The U.S. Equal Employment Opportunity Commission

EEOC Office of Legal Counsel staff members wrote the following informal discussion letter in response to an inquiry from a member of the public. This letter is intended to provide an informal discussion of the noted issue and does not constitute an official opinion of the Commission.


ADEA: Age-Based Pension Calculations

October 6, 2011

[ADDRESS]

Dear ____:

This is in reply to your two letters inquiring about the effect of the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C. § 621, et seq., on a specified proposed collective bargaining agreement (CBA) change to one aspect of the salary and pension practices of your clients, numerous public school systems in the State of ____.

I. Background

According to your letters, the ____ Teachers Retirement System (TRS) provides a defined benefit pension plan for teachers in the State of ____. The benefit provided is a percentage of “final average salary” times years of creditable service. “Final average salary” is the average of the four highest consecutive salary years within the last ten years before retirement (High-4). Teachers are eligible for unreduced pension benefits upon attaining the age of 60 or reaching 35 years of creditable service in TRS, whichever occurs first.

You also state that the TRS requires school districts to make an additional TRS contribution for any teacher who receives an annual raise in excess of 6% during any of the High-4 years. This “TRS penalty” is equal to the cost to the TRS of funding the pension for the portion of the salary increase that exceeds 6%. Your concern appears to be that this “TRS penalty” is a financial burden on school districts in light of currently severe budgetary constraints.

Your letters provided a proposed CBA clause for the school boards that would place a 6% annual cap on salary increases for any teacher who is within 4 years of retirement eligibility, regardless of the teacher’s actual retirement date. According to the proposed language, this salary limitation applies even if the increase is earned by, for example, taking on additional duties or being promoted. The proposed CBA language states:

LIMITATION OF SALARY INCREASES IN YEARS SUBJECT TO POTENTIAL PENSION CALCULATION

The parties recognize that increases in creditable earnings1 exceeding six percent in years which salaries are utilized to calculate pension benefits may result in costs imposed upon the Board by the Teachers Retirement System (TRS). The parties further recognize that the payment of such costs results in less district funds to pay for teacher salaries and other important educational costs.

As such, notwithstanding anything to the contrary herein, in the four school years preceding a teacher’s initial eligibility for a non-discounted retirement annuity from TRS (age 60 or 35 years of creditable service, whichever first occurs) and every year thereafter, increases in a teacher’s creditable earnings shall be limited to six percent of the creditable earnings earned in the previous year except to the extent that the increase or a portion thereof falls within an exception that the statute or TRS regulations recognize as not counting toward the 6% limitation. In that event, increases in “recognizable creditable earnings” shall be limited to 6% of the previous year’s creditable earnings.

Your proposed CBA language would work in tandem with an existing TRS rule that is designed to avoid having a large end-of-career salary increase artificially inflate an employee’s pension entitlement and thereby impose unanticipated and unfunded costs on the pension plan. Specifically, the TRS excludes from the pension benefit calculation any salary increase that was earned within the High-4 years and was greater than 20% in one year. The salary itself is not decreased. Importantly, the TRS rule’s calculation is not a speculative assessment based on retirement eligibility; it is made at the time of actual retirement and therefore accounts for the significant probability that many employees will work beyond their first eligibility for retirement.

II. Discussion and Analysis

Your proposal appears to assume that all employees will retire as soon as they are eligible to do so, at age 60 or after 35 years of service. As a result, as we understand the facts, every employee age 56 or over will be subject to the salary cap. The following example illustrates the situation and the ramifications of the proposed CBA language:

Teachers “A,” age 55, and “B,” age 56, have worked for the school board for 20 years; they have had identical salaries and duties during the 20 years. In the 2010-11 school year, each completes a master’s degree in education entitling each to a 12% salary increase that year in addition to the 3% cost of living increase provided by the school board, for a total of 15%. Under the existing CBA, each would be entitled to the entire 15% salary increase. Under the proposed CBA, Teacher A would receive a 15% increase, while Teacher B would be limited to a 6% increase, a difference of 9%. For each year in the future, A would continue to receive a significantly higher salary than B, even if both happen to work an additional 10 years. This difference in lifetime salary would be based solely upon age.

As you know, section 4(a)(1) of the ADEA prohibits discrimination because of age with regard to all aspects of employment.2 Although the Act does contain specific provisions that permit consideration of age in determining some fringe benefits,3 no provision permits salary disparities based on age. Moreover, we do not agree with your suggestion that Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), and Kentucky Retirement Systems v. Equal Employment Opportunity Commission, 554 U.S. 135 (2008), permit such a practice.

The issue in Hazen Paper was whether firing someone to avoid his vesting in his pension plan constituted age discrimination, where vesting was based entirely on years of service. In that context, the Court held that years of service and age are analytically distinct and that a decision based on years of service is not necessarily age-based. Unlike the plan in Hazen Paper, however, your proposal bases salary largely on age. It speculates that every teacher will retire at age 60 or earlier and, as noted, limits salary increases for every teacher age 56 or older. As such, the proposal gives rise to a disparate treatment claim because, in the words of Hazen Paper, “the employee’s protected trait actually play[s] a role in th[e] process and ha[s] a determinative influence on the outcome.” 507 U.S. at 610.

Kentucky Retirement Systems also is inapposite. The question there was whether the practice of crediting extra years of service to personnel disabled before normal retirement eligibility constituted unlawful age discrimination. The system permitted hazardous duty employees to retire with a full pension at the earlier of age 55 or 20 years of service, and the amount of the normal retirement benefit was based on salary times years of service. Persons who became disabled after having reached eligibility to retire were given their normal retirement benefit, while employees who became disabled before being eligible for normal retirement were given extra years of service to enhance their disability retirement benefit. The Court held that basing the amount of a disability retirement benefit on pension eligibility did not violate the ADEA, even though pension eligibility was partly based on age, because the employer was not “actually motivated” by age. However, that case involved calculation of benefit amounts, and the Court specifically stated that the case involved “not wages, but pensions – a benefit that the ADEA treats somewhat more flexibly and leniently in respect to age.” 554 U.S. at 144.

For these reasons, limiting the salaries of teachers who are eligible to retire within four years, where retirement eligibility is based partly on age, would likely constitute age-based disparate treatment under section 4(a)(1) and would be unlawful unless a defense or exception justifies the practice. No statutory provision permits a limitation on the salary of persons who are within four years of retirement eligibility.

III. Alternative Proposal

Recognizing the budget constraints now faced by public school districts, we suggest an alternative that would appear to meet your client’s need to limit payments to the pension system in a way that does not violate the ADEA. This alternative would involve your clients’ working with the TRS to obtain a change in its governing regulations which, we recognize, you may already have considered and rejected for reasons beyond our knowledge. Nonetheless, we note that the TRS currently excludes from the pension benefit calculations any one-year salary increase to the extent it exceeds 20% of the prior year’s salary and is earned during the High-4 years. As currently stated, this rule does not conflict with the ADEA.4 Neither would it conflict with the ADEA if this exclusion were lowered to the amount at which the state starts to charge school districts the “TRS penalty.” Such a change would allow the TRS to reduce pension costs for school districts in a manner that does not violate the ADEA.

Please note that this response is not an official opinion letter of the U.S. Equal Employment Opportunity Commission. It does not “represent the formal position of the Commission and does not commit the Commission to the views expressed [here]in.” See 29 CFR § 1626.20(c). We hope this informal advice has been useful. If you have questions, please contact Paul Boymel at 202-663-4692, Dianna B. Johnston at 202-663-4657, or me at 202-663-4645.

Sincerely,

 

Carol R. Miaskoff
Assistant Legal Counsel
Title VII/ADEA/EPA Division


Footnoes

1 You have advised that “creditable earnings” means all earnings.

2 Section 4(a)(1) of the ADEA states:

It shall be unlawful for an employer to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s age.

3 For example, section 4(f)(2)(B) of the ADEA allows an employee benefit plan to provide lower levels of certain benefits to older than to younger employees where the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker; section 4(i)(2) specifies that employers may adhere to the terms of a pension plan that “imposes (without regard to age) a limitation on the amount of benefits that the plan provides …”; and section 4(m) permits colleges and universities to offer tenured faculty certain age-capped early retirement plans.

4 Under the current TRS rule, any employee whose salary increased by more than 20% in any of the High-4 years does not get the benefit of the excess amount in his or her pension. Therefore, a teacher who is age 60, has 10 years of service, and retires in 2013 after receiving a 25% salary increase in 2011, would be treated identically to a teacher age 30 with 10 years of service who gets the same raise in 2011, quits in 2013, and waits until age 60 to collect a pension. In each case, the final 5% of the 25% raise would be ignored by the pension plan if the raise came in a High-4 year. By capping only the amount of the pension, the TRS rule is analogous to the example from the EEOC Compliance Manual, Vol. II, Section 3 (Employee Benefits), Part V.A., cited in your first letter. See http://www.eeoc.gov/policy/docs/benefits.html


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