Public employees filed the class action case in 2010, arguing that an element of the reform was unconstitutional because it essentially took their property.
A provision of the revised law requires retirees who later return to work to pay into the retirement system, making the same contributions as other employees but without accruing extra service credit for pension benefits, according to court documents.
Losing the case could have cost South Carolina at least $121 million, the amount of new contributions that working retirees had made under the revised law through June 2012, according to state financial filings last month.
Before the overhaul went into effect, retired public employees could return to work and earn up to $50,000 without giving up the right to receive retirement benefits and without having to make more contributions to the pension funds.
In making its decision about sovereign immunity, a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit said it considered that any money to pay a judgment against the retirement system would have to come out of the state treasury.