July 7, 2004
BB 04—75

In this issue:

  • Council Testifies in House Committee Cash Balance Hearing
  • Council Submits amicus Brief in Cash Balance Case
  • Automatic Rollover Rule Possible by End of July
  • Technical Update: Clarification of Relative Value Regulations Delay

Council Testifies in House Committee Cash Balance Hearing

On July 7, the full House Education and the Workforce Committee held a hearing titled "Examining Cash Balance Pension Plans: Separating Myth from Fact" in which the council heard testimony from James M. Delaplane, Jr., special counsel to the Council and a partner with the Benefits Group of Davis and Harman LLP. Delaplane's testimony on behalf of the Council extolled the value of hybrid defined benefit pension plans such as cash balance plans and emphasized the importance of maintaining flexibility and clarity when revising or regulating these plans. The Council was the only employer trade organization invited to testify.

Committee Chairman John Boehner (R-OH) began the hearing with a strong endorsement of cash balance plans, stating that the ultimate goal "is to ensure cash balance plans remain a viable option for employers who want to remain in the defined benefit system and workers who prefer the portable secure benefit this option provides." Notably, Boehner also highlighted the voluntary nature of retirement benefits and the questionable court decision in the age discrimination case of Cooper v. IBM.

Most of the witness testimony echoed these sentiments. Also touting the legitimacy of cash balance plans were:

  • Ellen P. Collier, Director of Benefits for Eaton Corporation in Cincinnati, Ohio, who described Eaton's implementation of a cash balance plan and the employees' overwhelmingly positive reaction to it.
  • Robert L. Clark, Ph.D., Professor, College of Management, North Carolina State University, who cited research indicating that most workers will have higher lifetime pension benefits in a world of cash balance plans compared to traditional defined benefit plans.
  • Nancy M. Pfotenhauer, President of the Independent Women's Forum in Washington D.C., who informed the panel that because women tend to change jobs more often than men, are more likely to leave the job market to handle family responsibilities, and often do not stay at a job long enough to be vested in a traditional plan, cash balance plans provide a more equitable and generous pension benefit for women.

The lone dissenting opinion, provided by attorney Robert Hill, a partner with Hill & Robbins in Denver, Colorado, suggested that employees facing a pension plan conversion should be provided with a choice of participation in the new plan or the prior plan, as proposed in the Pension Benefits Protection Act (H.R. 1677) sponsored by Representative Bernard Sanders (I-VT).

The Council's written testimony urged prompt legislative action from Congress to rescue hybrid defined benefit plans by:

  • clarifying that hybrid plan designs are not age discriminatory, and that charges to the contrary are unfounded;
  • confirming hybrid plan conversions that have already taken place are valid since these conversions were pursued in good faith and in reliance on the legal authorities in place at the time;
  • resolving legal uncertainties with regard to plan conversion issues such as "whipsaw", inclusion of early retirement subsidies in the opening account balance, voluntary use of "greater of" transition methods, and protection of employee-friendly transition techniques; and
  • rejecting benefit mandates as proposed in H.R. 1677.

The hearing was well-attended by both Republican and Democratic members of the committee, with questions for the panel covering a wide array of topics, including vesting schedules, lump sum versus annuity payments, and the potential effects of mandated choice legislation.

The committee is expected to develop cash balance legislation within the coming months. For more information, contact Diann Howland, Council vice president, retirement policy, at (202) 289-6700.

Council Submits Amicus Brief in Cash Balance Case

In a related matter, on June 30 the Council submitted an amicus ("friend of the court") brief to the U.S. District Court for the Southern District of New York in the case of Hirt v. Equitable Retirement Plan. In this case, the claim against the defendant alleges that Equitable's cash balance formula violates ERISA's age discrimination prohibition statute prohibiting the reduction in the rate of a participant's benefit because of the attainment of any age.

The case involves a traditional defined benefit plan frozen in 1988 and a cash balance plan maintained since 1989. Specifically, the complaint argues that the cash balance plan design inherently discriminates against older workers because they have fewer years left before normal retirement age to earn compound interest on their account balances. The plaintiff also lodges a complaint regarding the adequacy of the notice of the adoption of a cash balance plan.

The Council's amicus brief focuses on the age discrimination issue, arguing that all participants are treated equally and consistently as prescribed under ERISA's age discrimination provision and longstanding benefits practices. Notably, the plaintiff's claims conflict with statutory language, ERISA's legislative history and the findings of the U.S. Treasury Department. More specifically, the Council's brief argues that the cash balance plan design is not inconsistent with the age discrimination rules on an "equal cost" basis, and any interpretation of the applicable law to preclude the design on the basis of age discrimination ignores the statutory requirement that attainment of a certain age is the cause of the benefit reduction.

The Council will monitor further developments in this case. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

Automatic Rollover Rule Possible by End of July

The Department of Labor's Employee Benefits Security Administration (EBSA) has drafted its final safe harbor automatic rollover rule, which is now being reviewed by the Office of Management and Budget (OMB). EBSA personnel hope to release the rule by the end of July but acknowledged that OMB can take up to 90 days to review it. However, they anticipate that the rule may receive an expedited review since the agency missed the statutory deadline of the end of June. The Council has heard there may be some modifications to the income limitations contained in the proposed rule but agency personnel were unable to confirm. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Technical Update: Clarification of Relative Value Regulations Delay

Following the release of Internal Revenue Service (IRS) Announcement 2004-58, which delayed the effective date of the relative value regulations for most qualified joint and survivor annuity (QJSA) explanations, the Council spoke with U.S. Department of Treasury and IRS personnel seeking clarification on several issues. Based on these conversations, it is our understanding that the delayed effective date (February 1, 2006) is intended to apply to all distributions from defined contribution plans that would otherwise have been covered by the regulations. The relative value regulations set forth information required to be explained to pension plan participants regarding the optional forms of benefit offered by the plan. The annuity starting date is generally the date on which payments from the plan are considered to have commenced.

With the limited exception described in the June 30 Benefits Byte, the disclosure requirement will now apply to annuity starting dates beginning on or after February 1, 2006. Under the limited exception, the new requirements would apply for annuity starting dates on or after October 1, 2004 (the non-delayed effective date). If the October 1 effective date applies to a particular form of benefit such as a lump sum payment, the comparison under the relative value regulations need only be made to the qualified joint and survivor annuity (QJSA), and comparisons to other optional forms of benefit are subject to the preexisting law which agency personnel acknowledged was less clear.

It should be noted that Announcement 2004-58 does not mention qualified preretirement survivor annuities (QPSAs) which were subject to the new requirements effective July 1, 2004. However, it is our understanding that Treasury and the IRS do not view the requirements under the relative value regulations for QPSAs as making any changes to requirements under previous law.

The Treasury and IRS announcement indicated that the earlier effective date only applies to certain forms of benefit that are less valuable than the QJSA. The Council understands that "less valuable" benefits would include benefits considered reasonably equivalent in value to the QJSA because they are "worth" at least 95 percent of the value of the QJSA. In other words, forms of benefit "worth" at least 95 percent but less than 100 percent of the value of the QJSA will be required to meet the new requirements for annuity starting dates on or after October 1. Agency personnel indicated there would be an exception to that rule if there is no actual loss of benefit value (the difference is due to a difference in reasonable actuarial assumptions, as illustrated in the calculation example below, but does not reflect an actual difference).

It is our understanding that, for purposes of determining whether the delay applies, the calculation of whether a lump sum (or other form of benefit where the present value determination is subject to the mandatory use of certain interest rate and mortality assumptions under section 417(e)) is less valuable than the QJSA is made in the following manner. Assume that a plan's normal form of benefit is a single life annuity. Assume further that the plan converts a single life annuity to a QJSA using a 7 percent interest rate; the 417(e) assumptions are used to convert a single life annuity to a lump sum. In that case, the determination of whether the lump sum is less valuable than the QJSA is made in two steps. First, the QJSA is converted to a single life annuity by using any reasonable assumptions; in this case, the plan's 7 percent interest rate could presumably be used for this purpose. Second, that single life annuity is converted to a lump sum using the 417(e) assumptions. If, on the other hand, a plan's lump sum is the present value of the QJSA using 417(e) assumptions, then the two-step process does not apply. In that case, the determination of whether the delay applies is made by converting the QJSA to a lump sum using the 417(e) assumptions.

For more information, contact Jan Jacobson, Council director, retirement policy, 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.