Proposed Cash Balance Pension Rule Attacked From Both Sides
A proposed Treasury Department regulation on cash balance pension plans is at the center of an intense controversy.
Business groups say the proposed regulation is too restrictive and mechanical, making it difficult for employers to design plans to meet its specifications.
Two members of Congress also took shots at the regulation, saying it does not go far enough to protect workers rights.
They are sponsoring legislation they say would better protect older workers when companies switch from traditional retirement plans to cash balance plans.
A cash balance plan is a type of tax-qualified retirement plan that combines features of a 401(k) plan with those of traditional defined benefit plans.
In a cash balance plan, each employee has an account balance similar to a 401(k) plan. When employees change jobs, the cash balance plan can move with them.
However, employers bear all the investment risk, as is the case with defined benefit plans.
Many companies have converted traditional plans to cash balance plans, but many employees charge that doing so discriminates against older workers.
Older workers say that the conversion is accomplished in a way that reduces their retirement benefits by as much as 50%.
Treasury recently proposed rules designed to protect older workers. The rules require that any cash balance plan give older workers pay credits that are equal to or greater than the pay credits for younger workers.
In addition, the regulations require that any conversion be age-neutral, meaning employers cannot use factors in a conversion that provide a bigger benefit for younger workers than for older workers.
The regulations use a mathematical test to determine whether a plan is age discriminatory.
John M. Vine, an attorney representing the ERISA Industry Committee, Washington, an employers group, says the proposed regulations are “fundamentally flawed.”
The regulations, he says, employ a “rigid mathematical approach” that is inconsistent with Congressional intent and prevailing plan design.
“Under the approach taken by the regulations, the Social Security System would be considered age-discriminatory,” Vine says.
ERIC, he says, believes Treasury should adopt a clear, straightforward rule, which is that a plan may not provide that a participant stops earning benefits, or starts earning benefits, at a lower rate, once the participant attains a certain age.
But two members of Congress, Reps. Bernie Sanders, I-Vt., and George Miller, D-Calif., say that the proposed regulations should be discarded completely.
Instead, they are proposing legislation, called the Pension Benefits Protection Act (bill number not available at press time), that would require pension plans that seek to convert to cash balance plans to provide all participants over age 40 or who have worked for the company for 10 years or more with a choice.
These workers would be able to choose to receive the greater of the benefits under the traditional defined benefit plan or the cash balance plan, which would be determined at retirement.
“We are only seeking one thing through this bill,” Miller says, “fairness for employees who have devoted years to their employers with a clear expectation of a certain pension benefit when they retire.”
ERIC, however, says that offering employees such a choice would create a serious disincentive for employers to introduce new defined benefit plans.
In other news, the staff of the Joint Committee on Taxation is continuing its effort to eliminate the pre-1986 grandfather rule on corporate-owned life insurance policies.
The occasion was a Senate Finance Committee hearing on the Enron collapse and executive compansation issues, including COLI.
The Joint Committee notes in a prepared statement that even though Enron did not purchase any additional life insurance contracts after 1994, the companys debt and deductible interest under its existing contracts continued to increase throughout the 1980s and 1990s.
This, the Joint Committee says, is inconsistent with the legislative limits imposed by Congress on interest associated with tax-free inside buildup of life insurance contracts.
But industry representatives say they oppose any attempt to change the grandfather rule.
Eliminating the grandfather rule would undermine the fundamental confidence taxpayers have that Congress will not take action that changes the rules retroactively, says Jack Dolan, a spokesman for the American Council of Life Insurers, Washington.
Tom Korb, director of government affairs for the Association for Advanced Life Underwriting, Falls Church, Va., agrees.
He says he cannot imagine a justification for going back and changing the rules on policies that have been in force more than 17 years.
“Life insurance clients need to be able to rely on life insurance for long-term planning,” Korb says.
AALU, he says, will vigorously oppose repealing the grandfather rule on pre-1986 policies.
Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.