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Administration Withdraws Proposed Cash-Balance Rule

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NU Online News Service, June 16, 2004, 8:04 p.m. EDT – The Bush administration has decided against trying to use regulations to control conversions of traditional defined benefit pension plans to cash-balance formulas.[@@]

The Internal Revenue Service has withdrawn a proposed regulation released in December 2002 that would have provided guidance for employers conducting cash-balance plan conversions.

The Bush administration is withdrawing the proposed regulation to support congressional efforts to address the cash-balance conversion issue through legislation, the IRS says in Announcement 2004-57.

A proposal in the administration’s fiscal year 2005 budget would require companies converting to cash-balance plans to protect current employees through a 5-year “hold harmless” period. The proposal also would prohibit any benefit wear-way, set rules for interest crediting rates and set rules to protect sponsors of cash-balance plans from age-discrimination charges, the IRS says.

Rep. John Boehner, R-Ohio, chairman of the U.S. House Education and the Workforce Committee, says the committee will hold hearings on cash-balance conversions in July.

“Unfortunately, the ongoing uncertainty about cash-balance plan conversions is undermining the retirement security of American workers and jeopardizing employers’ willingness to continue offering defined benefit plans to their employees,” Boehner says in a statement about the issue.

The committee wants to come up with responsible solutions that will preserve the integrity of the defined benefit pension system, Boehner says.

Employers that sponsor traditional defined benefit pension plans assume that employees will accumulate guaranteed pension benefits over many years. Sponsors make smaller contributions for younger employees, on the assumption that the contributions will have decades to generate interest earnings.

Sponsors of cash-balance pension plans also promise that employees will receive a certain amount of income at retirement, but members of cash-balance plans accumulate pension benefits one year at a time. Sponsors contribute as much for new members of cash-balance plans as they contribute for longtime members.

Supporters of cash-balance conversions argue that cash-balance plans are much better for modern employees, who usually change jobs several times over the course of their careers, but opponents say the conversions may take benefits away from older employees.

The IRS notes that thousands of comment letters poured in when it released its proposed cash-balance conversion regulation.

Employees and employers both objected to the proposed regulation, the IRS says.

Employees complained about the damage that past cash-balance conversions had done to their lives, and employers said the proposed regulation could cause problems for some existing traditional defined benefit plans, the IRS says.

The IRS announcement about the withdrawal of the proposed regulation is on the Web at //