February 2, 2004
BB 04—12

In this issue:

  • Treasury Department Releases Proposal for Hybrid Pension Plan Conversions
  • Bush Administration Unveils Revised Savings Proposals
  • American Benefits Council IN THE NEWS: Pension Interest Rate Vote Coverage Features Council Comments

Treasury Department Releases Proposal for Hybrid Pension Plan Conversions

On February 2, the Treasury Department released its legislative recommendations for hybrid plan conversions as part of the Bush Administration Fiscal Year 2005 budget submission to Congress. Council staff members were briefed this morning by Treasury officials along with other representatives from the business community. A Treasury Department press release, with a Q&A section, as well as a summary of the briefing prepared by The Benefits Group of Davis and Harman, is available on the Council Web site.

The proposal is divided into three parts and all provisions would apply prospectively. The three parts include:

  • Recommendations for conversion requirements that would require that employers instituting a cash balance conversion provide benefits for all employees under the cash balance plan for a period of five years after the conversion. These benefits must be at least as generous as the benefits that employees would have earned had the traditional defined benefit formula continued in existence (the Treasury Department has indicated there will be parallel provisions for pension equity plans);
  • Clarification that cash balance plans would satisfy the age discrimination statutes as long as the pay credits provided to older workers were at least as generous as the pay credits provided to younger workers and clarification that transition strategies such as including the early retirement subsidy in the opening account balance would not violate the age rules; and
  • Affirmation that the accrued benefit to be paid out in a cash balance plan would equal the account balance as long as the interest crediting rate was no greater than a "market" rate of interest. The existing guidance on interest rate crediting (IRS Notice 96-8) would not be formally revoked.

The recommendations include no inference as to past conversions with respect to age discrimination questions and does not offer any protections for those conversions regardless of whether they were implemented in good faith based on then available legal authority. The proposal does not indicate a reopening of the determination letter process for plan qualification with respect to prospective or past conversions.

The Council anticipates that the recommendations will be received with mixed reaction and that legislative activity may be played out beyond the remainder of this congressional session. The Council is working closely with allies on Capitol Hill to ensure that past conversions are protected and to achieve recognition of hybrid plans retroactively as well as prospectively. For more information, or if you would like to be included on the Cash Balance Working Group, contact Lynn Dudley, Council vice president and senior counsel, at 202-289-6700.

Bush Administration Unveils Revised Savings Proposals

President Bush's budget proposal for Fiscal Year 2005 also includes slightly revised versions of the Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) and Employer Retirement Savings Accounts (ERSAs) proposed last year. (Bush's 2003 proposals were detailed in the January 31, 2003 Benefits Byte).

The Bush Administration proposed LSA and RSA contribution limits of $5,000 per year, reduced from the contribution limit of $7,500 proposed last year. Both limits would be indexed for inflation. Existing Roth IRAs would automatically become RSAs and existing traditional and nondeductible IRAs could be converted by taking into income the taxable portion. No income limit would apply to the ability to convert and no additional contributions could be made to existing traditional and nondeductible IRAs.

As in last year's proposal, contributions to both accounts would be nondeductible but earnings would accumulate tax-free, and qualified distributions would not be taxed. Qualified distributions from the RSA would be distributions made after age 58 or in the event of death or disability. Non-qualified distributions from the RSA would be subject to income tax plus a 10 percent penalty but, as is the case with Roth IRAs, distributions would be deemed to come from contributions first, resulting in no tax for the return of contributions. All distributions from LSAs would be tax-free, regardless of age or use of the distribution. No income limits apply to either account and only the RSA requires income that is at least the amount of the contribution.

The proposed budget also continues to include an account called an Individual Development Account (IDA). This proposal would provide dollar-for-dollar matching contributions of up to $500 for married filing jointly individuals making less than $40,000 (other income limits apply to single and head of household). The matching contribution would be funded through credits to the sponsoring financial institution. Qualified distributions could be made for higher education, first-time home purchase and small business capitalization.

The ERSA proposal would consolidate 401(k), SIMPLE 401(k), 403(b) and 457 employer plans into a single type of plan. Most of the defined contribution reform proposals contained in last year's ERSA proposal, such as changes to the coverage, cross-testing and top-heavy rules, and changes to the definition of highly compensated employee and compensation for retirement plan purposes, were omitted from this year's proposal. However, the proposal does retain the non-discrimination rule reforms from last year. It also makes clear that the ERSA and its rules are only applicable to defined contribution-type accounts that permit employee deferrals or employee after-tax contributions.

A Treasury Department press release is available on the Council Web site. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

American Benefits Council IN THE NEWS: Pension Interest Rate Vote Coverage Features Council Comments

Following passage on January 28 by the Senate of the Pension Funding Equity Act (H.R. 3108) the Council was contacted by a number of news organizations seeking our views on how the reform of the 30-year Treasury interest rate would affect retirement plans, the prognosis for a compromise bill with the House of Representatives, and the likelihood of the final measure being signed by the president.

Stories of interest that include quotes from Council staff are:

  • Panel to Debate Pension Measure (Kathy M. Kristof, Los Angeles Times, February 2)
  • Pension bill moves to committee (Jerry Geisel, Business Insurance, February 2)
  • Senate Flouts White House, Passes Pension Funding Bill with Special Corporate Relief (Siobhan Hughes, CQ Weekly, January 31) (requires subscription to view)
  • Senate OKs pension contribution relief (Andrew Mollison, Cox News Service, January 29) (also appeared in the Atlanta Journal-Constitution, the Miami Herald, the Fort Worth Star Telegram, and the Deseret Morning News)
  • Senate OKs bill easing pension burdens (Jim Abrams, Associated Press, January 28) (also appeared in the Pittsburgh Post-Gazette, the Oakland Tribune, the Boston Globe, the St. Petersburg Times, the Raleigh News and Observer, the Denver Rocky Mountain News, the Seattle Times, the Allentown Morning Call, the Newark Star Ledger, the Rocky Mount Telegram, the Dayton Daily News, the Guardian (UK), the San Diego Union Tribune, ABC, Fox, the Olympia Olympian, the Charleston Post Courier, the Palm Springs Desert Sun, the Billings Gazette, the Cincinnati Enquirer, the Fort Wayne Journal Gazette, the Wichita Eagle, the Macon Telegraph, the Akron Beacon Journal, the Columbus Ledger-Enquirer, the Biloxi Sun Herald, the Aberdeen American News, the Grand Forks Herald, the Duluth News Tribune, the Minneapolis Star Tribune, the Kansas City Star, the Tucson Citizen, Newsday, the Delaware News Journal, the Tulsa World, the Baton Rouge Advocate, the St. Louis Post-Dispatch, South Florida Sun Sentinel, Denver Post, and the Baltimore Sun)
  • Senate OKs pension relief legislation (Brian Tumulty, Gannett News Service, January 28) (requires a Factiva subscription to view)

Also of interest recently, was the Pension Benefit Guaranty Corporation's announcement of the change to its investment policy and the PBGC's deficit for fiscal year 2003, reaction to the Administration's health care and savings proposals as part of President Bush's State of the Union message, and the new Medicare prescription drug law and its affect on employer sponsored retiree health plans. Council staff were quoted in the following stories:

As other stories of note appear, the Council will keep you informed. For more information about any of these articles, please contact Deanna Johnson Keim, APR, Council director, communications, or Jason Hammersla, Council communications associate. Both can be reached by phone at 202-289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.