Trust Updates Archive

20050808BSA IBM's Cash Balance Conversion Ruling Upheld; IRS Lifts Moratorium

(Jan. 16, 2007--Chicago, IL)--The U.S. Supreme Court today denied plaintiffs' petition for a hearing in IBM's cash balance conversion case (Cooper v. IBM, No. 06-760). The decision spares IBM from a $1.4 billion payout and, in effect, means the federal courts consider its conversion to be nondiscriminatory. However, this may not be the final word on whether other conversions were discriminatory, cases are pending in federal court against Bank of America and JPMorgan Chase.

In 2003, a federal district court ruled in plaintiffs' favor finding that IBM had violated ERISA's prohibitions against age discrimination when it converted its DB plan to a cash-balance plan. IBM appealed, but also agreed to pay $320 million and as much as $1.4 billion if it lost the appeal. In 2006, the U.S. Court of Appeals for the Seventh Circuit reversed the district court ruling, finding that "removing a feature that gave extra benefits to the old differs from discriminating against them." The Supreme Court's decision today lets that decision stand.

In related news today, the IRS, in Internal Revenue Bulletin 2007-3, announced that it has lifted its moratorium on issuing determination letter applications for conversions. The agency suspended processing of applications in 1999 pending a study of the issues. The IRS decision follows the passage of the Pension Protection Act, which provides a safe harbor for conversions (see TRN August 2006). According to the IRS, it has a backlog of some 1,200 conversion filings that it hopes to resolve by year-end.

While some industry experts says that the passage of the Pension Protection Act will result in an "unprecedented number of companies closing their well-funded defined benefit pension plans," recent studies show that some 60 percent of Fortune 500 companies still have traditional DB plans. According to Steward Lawrence, of the New York-based The Segal Co., an actuarial and consulting firm, "fiduciaries should not be driven by headlines." His comments are echoed by other consultants that stress that firms needs to run their own number and base their decision to retain or convert on their particular financial and demographic point of view.

For more on this topic, see the upcoming issue of Trust Regulatory News.

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