Regulators Pull Back Some Cash Balance Conversion Rules

>The US Department of Treasury and the Internal Revenue Service (IRS) withdrew proposed rules under 401(a)(4) of the IRS code saying that an “eligible cash balance plan” (as defined in the proposed 411(b)(1)(H) regulations) may not demonstrate that the benefits under the plan do not discriminate in favor of highly compensated employees using the rules for defined benefit plans unless the plan complies with a modified version of the special 401(a)(4) regulations related to cross-testing by defined contribution plans and certain arrangements involving “hybrid” plans.

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.  In a cash-balance plan, employees get individual accounts and are generally provided regular statements showing their account’s value. The employer credits the employee’s account with income based on a pre-determined formula.

According to an announcement by both agencies, comments from the public showed that the proposed 401(a)(4) rules would make it difficult – if not impossible – for plan sponsors converting from a traditional pension plan to a cash balance plan to give participants aid to help ease the changeover. Such more difficult “transition relief” would include:

• providing plan participants who meet certain age or service criteria with a choice whether to accrue future benefits under the traditional plan formula or the cash balance plan formula
• providing such participants, at retirement, the greater of the benefit under the traditional plan formula or the benefit under the cash balance plan formula
• grandfathering current plan participants under the traditional plan formula
• providing transition credits to certain plan participants

“These consequences for plan participants who receive and plan sponsors who provide transition relief in cash balance conversions were not intended,” officials wrote in the announcement. “Therefore, Treasury and the IRS will withdraw the proposed  401(a)(4) regulations.”

>The withdrawn regulations were designed to make sure that plan sponsors could not avoid the “new comparability” rules applying to a defined contribution and hybrid plans through the use of a cash balance plan, the officials said.

New Version to Be Issued

“Treasury and the IRS remain concerned about the potential for plan sponsors to avoid the requirements of the new comparability regulations through the use of a cash balance plan,” officials wrote. “Treasury and the IRS intend to issue new proposed regulations that will address this specific concern without creating impediments to conversion practices implemented in the interests of fairness to plan participants.”

>The two agencies said they would accept written public comment on the replacement rules until July 27, 2003, which should refer to Announcement 2003-22. Comments may also be mailed to CC:PA:RU (Announcement 2003-22), room 5226, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 20044 or submitted via the Internet at Notice.Comments@irscounsel.treas.gov .

>Also proposed on December 11, 2002, along with the now-withdrawn rules were suggested regulations under 411(b)(1)(H) and 411(b)(2) of the IRS Code, which interpret the statutory age-discrimination rules for all qualified plans, including cash balance plans (See  Balance Beam ).

>Cash balance plans and government regulations of them have been an extremely controversial topic in recent years because of allegations that employers could unfairly discriminate against older workers by converting from a traditional pension program to a cash balance plan (See    Cash Balance Foes Threaten to Ball Up Snow Nomination ).