Hurlic v. So Cal Gas Co. ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DAVID HURLIC; SUSANNA H. 
SELESKY, individually and on
behalf of a class of all other
persons similarly situated, No. 06-55599
Plaintiffs-Appellants,
v.  D.C. No.
CV-05-05027-R
SOUTHERN CALIFORNIA GAS OPINION
COMPANY; SOUTHERN CALIFORNIA
GAS COMPANY PENSION PLAN,
Defendants-Appellees.

Appeal from the United States District Court
for the Central District of California
Manuel L. Real, District Judge, Presiding
Argued and Submitted
February 15, 2008—Pasadena, California
Filed August 20, 2008
Before: Betty B. Fletcher, Daniel M. Friedman,* and
N. Randy Smith, Circuit Judges.
Opinion by Judge N. Randy Smith
*The Honorable Daniel M. Friedman, Senior United States Circuit
Judge for the Federal Circuit, sitting by designation.
11089
11092 HURLIC v. SOUTHERN CALIFORNIA GAS
COUNSEL
Jeffrey Lewis,Vincent Cheng, Lewis, Fenberg, Renaker &
Jackson, P.C., Oakland, California; James M. Finberg, Steven
M. Tindall, Leiff, Cabraser, Heimann & Bernstein, LLP, San
Francisco, California, for the plaintiffs-appellants.
HURLIC v. SOUTHERN CALIFORNIA GAS 11093
Jeffrey R. Tone, Anne E. Rea, Chris K. Meyer, Sidley Austin
LLP, Chicago, Illinois; Mark E. Haddad, Michael C. Kelley,
Robert M. Stone, Sidley Austin LLP, Los Angeles, California,
for the defendants-appellees.
OPINION
N. RANDY SMITH, Circuit Judge:
David Hurlic, Susanna Selesky, and others similarly situ-
ated (“Plaintiffs”)1 appeal the district court’s dismissal of the
entirety of their lawsuit against Southern California Gas Com-
pany (“SCGC”) and the SCGC Pension Plan (“the Plan”).
Plaintiffs allege that SCGC’s 1998 amendment of the Plan
violated both the Employee Retirement Income Security Act
of 1974 (ERISA) and the California Fair Employment and
Housing Act (FEHA). We have jurisdiction pursuant to 28
U.S.C. § 1291. We affirm in part, reverse in part, and remand.
This appeal requires our court to consider, for the first time,
whether pension plans utilizing a so-called cash balance for-
mula (“cash balance plans”) violate various provisions of
ERISA and FEHA. We join four of our sister circuits and hold
that cash balance plans do not violate 29 U.S.C.
§ 1054(b)(1)(H), an anti-age discrimination provision of
ERISA. We also hold that cash balance plans do not violate
29 U.S.C. § 1054(b)(1)(B), one of ERISA’s “anti-
backloading” provisions. We further hold that ERISA pre-
empts Plaintiffs’ state law FEHA claim. Thus, we affirm the
district court’s dismissal of those claims. However, because
Plaintiffs’ complaint adequately alleged that SCGC and the
Plan violated ERISA’s notice requirement, we hold that the
district court erred by dismissing that claim.
1
This case has not been certified as a class action.
11094 HURLIC v. SOUTHERN CALIFORNIA GAS
FACTUAL BACKGROUND
The Plan, an ERISA-governed pension benefit plan, pro-
vides participating SCGC employees with a defined benefit at
retirement according to a benefit accrual formula set forth in
the Plan. Prior to July 1, 1998, the Plan required participants’
retirement benefits to be calculated according to a “pre-
conversion formula.” Under the pre-conversion formula, par-
ticipants were entitled to a single-life annuity, payable
monthly, beginning at normal retirement age. The amount of
the annuity was based on participants’ average compensation
during the final years of their employment with SCGC, which
was then multiplied by a percentage that increased with years
of service.
Effective July 1, 1998, SCGC amended the Plan. As a
result of the amendment, non-union employees’ benefits are
now calculated under a “cash balance formula.” The cash bal-
ance formula assigns each participant a “retirement account.”
Each retirement account is merely a bookkeeping entry used
to calculate a participant’s accrued benefit. The account exists
on paper but is hypothetical in the sense that no real money
is ever deposited into individual accounts.
The initial balance of each participant’s retirement account
is the actuarial equivalent of the participant’s accrued benefit
under the Plan prior to the July 1, 1998 amendment. Thereaf-
ter, the cash balance formula credits, on a monthly basis, each
participant’s retirement account with “retirement credits.” The
annual total of a participant’s retirement credits equals 7.5
percent of his or her annual earnings. The cash balance for-
mula also credits each participant’s retirement account with
interest credits, which are based on the 30-year U.S. Treasury
Bond rate. A participant’s retirement account continues to
accrue interest credits until normal retirement age regardless
of whether the participant continues to work for SCGC.
Like the pre-conversion formula, a participant’s benefit
under the cash balance formula is paid in the form of a single-
HURLIC v. SOUTHERN CALIFORNIA GAS 11095
life annuity beginning at normal retirement age. The amount
of a participant’s annuity is based on the actuarial equivalent
of the participant’s retirement account balance at normal
retirement age. However, unlike the pre-conversion formula,
the cash balance formula allows participants to elect to
receive their accrued benefits in a single lump sum payment.
The Plan, as amended, also contained a five-year “grandfa-
ther” provision. The grandfather provision allowed eligible
participants to continue accruing benefits under the pre-
conversion formula until June 30, 2003, at which time the par-
ticipants’ accrued benefits under the pre-conversion formula
were frozen. During this five-year period, each participant’s
retirement account was also credited as normal under the cash
balance formula. A participant who began to receive benefit
distributions during this period was entitled to receive the
greater of: 1) the actuarial equivalent of the Retirement
Account under the terms of the Cash Balance Plan expressed
in the form of an annuity; or 2) an annuity accrued under the
Pre-Conversion Formula through the individual’s termination
date.
If a participant did not begin receiving a payout of benefits
on or before June 30, 2003, the amount of his or her accrued
benefit is determined by a “wear-away provision.” The wear-
away provision provides that a participant’s accrued benefit is
an age 65 single-life annuity equal to the greater of: 1) the
actuarial equivalent of his or her retirement account under the
cash balance formula; or 2) the actuarial equivalent of his or
her frozen accrued benefit under the pre-conversion formula.
Hurlic, who is 53 years old, has been an SCGC employee
since 1983 and is a Plan participant. Selesky, who is 56 years
old, has been an SCGC employee since 1977 and is also a
Plan participant. Both Hurlic and Selesky were eligible under
the Plan’s grandfather provision and continued accruing bene-
fits under the pre-conversion Formula until June 30, 2003.
Under the wear-away provision, Hurlic’s estimated annuity
11096 HURLIC v. SOUTHERN CALIFORNIA GAS
payments based on his frozen pre-conversion formula benefits
will be greater than his estimated annuity payments based on
the cash balance formula until 2015. Selesky’s estimated
annuity payments based on her frozen pre-conversion formula
benefits will be greater until 2009. Thus, Hurlic and Selesky
will not accrue any additional benefits during these periods.
On July 8, 2005, Hurlic and Selesky filed suit against
SCGC and the Plan on behalf of all similarly situated individ-
uals. Plaintiffs alleged that: 1) the Plan, as amended, discrimi-
nates on the basis of age in violation of ERISA
§ 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H); 2) the Plan, as
amended, violates ERISA’s “anti-backloading” rules; 3) the
adoption and implementation of the wear-away provision of
the Plan amendment disproportionately affected SCGC
employees age 40 and older in violation of FEHA; and 4) the
Plan violated ERISA’s requirement that a pension plan may
not be amended as to cause a significant reduction in the rate
of benefit accrual unless advance notice of the effective date
is provided (the “notice claim”).
On October 18, 2005, the district court, without opinion,
dismissed without leave to amend Plaintiffs’ age discrimina-
tion, anti-backloading, and FEHA claims for failure to state a
claim. The district court also dismissed Plaintiffs’ notice
claim for failure to state a claim, but granted Plaintiffs ten
days to amend their complaint. On October 25, 2005, Plain-
tiffs filed their first amended complaint.
On January 25, 2006, the district court dismissed Plaintiffs’
amended notice claim for failure to state a claim and again
gave Plaintiffs ten days to further amend their complaint.
After Plaintiffs filed a second amended complaint, the district
court dismissed Plaintiffs’ notice claim for a third time, this
time without leave to amend. All three dismissal orders were
adopted as proposed by Defendants and did not include any
explanation of the basis for the decision.
HURLIC v. SOUTHERN CALIFORNIA GAS 11097
STANDARD OF REVIEW
We review de novo a district court’s dismissal for failure
to state a claim pursuant to Federal Rule of Civil Procedure
12(b)(6). Stoner v. Santa Clara County Office of Educ., 502
F.3d 1116, 1120 (9th Cir. 2007). “All allegations of material
fact in the complaint are taken as true and construed in the
light most favorable to the plaintiff. Dismissal of the com-
plaint is appropriate only if it appears beyond doubt that the
plaintiff can prove no set of facts in support of the claim
which would entitle him to relief.” Id. (quoting McGary v.
City of Portland, 386 F.3d 1259, 1261 (9th Cir. 2004)).
ANALYSIS
I. Cash balance plans do not violate ERISA
§ 204(b)(1)(H)
We must decide for the first time whether cash balance
pension plans discriminate based on age in violation of
ERISA § 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H). We join
the Second, Third, Sixth, and Seventh Circuits and hold that
they do not. See Hirt v. Equitable Ret. Plan for Employees,
Managers and Agents, ___ F.3d ___, 2008 WL 2669346 (2d
Cir. July 9, 2008); Register v. PNC Fin. Servs. Group, Inc.,
477 F.3d 56 (3d Cir. 2007); Drutis v. Rand McNally & Co.,
499 F.3d 608 (6th Cir. 2007); Cooper v. IBM Personal Pen-
sion Plan, 457 F.3d 636 (7th Cir. 2006).
A. Cash balance plans are defined benefit plans
[1] ERISA provides for two types of pension plans —
defined contribution plans and defined benefit plans — each
governed by different rules. A defined contribution plan “pro-
vides for an individual account for each participant and for
benefits based solely upon the amount contributed to the par-
ticipant’s account.” 29 U.S.C. § 1002(34). Typically, in a
defined contribution plan, the employer contributes a percent-
11098 HURLIC v. SOUTHERN CALIFORNIA GAS
age of payroll or profits to participants’ accounts and, at
retirement, a participant is entitled to whatever assets are ded-
icated to his or her individual account, subject to investment
gains and losses. See Hughes Aircraft Co. v. Jacobson, 525
U.S. 432, 439 (1999); Comm’r v. Keystone Consol. Indus.,
Inc., 508 U.S. 152, 154 (1993). A defined benefit plan is any
qualified pension plan that is not a defined contribution plan.
29 U.S.C. § 1002(35). A defined benefit plan “promises to
pay employees, upon retirement, a fixed benefit under a for-
mula.” Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S.
633, 637 n.1 (1990). A defined benefit plan “consists of a
general pool of assets rather than individual dedicated
accounts.” Hughes Aircraft, 525 U.S. at 439. The asset pool
may be funded by the employer, employee, or both, but “the
employer typically bears the entire investment risk and . . .
must cover any underfunding” that might occur as a result of
the plan’s investments. Id.
[2] We recognize, and the parties agree, that despite super-
ficial resemblance to defined contribution plans, cash balance
plans, including the Plan at issue here, are defined benefit
plans. See, e.g., Berger v. Xerox Corp. Ret. Income Guarantee
Plan, 338 F.3d 755, 757 (7th Cir. 2003); Campbell v. Bank-
Boston, N.A., 327 F.3d 1, 4 (1st Cir. 2003); Esden v. Bank of
Boston, 229 F.3d 154, 158 (2d Cir. 2000); Lyons v. Georgia-
Pacific Corp. Salaried Employees Ret. Plan, 221 F.3d 1235,
1237 (11th Cir. 2000) (all holding that cash balance plans are
defined benefit plans). Cash balance plans guarantee partici-
pants a defined benefit, determined by a formula, at retire-
ment. The participants bear no risk that their accrued benefits
will decrease due to investment risk. Additionally, unlike
defined contribution plans, the “contributions” made to indi-
vidual accounts under cash balance plans merely reflect book-
keeping entries that track the growth of the participants’
accrued benefits. Accordingly, cash balance plans must com-
ply with ERISA rules governing defined benefit plans.
HURLIC v. SOUTHERN CALIFORNIA GAS 11099
B. Cash balance plans do not reduce the rate of an
employee’s benefit accrual because of the
attainment of any age
[3] ERISA § 204(b)(1)(H)(i) prohibits a defined benefit
plan from ceasing an employee’s benefit accrual or reducing
“the rate of an employee’s benefit accrual . . . because of the
attainment of any age.” 29 U.S.C. § 1054(b)(1)(H)(i). Plain-
tiffs argue that the Plan violates this provision because it guar-
antees interest credits regardless of continued employment
with SCGC. Thus, a younger participant who performs the
same job and earns the same salary as an older participant will
always have a greater accrued benefit at retirement age.2
Plaintiffs’ argument equates the phrase “rate of an employ-
ee’s benefit accrual,” as used in ERISA § 204(b)(1)(H)(i),
with the term “accrued benefit,” which is defined elsewhere
in ERISA. For defined benefit plans, ERISA defines a partici-
pant’s “accrued benefit” as “the individual’s accrued benefit
determined under the plan and . . . expressed in the form of
an annual benefit commencing at normal retirement age.” 29
U.S.C. § 1002(23)(A). Thus, Plaintiffs argue that ERISA
§ 204(b)(1)(H)(i) prohibits a plan from reducing a partici-
pant’s total accrued benefit because of the “attainment of any
age” rather than prohibiting only a reduction in the rate at
which the participant’s benefit accrues. We reject this argu-
ment for several reasons.
2
For example, consider the case of an 18 year-old employee and a 48
year-old employee who both perform the same job duties and earn the
same salary. Both work for SCGC for two years and then leave for other
jobs when they are 20 years old and 50 years old, respectively. Under the
Plan, both would have the same accrued benefit at the end of those two
years. However, assuming neither employee took an early lump-sum dis-
tribution, the 20 year-old would continue to compound interest for 45
years (until age 65), while the 50 year-old would compound interest for
only 15 years.
11100 HURLIC v. SOUTHERN CALIFORNIA GAS
[4] First, it is a basic principle of statutory construction that
“[w]here Congress includes particular language in one section
of a statute but omits it in another section of the same Act, it
is generally presumed that Congress acts intentionally and
purposely in the disparate inclusion or exclusion.” Russello v.
United States, 464 U.S. 16, 23 (1983) (citation omitted). Con-
gress defined the term “accrued benefit” in ERISA and used
it throughout ERISA § 204(b)(1). However, Congress omitted
the term “accrued benefit” in ERISA § 204(b)(1)(H)(i) and
replaced it with the phrase “rate of an employee’s benefit
accrual.” 29 U.S.C. § 1054(b)(1)(H)(i). Thus, we must pre-
sume that Congress intended to do so. The phrase “rate of an
employee’s benefit accrual” plainly refers to the rate at which
a participant’s benefits increase rather than the participant’s
total accrued benefit. Interpreting ERISA § 204(b)(1)(H)(i) in
another context, the Supreme Court has held likewise. See
Lockheed Corp. v. Spink, 517 U.S. 882, 897 (1996) (“A
reduction in total benefits due is not the same thing as a
reduction in the rate of benefit accrual; the former is the final
outcome of the calculation, whereas the latter is one of the
factors in the equation.”).
Plaintiffs’ argument also equates the phrase “rate of an
employee’s benefit accrual” with the defined term “accrued
benefit,” because Congress used the words “benefit accrual”
in ERISA’s anti-age discrimination provision which pertains
to defined benefit plans, but did not use those words in the
anti-age discrimination provision which pertains to defined
contribution plans. Compare 29 U.S.C. § 1054(b)(1)(H)(i)
with 29 U.S.C. § 1054(b)(2)(A). Defined contribution plans
satisfy ERISA’s anti-age discrimination provision as long as
“allocations to the employee’s account are not ceased, and the
rate at which amounts are allocated to the employee’s account
is not reduced, because of the attainment of any age.” 29
U.S.C. § 1054(b)(2)(A). Plaintiffs do not, and could not, dis-
pute the fact that the Plan would be non-discriminatory if it
was a defined contribution plan. However, given that defined
benefit plans and defined contribution plans are often gov-
HURLIC v. SOUTHERN CALIFORNIA GAS 11101
erned by different rules, Plaintiffs argue that something which
is non-discriminatory for a defined contribution plan must be
discriminatory for a defined benefit plan, merely because
Congress chose to word the rule for defined benefit plans to
describe prohibited conduct while wording the rule for
defined contribution plans to describe permissible conduct.
This argument, however, ignores that defined benefit plans
are not always governed by different rules than are defined
contribution plans. The 1986 conference notes regarding
ERISA’s anti-age discrimination provisions strongly suggest
that Congress did not intend that different age discrimination
rules should apply for defined benefit plans and defined con-
tribution plans. See H.R. Rep. No. 99-1012, at 378 (1986)
(Conf. Rep.), reprinted in 1986 U.S.C.C.A.N. 3868, 4023
(explaining that “benefit accruals or continued allocations to
an employee’s account under either a defined benefit plan or
a defined contribution plan may not be reduced or discontin-
ued on account of the attainment of a specified age”). Addi-
tionally, both anti-age discrimination provisions explicitly
reference the “rate” at which employee’s benefits accrue.
Thus, nothing demonstrates that Congress intended a formula
that “is non-discriminatory when used in a defined-
contribution plan” to “become unlawful because the account
balances are book entries rather than cash.” Cooper, 457 F.3d
at 638.
Second, we agree with the Seventh Circuit that nothing
suggests that “Congress set out to legislate against the fact
that younger workers have (statistically) more time left before
retirement, and thus a greater opportunity to earn interest on
each year’s retirement savings.” Cooper, 457 F.3d at 639.
Plaintiffs’ argument ignores the realities of the time value of
money. Under a cash balance plan, younger workers have
more years in which to earn interest, but must wait longer
until their benefit is paid out. However, if a participant elects
to receive a payout before reaching age 65, the Plan must dis-
tribute the “actuarial equivalent” of the annuity that would be
11102 HURLIC v. SOUTHERN CALIFORNIA GAS
available at normal retirement age. Id. at 640 (citing 29
U.S.C. § 1054(c)(3)). This value is calculated by adding all
the interest that the participant would accrue through age 65
and discounting the resulting sum to its present value. Id.
Time value of money can be best illustrated using the
example in footnote 2, above. Assume that in 15 years, when
the older worker has reached retirement age, the younger
worker decides to withdraw his benefits from the Plan. The
amount the younger worker receives will be calculated by
adding up all of the interest he would have earned had he
waited until he was 65 to retire and discounting it to present
value. Depending on the factor used to discount to present
value, he will receive substantially similar (or possibly less)
benefit than the older worker. Thus, although a younger work-
er’s total accrued benefit at retirement age will be greater
under the cash balance formula than an older worker’s if both
started working at the same time, the difference is due to the
time value of money rather than age discrimination. See id. at
639 (citing Hazen Paper Co. v. Biggins, 507 U.S. 604, 611
(1993) (holding that variables correlated with age must be
kept “analytically distinct” from age when searching for dis-
crimination)).
Finally, Plaintiffs’ argument would require us to ignore
Congress’s use of the word “attainment” in ERISA
§ 204(b)(1)(H)(i). The phrase “attainment of any age” means
the act of reaching a certain age. See Webster’s Third New
International Dictionary 140 (1993). The Plan’s cash balance
formula does not reduce an older worker’s accrued benefit
when he or she attains a certain age. Rather, the Plan sets a
lower ceiling for an older worker’s accrued benefit because he
or she has less time to earn interest than a similarly situated
younger worker.
The statute’s legislative history makes clear that the word
“attainment” is important. As originally enacted, ERISA did
not require that a pension plan allow participants who worked
HURLIC v. SOUTHERN CALIFORNIA GAS 11103
beyond normal retirement age to continue earning benefits.
See H.R. Rep. No. 99-1012, at 378 (1986) (Conf. Rep.),
reprinted in 1986 U.S.C.C.A.N. 3868, 4023. In 1986, Con-
gress enacted provisions to remedy that problem, explaining
that “benefit accruals or continued allocations to an employ-
ee’s account under either a defined benefit plan or a defined
contribution plan may not be reduced or discontinued on
account of the attainment of a specified age.” Id. (emphasis
added).
This language clearly describes Congress’s intent to pro-
hibit pension plans from reducing or ceasing benefits when a
participant reached age 65 or any other specified age. For
example, the Plan would clearly be in violation of ERISA
§ 204(b)(1)(H)(i) if it provided that when participants reached
age 50, they stopped receiving benefits or began accruing
benefits at a reduced rate. However, the Plan does no such
thing. It is not within our province “to read out of the statute
the requirement of its words.” Quarty v. United States, 170
F.3d 961, 973 (9th Cir. 1999) (citing Rand v. United States,
249 U.S. 503, 510 (1919)).
Plaintiffs’ reading of the statute would allow every worker
who does not begin employment with SCGC at the minimum
employment age to bring an age discrimination claim.3 Alter-
natively, it would force all employers to scale interest rates in
3
Under Plaintiffs’ logic, a 19 year-old participant would have a viable
claim for age discrimination because when he or she attained age 19, his
or her total accrued benefits are reduced in comparison with a similarly
situated 18 year-old participant. This argument makes little sense. Neither
the rate of benefit accrual nor the total accrued benefit of the 19 year-old
are actually reduced when he or she attains age 19. At that time, the 19
year-old’s rate of benefit accrual and total accrued benefit are equal to the
18 year-old’s. In fact, assuming that their salaries remain equal, both will
have the same rate of benefit accrual and total accrued benefit until the 19
year-old turns 65 and begins receiving a payout of benefits. The 18 year-
old’s total accrued benefit will, over the course of the following year,
become larger because he or she will have to wait one more year to
receive benefits and interest will compound during that year.
11104 HURLIC v. SOUTHERN CALIFORNIA GAS
a way that made the total benefit accrued equal for all
employees regardless of time remaining until retirement. For
example, Plaintiffs seem to believe that a 64 year-old partici-
pant should earn as much interest in one year as an 18 year-
old does in 47 years. This reading of the statute completely
ignores the time value of money. Thus, not only does Plain-
tiffs’ interpretation of ERISA § 204(b)(1)(H)(i) read out
important words, it would also lead to absurd results. See Ari-
zona State Bd. for Charter Sch. v. U.S. Dept. of Educ., 464
F.3d 1003, 1008 (9th Cir. 2006) (noting that “well-accepted
rules of statutory construction caution us that ‘statutory inter-
pretations which would produce absurd results are to be
avoided’ ” (citation omitted)).
[5] Under the Plan, a younger participant and older partici-
pant earning the same salary will both receive the same retire-
ment credit and interest credit to their bookkeeping account
every year. Thus, their benefits will accrue at an equal rate.
The only difference is that, based on the time value of money,
a younger participant’s total accrued benefit at retirement will
be greater because the younger participant has more time
before retirement in which interest will compound. Because
the Plan does not reduce a participant’s rate of benefit accrual
due to the attainment of any age, the Plan does not violate
ERISA § 204(b)(1)(H)(i). Plaintiffs cannot prove any set of
facts on which they would be entitled to relief. Thus, the dis-
trict court correctly dismissed Plaintiffs’ claim. See Stoner,
502 F.3d at 1120.
II. Cash balance plans do not violate 29 U.S.C.
§ 1054(b)(1)(B)
[6] Plaintiffs also argue that the district court erred by dis-
missing their claim that the Plan violates ERISA’s “anti-
backloading” provisions. ERISA includes three “anti-
backloading” provisions: the three percent rule, the 133-1/3
percent rule, and the fractional rule. 29 U.S.C.
§ 1054(b)(1)(A)-(C). All three are intended to prevent plans
HURLIC v. SOUTHERN CALIFORNIA GAS 11105
from “providing inordinately low rates of accrual in the
employee’s early years of service when he is most likely to
leave the firm and . . . concentrating the accrual of benefits in
the employee’s later years of service when he is most likely
to remain with the firm until retirement.” H.R. Rep. No. 93-
807 (1974), reprinted in 1974 U.S.C.C.A.N. 4670, 4688. A
plan need only comply with one of the “anti-backloading”
provisions. 29 U.S.C. § 1054(b)(1)(A)-(C).
Plaintiffs argue that the Plan violates the 133-1/3 percent
rule, which provides that benefits accrued in any one year
may not exceed 133-1/3 percent of the benefit accrued in any
prior year.4 29 U.S.C. § 1054(b)(1)(B). Plaintiffs argue that
they will not accrue any additional benefits until the year in
which their cash balance formula benefits exceed their frozen
pre-conversion formula benefits. Thus, during the wear-away
period, Plaintiffs contend that they will accrue benefits at a
rate of zero percent. According to Plaintiffs’ theory, the bene-
fits they accrue in the year in which their cash balance for-
mula benefits become greater than their frozen pre-conversion
formula benefits will thus, by definition, exceed 133-1/3 per-
cent of the benefits they accrued during the wear-away period.
Plaintiffs’ argument is premised on the idea that Treasury
Regulation section 1.411(b)-1(a) requires that we use two dif-
ferent formulas when applying the 133-1/3 percent rule: the
pre-conversion formula while their frozen benefits are greater
and the cash balance formula once their cash balance account
exceeds their frozen benefits. Treasury Regulation section
1.411(b)-1(a) states:
4
Plaintiffs assert that the Plan violates ERISA if it does not comply with
the 133-1/3 percent rule because the other two anti-backloading provisions
do not apply to cash balance plans. Although SCGC and the Plan chal-
lenge this assertion, we need not address either the three percent rule or
the fractional rule because we hold that the Plan satisfies the 133-1/3 per-
cent rule.
11106 HURLIC v. SOUTHERN CALIFORNIA GAS
A defined benefit plan may provide that accrued
benefits for participants are determined under more
than one plan formula. In such a case, the accrued
benefits under all such formulas must be aggregated
in order to determine whether or not the accrued
benefits under the plan for participants satisfy one of
the alternative methods.
26 C.F.R. § 1.411(b)-1(a)(1).5
In Register, the Third Circuit addressed this argument and
held that a similar plan did not violate the 133-1/3 percent
rule. 477 F.3d at 70-72. The Register court reasoned that
because of the “plan amendment provision” to the 133-1/3
percent rule, the plan did not, in fact, determine participants’
benefits under more than one formula. Id. at 72. The “plan
amendment provision” to the 133-1/3 percent rule provides
that “any amendment to the plan which is in effect for the cur-
rent year shall be treated as in effect for all other plan years.”
29 U.S.C. § 1054(b)(1)(B)(i). “Thus, once there is an amend-
ment to the prior plan, only the new plan formula is relevant
when ascertaining if the plan satisfies the [133-1/3 percent
rule].” Register, 477 F.3d at 72.
As in Register, if the Plan’s cash balance formula had been
in effect for all other Plan years, Plaintiffs “never would have
accrued a benefit under the old plan and would have started
to accrue benefits under the cash balance formula from the
beginning of their employment.” Id. Plaintiffs would always
have had an annual accrual rate equal to 7.5 percent of their
salary plus their interest credit. Thus, the Plan would not vio-
late the 133-1/3 percent rule.
But the Plan differs from the pension plan at issue in Regis-
5
Although the Treasury Regulation was adopted under the Internal Rev-
enue Code § 411, 26 U.S.C. § 411, it applies equally to the parallel
requirements of 29 U.S.C. § 1054. See 29 U.S.C. § 1202(c).
HURLIC v. SOUTHERN CALIFORNIA GAS 11107
ter in that, after SCGC amended the Plan, the Plan’s grandfa-
ther provision allowed employees pre-conversion benefits to
increase for five years before they were frozen. The pension
plan in Register froze employees’ pre-conversion benefits as
of the date of amendment. Id. at 60. However, this distinction
does not change the result. To the extent that the Internal Rev-
enue Service’s (“IRS”) Revenue Ruling 2008-7 suggests oth-
erwise, we find its reasoning unpersuasive and decline to
defer to the IRS’s interpretation of the 133-1/3 percent rule.
See Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (hold-
ing that the weight afforded to an administrative agency’s
interpretation of a statute contained in an informal rule-
making depends on “all those factors which give it power to
persuade,” including “the validity of its reasoning”); Omohun-
dro v. United States, 300 F.3d 1065, 1067-68 (9th Cir. 2002)
(applying Skidmore deference to a Revenue Ruling); see gen-
erally McDaniel v. Chevron Corp., 203 F.3d 1099, 1112 (9th
Cir. 2000) (“Though revenue rulings do not have the force of
law, they do constitute a body of experience and informed
judgment to which we may look for guidance.”).
In Revenue Ruling 2008-7, the IRS applied provisions of
the Internal Revenue Code which parallel ERISA’s “anti-
backloading” provisions to a pension plan which had con-
verted to a cash balance formula. Rev. Rul. 08-7, 2008-7
I.R.B. 419. The IRS recognized that, due to the “plan amend-
ment provision” of the 133-1/3 percent rule, such plans do not
violate the 133-1/3 percent rule if, like in Register, a partici-
pant’s pre-conversion benefits are frozen as of the date of the
plan amendment. Id. However, the IRS indicated that a plan
would violate the 133-1/3 percent rule if it allowed partici-
pants to continue to accrue benefits under a pre-conversion
formula for a period of time before they became frozen. The
IRS’s discussion of this issue provided little in the way of rea-
soning. The IRS relied heavily on an example which seems to
suggest that the IRS believes that the aggregation rule of
Treasury Regulation section 1.411(b)-1(a) trumps the “plan
amendment provision” and requires aggregation of the two
11108 HURLIC v. SOUTHERN CALIFORNIA GAS
formulas whenever a plan contains a grandfather provision
like the one at issue here.6
[7] We disagree. The fact that the Plan allowed eligible par-
ticipants’ pre-conversion formula benefits to accrue until June
30, 2003 before becoming frozen rather than simply freezing
them on July 1, 1998 (when SCGC amended the Plan) does
not implicate Treasury Regulation section 1.411(b)-1(a).
Quite simply, the Plan, as amended, does not determine a par-
ticipant’s benefits by aggregating two formulas. The sections
of the Plan entitled “Reservation of Prior Plan Accrued Bene-
fit” and “Grandfather Benefit Amount” both refer to a partici-
pant’s accrued benefit under the “Prior Plan.” Because
Congress has directed us to treat the amended plan as if it was
in effect for all other plan years, 29 U.S.C. § 1054(b)(1)(B)(i),
we must assume that, for purposes of applying the 133-1/3
percent rule, there was never a prior plan under which Plain-
tiffs accrued benefits.
This analysis does not change merely because SCGC
included a beneficial grandfather provision in the Plan rather
than simply freezing all participants’ pre-conversion benefits
on July 1, 1998, as it clearly could have. The only difference
is that SCGC allowed eligible participants’ pre-conversion
formula benefits to increase before they were frozen. It would
be an odd result indeed to allow a pension plan which con-
verts to a cash balance formula to freeze pre-conversion bene-
fits immediately but forbid a plan from providing for a grace
period in which participants can continue to accrue additional
benefits before they are frozen.7
6
The IRS does, however, ultimately conclude that a plan such as the one
at issue here may not violate ERISA’s “anti-backloading” provisions pro-
vided that the plan can show that it satisfies the fractional rule for each
participant. Rev. Rul. 08-7, 2008-7 I.R.B. 419.
7
Our conclusion is further supported by the Treasury Department’s pro-
posed amendments to the regulation which would clarify that “a plan that
determines a participant’s accrued benefit as the greatest of the benefits
HURLIC v. SOUTHERN CALIFORNIA GAS 11109
[8] Additionally, we note that neither the Plan’s conversion
to the cash balance formula nor its grandfather provision con-
flict with the objective of ERISA’s “anti-backloading” provi-
sions, which is “to prevent a plan from being unfairly
weighted against shorter-term employees.” Register, 477 F.3d
at 72 (internal quotation marks omitted). Because the Plan sat-
isfies the 133-1/3 percent rule, Plaintiffs can prove no set of
facts on which they would be entitled to relief on their claim
that the Plan violates ERISA’s “anti-backloading” provisions.
Accordingly, the district court correctly dismissed this claim.
See Stoner, 502 F.3d at 1120.
III. ERISA preempts Plaintiffs’ FEHA claim
[9] SCGC argues that ERISA preempts Plaintiffs’ state law
FEHA claim for age discrimination. ERISA § 514(a) contains
a broad preemption provision stating that ERISA:
shall supercede any and all State laws insofar as they
may now or hereafter relate to any employee benefit
plan described in section 1003(a) of this title and not
exempt under section 1003(b) of this title
29 U.S.C. § 1144(a). Plaintiffs concede that their FEHA claim
“relates” to an employee benefit plan and thus falls within
ERISA’s general preemption provision. Nevertheless, Plain-
tiffs argue that their FEHA claim is saved from preemption by
ERISA § 514(d), which provides that ERISA’s general pre-
emption provision shall not “be construed to alter, amend,
modify, invalidate, impair, or supersede any law of the United
States.” 29 U.S.C. § 1144(d). Specifically, Plaintiffs argue
determined under two or more separate formulas is permitted . . . to dem-
onstrate satisfaction [of the anti-backloading rule] by demonstrating that
each separate formula satisfies” the anti-backloading requirement. 73 Fed.
Reg. 34665, 34669 (June 18, 2008). Thus, under the amended regulations,
aggregation will not be required in cases such as this one.
11110 HURLIC v. SOUTHERN CALIFORNIA GAS
that the joint state/federal enforcement scheme of the Age
Discrimination in Employment Act (“ADEA”) would be
impaired if we were to hold that ERISA preempts their FEHA
claim.
In Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 101-06
(1983), the Supreme Court addressed whether ERISA
§ 514(d) saved from preemption a state anti-discrimination
law which “relate[d] to an employee benefit plan” under
ERISA § 514(a). Specifically, the Court considered the appel-
lants’ argument that preemption of the state law would impair
the joint state/federal enforcement scheme of Title VII. Id.
[10] The Court recognized that Title VII provides for a
comprehensive joint state/federal enforcement scheme
wherein both states and the federal government enact valid
anti-discrimination laws and work together to enforce them.
Id. at 101-02. Given this interplay, the Court held that pre-
emption of a state anti-discrimination law would “impair Title
VII to the extent that the [state law] provides a means of
enforcing Title VII’s commands.” Id. at 102. Thus, the Court
held that, as long as the state anti-discrimination law does not
prohibit something that Title VII allows, preempting the state
law would “frustrate the goal of encouraging joint state/
federal enforcement of Title VII” and thus “impair” federal
law. Id. In so holding, the Court expressed concern that, if
ERISA were interpreted to entirely preempt state anti-
discrimination laws as they relate to employee benefit plans,
states would be unable to prohibit or grant relief for discrimi-
nation in ERISA plans and thus “an employee’s only reme-
dies for discrimination prohibited by Title VII in ERISA plans
would be federal ones.” Id.
[11] The Court also noted that Title VII “does not itself
prevent States from extending their nondiscrimination laws to
areas not covered by Title VII.” Id. However, enforcement of
Title VII does not depend on such extensions of state law.
“Title VII would prohibit precisely the same employment
HURLIC v. SOUTHERN CALIFORNIA GAS 11111
practices, and be enforced in precisely the same manner, even
if no State made additional employment practices unlawful.”
Id. Thus, the Court held that “[i]nsofar as state laws prohibit
employment practices that are lawful under Title VII, . . . pre-
emption would not impair Title VII within the meaning of
§ 514(d).” Id. at 103.
[12] The ADEA provides for a joint state/federal enforce-
ment scheme that is nearly identical to that provided in Title
VII. Compare 29 U.S.C. § 633(b) with 42 U.S.C. § 2000e-
5(c). However, FEHA does not merely parallel the ADEA, as
Plaintiffs allege. It is true that both statutes contain broad pro-
hibitions against age discrimination. Compare 29 U.S.C.
§ 623(a) with Cal. Gov’t Code §§ 12940, 12941. But unlike
FEHA, the ADEA contains specific provisions relating to
pension plans. See 29 U.S.C. § 623(i). One of these, ADEA
§ 4(i)(1)(A), mirrors ERISA § 204(b)(1)(H)(i), the section
which forms the basis for Plaintiffs’ first claim. Those two
provisions were enacted together as part of the 1986 Omnibus
Budget Reconciliation Act, 99 Pub. L. 509, 100 Stat. 1874,
and Congress has made clear that the provisions should be
interpreted to have an identical meaning. H.R. Rep. No. 99-
1012, at 378-79 (1986) (Conf. Rep.), reprinted in 1986
U.S.C.C.A.N. 3868, 4023-24. Because we have held that the
Plan does not violate ERISA § 204(b)(1)(H)(i), it follows that
the Plan does not violate ADEA § 4(i)(1)(A).
Plaintiffs argue, however, that ADEA § 4(i) does not exclu-
sively govern age discrimination claims relating to pension
plans, and that their FEHA claim tracks ADEA § 4(a), not
ADEA § 4(i)(1)(A). In support of their position, they point
out that their first and fourth claims are not identical. Specifi-
cally, the first claim asserts that the cash balance formula as
a whole discriminates on the basis of age, while the fourth
claim challenges only the wear-away provision of the
amended Plan, under which many workers suffer a temporary
cessation of benefit accrual.
11112 HURLIC v. SOUTHERN CALIFORNIA GAS
Although it is true that the two claims are not identical, the
difference between them does not save the FEHA claim from
preemption. The controlling provision in this case is ADEA
§ 4(i)(4), which provides that “[c]ompliance with the require-
ments of [subsection (i)] with respect to an employee benefit
pension plan shall constitute compliance with the require-
ments of [ADEA § 4] relating to benefit accrual under [an
employee pension benefit] plan.”8 29 U.S.C. § 623(i)(4).
Thus, we must determine whether the wear-away provision of
the Plan relates to benefit accrual. If it does, the wear-away
provision need satisfy only the requirements of ADEA § 4(i).
See id.
The term “accrue” means “to increase.” Webster’s Third
New International Dictionary 13 (1993). “Benefit accrual”
thus refers to the process by which benefits increase. See id.
In traditional defined benefit plans, such as SCGC’s pre-
conversion plan, benefits increased according to a formula
that took into account the employee’s salary and years of ser-
vice. Under the cash balance plan, benefits increase as the
employer credits the account with earnings and interest cred-
its. Plaintiffs’ wear-away claim protests the fact that under the
“greater of” provision, actual benefits payable (as compared
to the hypothetical account balance) do not increase until the
amount payable under the cash balance formula exceeds that
payable under the pre-conversion formula. This claim thus
relates to benefit accrual because it challenges the fact that
benefits do not increase for some period of time.
8
Prior to oral argument, Defendants’ submissions to this court only ref-
erenced ADEA § 4(i) once, in the “Counterstatement of the Case” in their
response brief. There they noted only that ERISA § 204(b)(1)(H) and
ADEA § 4(i) are “parallel age discrimination provisions” that Congress
indicated should be interpreted to have identical meaning. At no point did
they discuss ADEA § 4(i)(4) or the relationship between subsections (a)
and (i). However, we decline to conclude that this argument is waived
because it presents a pure question of law and the Plaintiffs fully briefed
it in their supplemental brief to the court following oral argument.
HURLIC v. SOUTHERN CALIFORNIA GAS 11113
As such, it must be brought under ADEA § 4(i), not the
generic anti-discrimination provision of ADEA § 4(a). How-
ever, the wear-away claim is not cognizable under ADEA
§ 4(i) because that subsection provides that, with respect to
benefit accrual under a pension plan, a plan only engages in
prohibited discrimination if it violates § 4(i)(1)(A). See 29
U.S.C. § 623(i)(4); see also H.R. Rep. No. 99-1012, at 382
(1986) (Conf. Rep.), reprinted in 1986 U.S.C.C.A.N. 3868,
4027 (“It is the intention of the conferees . . . that the require-
ments contained in section 4(i) related to an employee’s rights
to benefit accruals with respect to an employee benefit plan
. . . shall constitute the entire extent to which ADEA affects
such benefit accrual.”). It follows that the wear-away provi-
sion is not prohibited by ADEA § 4.
[13] FEHA mirrors ADEA § 4(a), not ADEA § 4(i). Plain-
tiffs thus seek to invalidate the wear-away provision under a
broad, general anti-age discrimination provision — something
they would not be allowed to do under the ADEA. With
regard to ERISA plans then, FEHA does not provide a means
of enforcing the ADEA’s commands such that preemption
would “impair” the joint state/federal enforcement scheme of
the ADEA. See Shaw, 463, U.S. at 102. Because FEHA pro-
hibits practices which would be lawful under the ADEA,
Plaintiffs’ FEHA claim is preempted. See 29 U.S.C.
§ 1144(a); Shaw, 463 U.S. at 103. Thus, the district court cor-
rectly dismissed this claim.
IV. Plaintiffs adequately stated a claim that SCGC
violated ERISA’s notice requirement
[14] At the time SCGC amended the Plan, ERISA con-
tained a notice requirement regarding pension plan amend-
ments which provided that:
A plan . . . may not be amended so as to provide for
a significant reduction in the rate of future benefit
accrual, unless, after adoption of the plan amend-
11114 HURLIC v. SOUTHERN CALIFORNIA GAS
ment and not less than 15 days before the effective
date of the plan amendment, the plan administrator
provides a written notice, setting forth the plan
amendment and its effective date, to . . . each partici-
pant in the plan[.]
29 U.S.C. § 1054(h)(1)(A) (1998) (current version at 29
U.S.C. § 1054(h)). Plaintiffs’ complaint alleged that SCGC
failed to provide the required notice. SCGC does not contest
Plaintiffs’ allegation that they did not receive notice fifteen
days before the Plan amendment became effective. Rather,
SCGC argues that Plaintiffs failed to adequately allege that
they suffered harm.
In Frommert v. Conkright, the Second Circuit addressed
how a plaintiff might suffer harm due to lack of notice under
29 U.S.C. § 1054(h)(1)(A). 433 F.3d 254, 266 (2d Cir. 2006).
In Frommert, the court held that by not receiving the required
notice under 29 U.S.C. § 1054(h)(1)(A), the plaintiffs “were
deprived of the opportunity to take timely action in response
to the purported [plan] amendment.” Id. (internal quotation
marks omitted). “Such action might have included seeking
injunctive relief, altering their retirement investment strate-
gies, or perhaps considering other employment.” Id.
Plaintiffs’ complaint alleges that the lack of notice pre-
cluded them from: 1) timely filing for injunctive relief; and 2)
pursuing alternative retirement strategies. SCGC is correct to
the extent that it argues that there was no potential violation
of law which Plaintiffs could have enjoined even if they had
received timely notice. We have held that the amended Plan
does not violate ERISA’s anti-age discrimination or “anti-
backloading” provisions and that ERISA preempts Plaintiffs’
FEHA claim.9
9
Even if Plaintiffs had asserted a timely ADEA claim, they could not
have obtained an injunction. As discussed above, the ADEA mirrors
ERISA as it pertains to age discrimination relating to benefit accrual.
HURLIC v. SOUTHERN CALIFORNIA GAS 11115
Although they would not have been entitled to injunctive
relief if SCGC had provided notice, Plaintiffs also alleged that
they could have altered their retirement strategies if SCGC
had provided the required notice. SCGC insists that this alle-
gation is insufficient as a matter of law because plaintiffs
were not entitled to receive notice of “the fact or potential
impact” of the wear-away provision and because the partici-
pants received a summary plan description in 2000, three
years before Plaintiffs’ pre-conversion benefits were frozen
and the wear-away provision took effect. Both of these argu-
ments disregard the statutory and regulatory notice require-
ments, however, and as a result, neither of them undermines
Plaintiffs’ claim.
[15] Prior to 2002, notice under 29 U.S.C. § 1054(h)(1)(A)
did not “need [to] explain how the individual benefit of each
participant . . . [would] be affected by the [plan] amendment.”
26 C.F.R. § 1.411(d)-6T, Q&A(10) (1998). But although no
such individualized explanation was required, the notice was
required to provide a summary of the amendments “written in
a manner calculated to be understood by the average plan par-
ticipant.” Id. Thus, contrary to SCGC’s contention, Plaintiffs
were entitled to receive notice of the wear-away provision.
Even without an individualized explanation of how the provi-
sion would affect their benefits, notice of the provision could
have induced Plaintiffs to increase savings in other retirement
vehicles or to consider other employment.10 See Frommert,
433 F.3d at 266.
[16] Turning to SCGC’s next argument, the fact that SCGC
distributed a summary plan description in 2000 does not
undermine Plaintiffs’ claim. The statute clearly required that
notice be provided fifteen days prior to the effective date of
10
As a defined benefit plan, the Plan has always been funded exclu-
sively by SCGC, without contributions from participants. Thus, even if
Plaintiffs had received proper notice, they could not have increased retire-
ment savings in the Plan itself.
11116 HURLIC v. SOUTHERN CALIFORNIA GAS
the amendment. 29 U.S.C. § 1054(h)(1)(A) (1998); see also
Prod. & Maint. Employees’ Local 504 v. Roadmaster Corp.,
954 F.2d 1397, 1404 (7th Cir. 1992) (“Section 204(h)’s lan-
guage is . . . clear and imperative: a plan ‘may not be
amended’ absent proper notice.”). Even if the district court
were to determine that Plaintiffs received proper notice in
2000, this tardy notice would not be sufficient to satisfy the
statutory requirement, which required notice no later than
June 15, 1998. There was still some period between the
amendment and when notice was received during which
Plaintiffs were harmed because they did not know that they
should be increasing their retirement savings to cover for the
decreased benefits that they would earn under the amended
Plan. Allowing the Plan to provide notice of a reduction in the
rate of benefit accrual two years after the fact would “upend”
the purpose of 29 U.S.C. § 1054(h)(1)(A), which is to provide
notice as a prerequisite to amending a plan. See Frommert,
433 F.3d at 266.
[17] Taking all allegations of material fact as true and con-
struing them in the light most favorable to the plaintiff, we
cannot say beyond doubt that Plaintiffs cannot prove any set
of facts that would entitle them to relief under 29 U.S.C.
§ 1054(h). See Stoner, 502 F.3d at 1120. Thus, the district
court erred by dismissing this claim.
CONCLUSION
In conclusion, we hold that cash balance plans do not vio-
late: 1) 29 U.S.C. § 1054(b)(1)(H), an anti-age discrimination
provision of ERISA; or 2) 29 U.S.C. § 1054(b)(1)(B), one of
ERISA’s “anti-backloading” provisions. We also hold that
ERISA preempts Plaintiffs’ state law FEHA claim. Thus, we
affirm the district court’s dismissal of those claims. However,
we hold that Plaintiffs’ complaint adequately alleged that
SCGC and the Plan violated ERISA’s notice requirement.
Thus, we reverse the district court’s dismissal of Plaintiffs’
notice claim and remand so that claim may be reinstated.
HURLIC v. SOUTHERN CALIFORNIA GAS 11117
AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED.
Each party shall bear its own costs on appeal.