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The proposed regulations are being withdrawn, says the IRS, to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Bush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.

-- Copyright 2004 A.M. Publishing, Inc., Trust Regulatory News

No statement in this issue is offered as or should
be construed as legal opinion or advice.
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