Working Longer Could Boost Retirement Security

However, research finds workers with a lower socioeconomic status have a harder time staying in the workforce.

Remaining in the workforce for as long as feasible benefits workers in three main ways, the Center for Retirement Research at Boston College maintains in a new issue brief, “Is Working Longer a Good Prescription for All?” It gives people a longer time frame in which to save, it increases their Social Security benefits and it shortens the number of years, and therefore the resources, they will spend in retirement.

The Center decided to examine whether it is possible for those of a lower socioeconomic status (SES), i.e. those who are less educated, to remain in the workforce, and found that they have fewer options available to them than those of a higher SES.

However, the Center also found that both men and women in a lower SES have seen their life expectancies increase by fewer years than those of a higher SES between the years 1979 and 2011. Among 65-year-old men in the lowest income quartile in 1979, their life expectancy was 77.5 years. That increased by a full four years to 81.5 in 2011. However, among the highest income quartile 65-year-old men in 1979, their life expectancy was 78.9 and that increased by 6.1 years to 85.0 by 2011.

For the lowest-income quartile 65-year-old women in 1979, their life expectancy was 82.3. By 2011, that had increased by 1.7 years to 83.7. By comparison, for the highest-income quartile 65-year-old woman in 1979, their life expectancy was 83.4, and by 2011, that had increased by 3.2 years to 86.6.

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The Center says that the significance of this data is that while lower SES individuals have a harder time remaining in the workforce, their longevity has not increased as much as it has for higher SES individuals.

However, one solution that could help individuals remain in the workforce longer would be to switch to a job better suited to working longer, and this is equally true for people with no college education and those with some college education or a college degree, the Center says. The Center found that for those with no college education, the probability of remaining in the workforce to age 65 increased by 7.5%, and for those with some college education, it increased by 10.9%.

The downside to this is that by moving into a new industry, they lose their seniority and, possibly, open themselves up to job loss. And this risk could be higher for less-educated workers, the Center says. Additionally, job options become fewer for those age 50 and older, although options for older workers have increased since the late 1990s.

The Center then examined what policymakers could do to help people remain in the workforce longer, starting with lowering the cost of their health insurance, which, the Center says, is about five times the cost of insurance for younger workers. The Center says that some states have limited how much insurance companies can increase premiums by age, and some have even mandated that insurance companies do not consider age at all when setting premiums. The Center then studied whether such initiatives actually help people remain in the workforce longer and found that they do not. The only benefit was that high school graduates saw their wages increase.

The Center concludes that policymakers should find ways to help people remain in the workforce longer other than lowering their health insurance costs. The Center for Retirement Research’s brief can be downloaded here.

Appeals Court Sides with UPMC in Top-Hat Plan Dispute

A recent appellate court decision underscores the important differences in anti-cutback vesting requirements that exist between “top-hat” plans and retirement benefits for lower-compensated employees.

The 3rd U.S. Circuit Court of Appeals has ruled in support of the district court and defendants in a case testing the differences in anti-cutback vesting regulations applying to “top-hat” retirement plans versus traditional defined contribution (DC) or defined benefit (DB) plans.

As detailed in the initial lawsuit, the plaintiff is a former employee of a Pennsylvania non-profit, University of Pittsburgh Medical Center, known as UPMC. The plaintiff, a vice president at UPMC, was a participant in the non-profit’s supplemental benefits plan from 2008 until he voluntarily terminated his employment with UPMC in 2011. The lawsuit claims he applied for a lump-sum distribution of his account balance and says he never received a written decision from the plan committee.

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He “kept pursuing the distribution throughout 2012, and eventually received a letter from the committee informing him that all rights and benefits allegedly due to him had been forfeited because he had not entered into a written post-retirement service agreement.” The plan committee maintained that the plan is a “top hat” plan for purposes of the Employee Retirement Income Security Act (ERISA) and was, therefore, exempt from the vesting and non-forfeiture provisions of that law.

In short, the district court ruled the plaintiff cannot rely on ERISA for benefit protections, as the plan in which he participated is indeed a “top hat” plan. Noting that a non-qualified deferred compensation plan under Section 457(f) of the Internal Revenue Code must be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, U.S. District Judge Mark R. Hornak of the U.S. District Court for the Western District of Pennsylvania looked to a separate 3rd Circuit case which said “the plan must cover relatively few employees . . . [and] the plan must cover only high level employees.”

Clearly swaying the district court’s decision, the non-profit UPMC provided evidence that from 2007 through 2011 the number of plan participants ranged from 16 to 68. During that time, the total number of UPMC employees ranged from 37,965 to 48,731, so the absolute highest percentage of employees participating in the plan was .14%. Hornak concluded this was “relatively few.” According to the text of the district court opinion, UPMC’s Non-Qualified Supplemental Benefit Plan limits participation to “key executives selected by the committee,” and the primary factors in selecting those key executives are their influence within the organization and their ability to impact its performance. 

UPMC also successfully argued that the compensation of these employees makes certain their “high level status.” Eligibility to participate in the plan is limited to those whose incentive levels under the separate management incentive plan are at least 20% of their salary. During the relevant period, the average compensation of plan participants was roughly $500,000 per year. Hornak concluded these employees were “very handsomely compensated by any measure.”

Important to the subsequent appellate decision, the district court also rejected the plaintiff’s argument that the “bargaining power” of participants is an indicator in favor of a plan being considered a “top hat” plan. Hornak noted there has not been one federal court that has applied “bargaining power” as an element in directly determining whether a deferred compensation plan is a top hat plan that is exempt from ERISA coverage.

Lessons from the 3rd Circuit

Turning to the appeal, the plaintiff-appellee again argued that the district court should have required UPMC “to prove that plan participants had bargaining power before concluding that he participated in a top-hat plan.” But the 3rd Circuit is equally skeptical, ruling simply that “plan participant bargaining power … is not a substantive element of a top-hat plan. We will therefore affirm the district court’s judgment.”

Some additional context is given in the mere 14-page appellate decision: “While Sikora’s notice of appeal also references the district court’s entry of summary judgment on his contract claim, he makes no argument in support of that claim in his briefing. We therefore deem it abandoned.”

As laid out in the decision, the 3rd Circuit has previously described top-hat plans derived from the statutory definition as having three elements: The plan must be unfunded; it must “exhibit the required purpose”; and “it must also cover a ‘select group’ of employees.” Against this backdrop, the plaintiff-appellee has the burden of showing that the plan is not a top-hat plan to obtain relief under ERISA.

The decision goes on: “The plaintiff does not dispute that the plan is both unfunded and maintained by UPMC for the statutorily prescribed purpose. He takes issue only with the third element of the test laid out, which requires that the plan cover a select group of employees … This court has previously described this ‘select group’ element as having both quantitative and qualitative restrictions. In number, the plan must cover relatively few employees. In character, the plan must cover only high level employees.”

According to the decision, applying both the quantitative and qualitative restrictions of the select group element reveals that the plan qualifies as a top-hat plan. During the plaintiff-appellee’s participation in the plan, approximately 0.1% of the entire UPMC workforce was similarly situated. The court cites previous cases where plans serving 15% of an employee population were sufficiently select. As to the qualitative restriction, although the relevant statutory language only requires participants to be members of a select group of management or highly compensated employees, here the plan covers high-level employees who are both a select group of management and highly compensated employees.

The court’s conclusion follows suit: “Given that both the quantitative and qualitative restrictions of the select group element have been satisfied, we hold that the plan in question qualifies as a top-hat plan. Although both the quantitative and qualitative restrictions of the select group element have been satisfied, the plaintiff nonetheless argues that the plan does not cover a select group because there is no evidence regarding the bargaining power of the plan participants. This argument would require a district court to inquire not only into the qualitative and quantitative restrictions discussed above, but also into the presence of bargaining power before concluding that a particular plan is a top-hat plan. The argument is unpersuasive.”

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