updated 9/29/2004 5:30:46 PM ET 2004-09-29T21:30:46

IBM Corp. and plaintiffs challenging the legality of its pension plan agreed to a deal Wednesday that settles most claims and caps the company’s potential liability at $1.7 billion. The company previously had estimated a settlement could cost as much as $6.5 billion.

IBM earlier this month settled with 15,000 of the 140,000 workers who claimed its adoption of a “cash balance” pension plan discriminated against older workers. That settlement, together with Wednesday’s settlement, will lead the company to take a one-time charge of approximately $320 million in the third quarter.

Wednesday’s agreement ends the company’s pension litigation on all but two claims.

Cash balance plans, which mushroomed in popularity in the 1990s, resemble 401(k) plans in that they let workers track the growth of their money in a hypothetical individual “account.” Unlike a 401(k), workers can’t allot any of their own pay toward the plan or decide how it’s invested.

Traditional pension plans reward workers for staying with a company over time, often making their last years with the company the time when their eventual pension increases the most.

Cash balance plans are computed using a formula that awards benefits at a steady rate through a worker’s tenure, which awards workers who jump from job to job more benefits than they would have under a traditional plan. A worker counting on a leap in benefits at the end of his career can be sorely disappointed if his company switches to a cash-balance plan not long before he retires.

The Federal judge hearing the case ruled in favor of the workers earlier this year, saying the company’s cash balance plan is illegal because it discriminates against workers on the basis of age. IBM has said it will challenge that contention.

The other remaining issue is the plaintiffs’ contention that the transition from the previous pension plan to the cash balance plan was also age discriminatory. The judge has ruled for the plaintiffs on that as well. IBM has said it will appeal.

If its appeals fail, the company has agreed to pay up to $780 million as a remedy on the claim that the plan itself is discriminatory and $620 million as a remedy on the claim the transition was discriminatory.

In the coming months, class members will receive formal notice of the settlement and the judge will hold a fairness hearing. If the settlement is approved, IBM will file its appeals.

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