman amplitudes,avec C. de Calan et F. David, Commun. Math. Phys. 78, 4 (1981). 4. Local existence of the Borel transform in
Shareholder value creators and shareholder value destroyers in USA. Year 2002 Pablo Fernández* and Laura Reinoso** IESE Business School ABSTRACT 2002 was a bad year: the shareholder value destruction of the companies in the S&P 500 was $3.3 trillion. In2002 only 16% of the companies created value (80 companies created value and 420 companies destroyed value). Thepercentage of