Treasury Secretary Lawrence Summers articulated the administration’s position in a written response to a request for clarification on the position from Senate Finance Committee Chairman William Roth (R-De).
“Wear-aways” occur when an existing pension plan is converted to a cash balance plan AND the opening balance in the new plan is set – or slips below – the “accrued benefit” calculated under the existing plan.
When an existing plan is converted (or terminated), you calculate each participant’s accrued benefit – what they are entitled to at that point in time.
ERISA prohibits “cutbacks” in the accrued benefit, requiring the plan to offer the benefit from the old plan calculation as long as it exceeds the benefit from the new plan.
In these situations, an employee will effectively cease accumulating additional benefits until the cash balance catches up with, and exceeds, the existing balance.
Said another way, his benefit will be frozen until the difference between the two ‘wears away” – which could take years.
The next action on cash balance plans will be taken in the Senate Finance Committee’s markup of the Comprehensive Retirement Security and Pension Reform Act (H.R. 1102) on September 7.
You can read a copy of Secretary Summers’ letter on the Association of Private Pension and Welfare Plans (APPWP) web site at http://www.appwp.org/senatefinanceltr_082400.htm .
– Nevin Adams firstname.lastname@example.org