Transitional Guidance For Cash Balance Plans

The Internal Revenue Service has issued a new notice providing transitional guidance for cash balance plans. It also announced that its moratorium has been lifted on issuing determination letters regarding these plans.

A cash balance plan is a defined benefit plan that calculates benefits in a manner similar to the way benefits are calculated for defined contribution plans. Each participant has a hypothetical “account,” but participants do not direct investments, and the employer bears the plan’s investment risk.

In the past, these plans have been controversial because some claim that cash balance plans illegally discriminate against older workers. In fact, cash balance plans became so controversial that the Service announced in early 2003 that it would not process determination letters regarding these plans until final regulations were issued regarding them.

Then, as part of the Pension Protection Act of 2006, Congress provided (prospectively at least) that cash balance plans will not be considered to discriminate on the basis of age if certain requirements are met. As a result of these provisions in the PPA, the Service has lifted its moratorium and is beginning to process determination letters regarding cash balance plans.

However, a plan will not be reviewed regarding whether it discriminates on the basis of age if it was converted to a cash balance plan before June 30, 2005.