by Alvin D. Lurie

STRIKING A (CASH) BALANCE

Like a breath of spring air amidst the wintry blasts of December, the IRS proposed new rules for cash balance plans in mid-December that, if adopted, promise to thaw the deep freeze in which cash balance pension plans have been captured for the past three years ever since the employees of IBM, using the company's vaunted intranet system, unleashed a storm of protest against the proposed conversion of the IBM defined benefit plans into cash balance plans. The employees' argument was the conversions were a form of unlawful age discrimination because theu would hit older employees when they were most vulnerable, as they approached their retirement age, by slowing, if not halting, the then anticipated escalating increments in their pension benefits.

Words like "wear away" came into common parlance, to describe the cap on disproportinate benefit growth that was a function of the typical final-average benefit design commonly in use in defined benefit plans, but not cash balance plans. The result was a flurry of critical - if not hostile - articles in the press (most especially the Wall Street Journal), flaming oratory and a welter of restrictive bills in the Congress, and a tent-circling mentality in the administrative agencies, culminating in a refusal by the IRS to issue determination letters approving the tax qualification of such conversions "pending study". Indeed, it appeared inevitable that constricting legislation would be enacted late last year, until the Enron frenzy engulfed all other pension concerns of the Congress and the Administration.

Since then cash balance plans have been in a state of suspended animation, waiting for one or the other shoe to drop. Suddenly, with the issuance of a proposed regulation by the Service on December 12th last, it appears that no shoes may drop after all. The long freeze may be about to end, because the Service will presumably begin again to issue determination letters in case of cash balance conversions, notwithstanding reductions of benefits or wearaways of benefits that may occur on the occasion of conversions from a defined benefit plan, so long as the calculation of converted benefits is predicated on the use of reasonable interest rates and mortality projections.

Most notable among the troublesome questions resolved by the proposed regulations was repudiation of the notion that a cash balance plan essentially cannot satisfy the age discrimination prohibitions of the Internal Revenue Code and ERISA because of a characteristic of such a plan that is inherent in its design resulting in shrinking interest credits with each passing year. It is to be noted that this characteristic is not a function of a participant's increasing age with the approach of retirement, inasmuch as the interest credits for a 25 year old will likewise represent a smaller percentage of pay credits than those of a 24 year old. It appears that, as long as the pay credits themselves are not a smaller percentage of salary of older workers than of younger workers, age discrimination is not involved within the meaning of the governing statutes.

It is to be expected that increasing numbers of employers will soon adopt, or resume sponsoring, pension plans of the cash balance design, as distinguished from 401(k) plans, thus providing protection against the market risks inherent in defined contribution trusts such as K plans. That has to be good news for workers.