Issues Center > Index of Issues > Retirement & Pension
Retirement Security: Cash Balance and Hybrid Pension Plans
Background
Cash balance plans are defined benefit plans that combine the advantages of a 401(k) plan with those of a traditional pension plan. Cash balance plans are part of a group of plans referred to as "hybrid plans." An employer may choose to implement a new cash balance plan, but a significant number of cash balance plans have arisen from conversions. In a conversion, an employer converts a traditional benefit plan into a cash balance plan. All benefits that have accrued under the traditional plan are protected and cannot be reduced. For some employees close to retirement, the cash balance conversion may upset future expectations. This change in expectations has led to accusations of discrimination.
Litigation in this area has been inconsistent and has increased the risk of legislation for all hybrid plan sponsors. The Chamber has argued that, due to this judicial uncertainty, legislation is necessary to clarify the legal status of cash balance and hybrid plans. After six months of conference negotiations, Congress passed the Pension Protection Act of 2006. The Senate passed by the bill by a vote of 93 – 5 on August 3, 2006 and the House passed the bill by a vote of 279 – 131 on July 28, 2006. The president signed the bill into law on August 17, 2006. The Act creates a non-discrimination standard that would apply to all defined benefit plans. However, these provisions are prospective only. The bill also contains a requirement that in future hybrid conversions plans provide participants with the sum of the benefits earned under the prior formula as of the conversion plus the benefits earned under the new formula post-conversion (a so-called "A+B" requirement). This conversion requirement is effective for conversions adopted after, and taking effect after, June 29, 2005.
In addition, to legislation that provides some certainty, plan sponsors also achieved a significant judicial victory. On August 7, 2006, the United States Court of Appeals for the Seventh Circuit overturned the district court opinion in Cooper v. IBM and held that cash balance plans are not age discriminatory. Despite four cases finding that cash balance plans are legal, including one as recently as 2005 (Register v. PNC Financial Services Group, Inc., 2005 U.S. Dist. LEXIS 29678; 36 Employee Benefits Cas. (BNA) 1321 (E.D. Pa. 2005), one case finding to the contrary dominated the debate. In Cooper v. IBM Personal Pension Plan (U.S. Dist. LEXIS 13223, S.D. Ill. July 31, 2003), the court for the Southern District of Illinois found that IBM's pension equity plan and cash balance plan violated the age discrimination rules of the Employee Retirement Income Security Act (ERISA). The publicity generated by this case led to detrimental legislative activity. In January 2004, the Consolidated Appropriations Act was signed into law; it included a provision that prohibited the Treasury Department from issuing regulations on age discrimination issues. As a result of this provision, on June 15, 2004, the Treasury Department and the Internal Revenue Service decided to withdraw the proposed regulations on age discrimination that had been issued in December 2002. On February 2, 2004, Treasury announced a legislative proposal addressing cash balance plan conversions, legal status, and the whipsaw issue.
Chamber Position
We are pleased to see that the Pension Protection Act includes a general non-discrimination test for all plans and includes limited restrictions on conversions. While there are provisions that continue to concern us, we are hopeful that these issues can be resolved through legislative history and technical corrections. The U.S. Chamber believes that cash balance and other hybrid plans are not inherently discriminatory on the basis of age and works to preserve this form of benefit for workers. The Chamber will continue to monitor and oppose efforts that would decrease the availability of hybrid retirement plans.
|
RSS Issue Feed
