Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA “Annual Fall Employee Benefits Law and Practice Update” and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a “hypothetical account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.” However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)
Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:
(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)
(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury’s cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the “Sanders Amendment” here and the Senate amendment called the “Harkin Amendment” here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.
(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are “stuck” at the national office (400 or so of them, according to Mr. Sweetnam) due to the “freeze” on determination letters. Under this “freeze,” determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.
What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was “well-reasoned” so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a “risk analysis” and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be “topped up” to the highest rate of benefit accrual of any other younger employee under the plan so that any “risk analysis” should include this possibility.
Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:
(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.
(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.
(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.