IRS Withdraws Remaining Cash Balance Plan Regulations



Bradley Arant Boult Cummings LLP Human Resources E-Newsletters

The IRS announced this week the withdrawal of its proposed regulations on cash balance plans and age discrimination.  The regulations had set forth conditions under which cash balance plans could meet certain age discrimination requirements under the Internal Revenue Code.  As a result, the future of cash balance plans—particularly plan conversions—remains somewhat uncertain.

A cash balance plan is basically a defined benefit plan that looks like a defined contribution plan such as a 401(k) plan in that each participant is provided with an "account balance."  The account balance is, however, a hypothetical account balance that is credited annually with contributions and interest credits.  For cash balance plans that have resulted from the conversion of a traditional defined benefit plan, the concern of some courts (and presumably Congress and the President) is the "wear-away" that results in certain plans when the converted balance is less than the accrued benefit under the traditional plan until the participant's hypothetical account balance exceeds the value of benefits accrued under the traditional plan's formula.  Since this takes longer for older workers, the wear-away feature has been challenged as discriminatory based on age.

The original proposed regulations for cash balance plans, issued in December 2002, dealt with both the application of general nondiscrimination requirements under the Internal Revenue Code and with the age discrimination requirements.  Last year, in Announcement 2003-22, the IRS withdrew the proposed regulations with respect to the nondiscrimination requirements.  In the recent announcement, Announcement 2004-57, the IRS has withdrawn the remainder of the proposed regulations regarding the age discrimination requirements, which regulations had provided that such requirements would be met if conversions of traditional pension plans to cash balance plans were made on an age-neutral basis and if established plans provide older workers with contribution credits equal to or greater than those provided to younger workers. 

In Announcement 2004-57, the IRS also indicated that the withdrawal of the remaining regulations would provide Congress and the President with an opportunity to review legislative proposals relating to cash balance plans.    The Administration's budget for 2005 includes a legislative proposal addressing cash balance plans and conversions, which would require companies converting to cash balance plans to protect current employees through a five-year "hold harmless" period and would prohibit any benefit "wear-away." The proposal also would provide rules under which cash balance formulas would not be considered age-discriminatory and rules regarding interest rate credits.  In effect, the IRS has backed off taking any action until the Congress and the President reach a legislative solution.

The news may not, however, be so bleak.  It may well be that Congress will pass legislation that will at the least provide certainty for cash balance plans—new plans, existing plans, and especially conversions.   In the meantime, however, plan sponsors will need to wait and see what will happen.