Trust Updates Archive
IRS Withdraws Cash Balance Regulations
(June 15, 2004, Chicago, IL)--The IRS announced today the withdrawal
of its proposed regulations on cash balance pension plans and cash balance
conversions. The proposed regulations were recently updated to provide
more protection for older workers (see TRN March 2004.) The update
was in response to Congressional criticism.
Cash balance plans are hybrids of defined benefit and defined contribution
plans. Unlike traditional defined benefit plans, benefits from cash balance
plans are expressed in terms of account balances. Contributions are based
on percentages of employee compensation, and a rate of interest is guaranteed.
Converting to cash balance plans can reduce company expenses, and potentially,
benefits of older workers. The reduction in benefits is known as "wear
away." Conversions have prompted several class-action lawsuits, the most
prominent is against IBM. A federal district court recently ruled in favor
of the IBM plaintiffs.
The proposed regulations are being withdrawn, says the IRS, to provide
Congress an opportunity to review and consider a legislative proposal on
cash balance plans that was included in the Bush Administration's Budget
for Fiscal Year 2005. The legislative proposal would require a five-year
"hold harmless" period for current employees following a cash balance conversion,
would ban benefit "wear-away" after a cash balance conversion, and would
clarify the legal status of cash balance plans and other hybrid plans.
"We want to work with Congress to enact these employee protections
and remove legal uncertainty about cash balance plans," said Greg Jenner,
Acting Assistant Secretary for Tax Policy.
Congressional spokesmen for House and Senate banking committees say
that no hearings are currently scheduled.