The proposed rules will reportedly describe the steps that will help firms that adopt cash balance programs avoid age-discrimination challenges when they convert from a traditional defined benefit pension plan. A cash balance plan is a defined benefit plan. However, since these plans also have some of the characteristics of a defined contribution plan, they are frequently called a “hybrid” plan.
The new rules will reportedly condone conversions of traditional pension plans to cash balance plans if benefit accruals are not stalled as a result – or at least not stalled because of age discriminatory factors, according to Washington-based legal publisher BNA. The proposed regulations, would, if finalized, end a September 1999 moratorium on issuing Internal Revenue Service determination letters for cash balance conversions.
During the last Congress, Representative Bernie Sanders (I-Vermont) introduced an amendment to an appropriations bill that would prevent the Internal Revenue Service from changing the current requirement that cash balance plans continue to use the 30-year Treasury interest rate as a growth assumption in establishing participant balances (see Sanders Slips Cash Balance Measure Into Bill) .
The most controversial aspect of cash balance programs has been the process used in converting existing pension accruals into a balance in a new cash balance plan. All other things being equal, older workers can – and do – end up with less benefits under a cash balance plan than a traditional plan. However, in a real sense, traditional pension plans also “discriminate” based on age – in favor of older workers. Benefits in a cash balance plan generally accumulate evenly throughout a career. Consequently, workers with 20 years to accumulate benefits will fare better than those with just 5….just like participation in a 401(k) plan (for more on how this works, see What to Watch Out For ).
The process of converting to a cash balance approach can result in the so-called “wearaway” effect if the converted balance is less than the accrued benefit under the traditional plan. Accruals in the cash balance are effectively frozen until the participant’s hypothetical account exceeds, or “wears away” the value of benefits accrued under the traditional plan’s formula, which tends to take longer for older workers.
Under the new rules, companies will be able to use this approach if they use “reasonable” interest rates and mortality projections in calculating the value of pensions. The regulations will be proposed with a 90-day comment period, however at that point the I.R.S. is expected to begin approving pension plans.
About one-third of the nation’s largest public companies have cash-balance plans or their equivalent. According to Congressional critics, more than 800 claims of age discrimination have been filed over conversions to cash-balance plans, according to the New York Times.