The US Treasury Department’s proposal would impose a five-year hold harmless period after each conversion, during which the benefits earned by any worker under the cash balance plan would have to be at least as valuable as the benefits the worker would have earned under the traditional plan if the conversion had not occurred. The proposal would ban any “wear-away” of retirement benefits, so that all workers would earn benefits immediately after the conversion, according to a government announcement.
The provisions would be enforced through a 100% excise tax that would not apply if a company gives workers a choice between the traditional plan and the cash balance plan or if the cash balance conversion grandfathers current workers, the Treasury Department said. The proposal would also clarify that cash balance plans do not violate the age-discrimination rules that apply to pension plans as long as they treat older workers at least as well as younger workers, the administration said.
The proposal also eliminates the whipsaw effect, which acts as a cap on the interest credits that cash balance plans can provide to workers. This would permit companies to give higher interest credits, allowing larger retirement accumulations for workers.
“This proposal will make sure that every company converting to a cash balance plan deals fairly with its older workers,” said Secretary John Snow. “Cash balance plans play an important role in achieving retirement security for millions of American workers and their families. But we must make sure that companies changing from a traditional pension to a cash balance pension include a fair transition for older workers. Cash balance plans can be a better option, particularly for today’s younger, more mobile workforce.
A cash balance plan is a pension plan that combines the benefit formula of a defined contribution plan with the worker investment security of a defined benefit plan. Under a cash balance plan, a hypothetical account is set up for each worker and is credited with hypothetical pay and interest credits.
Older Work Harm
They have been enormously controversial in recent years as pension advocates and some judges (See Murphy’s Law: IBM Loses Cash Balance Ruling ) have asserted that they can cut – often drastically – the amount of benefits available for older workers.
Congressional lawmakers waged a bitter firefight to block earlier Bush efforts to authorize the plans via administrative rule versus a formal legislative proposal. Those efforts appear to have paid off as the latest proposals were put forward in the form of legislation.
US Representatives George Miller (D-California) and Bernie Sanders (I-Vermont), lawmakers who led the opposition along with US Senator Tom Harkin (D-Iowa) to the regulatory change, said in a statement that they will review Monday’s proposal to determine whether it will properly protect the earned pension benefits of millions of employees with longer terms of service to their employer.
“The Administration’s original plan would have given a green light to private companies with millions of employees to convert traditional pension plans to cash balance plans with no guarantees to older workers that their pensions would be secure,” Miller and Sanders said. “The GAO found that older workers were at greatest risk from conversions and could lose as much as half the value of their pensions. We hope that the President’s new legislation corrects this problem and we will review the plan carefully to ensure that it meets important criteria.”
Also Monday, an industry group said the latest proposal had its good points and its negative aspects. According to an American Benefits Council (ABC) statement, the proposal is positive because it helps to validate that the cash balance plans are not inherently age discriminatory. but does not completely clarify the status of already converted plans. “As the legislative process unfolds, the employer community will work vigorously to protect the more than 1,200 plans covering more than 7 million participants that are already in place,” ABC President James A. Klein said in a statement.
>Details of the administration’s latest proposal are at http://www.treas.gov/press/releases/js1132.htm .