FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury Department and the IRS issued proposed regulations on cash balance pension plans.  The regulations address the application of the pension plan age discrimination rules to cash balance plans. 

"The proposed regulations would provide long-needed guidance on significant questions about cash balance plans.  Cash balance plans are a type of defined benefit plan adopted by many employers over the past ten years,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.  “Guidance on defined benefit plans is important because under these plans the employer bears the investment risk which results in retirement security not available under a defined contribution plan."

A cash balance pension plan combines the benefit formula of a defined contribution plan with the investment security of a defined benefit plan.  A cash balance plan establishes a “hypothetical account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.”   The proposed regulations would apply to cash balance plans the same rule that applies to defined contribution plans.  Consequently, a cash balance plan would generally satisfy the age discrimination rules if the pay credits to an employee’s account are not less than the pay credits that would be made if the employee were younger.

The proposed regulations also address “conversions” of traditional pension plans to cash balance plans.  Under these rules, the plan must be age-neutral before the conversion, age-neutral after the conversion, and age-neutral in the process of the conversion.  This means that each employee following a conversion must start with a cash balance account calculated on an age-neutral basis.  Assuming that is the case, a “wear-away” period, during which cash balance benefits catch up with benefits under the traditional plan would not run afoul of the proposed rules.

The proposed regulations are subject to public comment.  The IRS will not begin issuing administrative “determination letters” on converted cash balance plans prior to consideration of all comments and the publication of final regulations.

The text of the proposed regulations is attached.