Compliance April 9, 2003

Study: Proposed Rules Would Hurt More DB Plans

April 9, 2003 (PLANSPONSOR.com) - Proposed pension regulations that include a new interpretation of age discrimination would invalidate more than two thirds of the defined benefit plans sponsored by Fortune 100 companies.
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Of the 72 surveyed companies with DB plans, 50 would fail under the proposed regulations while 22 would pass, according to the analysis sponsored by the Coalition to Preserve the Defined Benefit System and conducted by Watson Wyatt.   Eighteen companies do not currently offer defined benefit plans.

“The flaws in the proposed regulations will trip up pension plans that have never before been questioned and are clearly not discriminatory,” Kathy Cissna, director of retirement plans at R.J. Reynolds, testified at a two-day Washington public hearing conducted by the Treasury Department and Internal Revenue Service. “We’re afraid that the proposed regulations will force even more companies to abandon defined benefit plans, which provide a critical source of retirement income to millions of American workers.” Cissna represented the coalition.

Treating DB Plans Differently

According to a news release, one of the coalition’s major concerns with the proposed regulations is the restrictive general rule that applies to defined benefit plans, and the way in which the proposed rules treat defined contribution and cash balance plans on one hand, and all other defined benefit plans on the other hand, Cissna said.   About 80% of all retirement plans are defined contribution or cash balance plans.

While commending federal regulators for their decision earlier this week to withdraw the portion of the proposed regulations that would have imposed new comparability nondiscrimination tests on cash balance plans (See  Regulators Pull Back Some Cash Balance Conversion Rules) , Cissna also called on them to consider several changes to the proposed regulations:

  • test age discrimination for all retirement plans on the same basis.   There should not be a different and more onerous age discrimination rule that applies to only 20% of the employer-sponsored plans.
  • adopt an accrued-to-date test rather than an annual test for determining accrual rates.
  • allow offset pension plan designs to test for discrimination on the basis of the gross benefit, not the net benefit.
  • maintain the existing rules for benefit delivery to employees who are older than the plan’s normal retirement age, particularly in situations where the plan does not suspend benefits or offset for in-service distributions.

For more information on the coalition, go to www.preservedb.com .

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