September 21, 2004
BB 04—93

In this issue:

  • House Approves Sanders Cash Balance Amendment to Appropriations Bill
  • Stock Option Expensing Valuation Changes

House Approves Sanders Cash Balance Amendment to Appropriations Bill

On September 15, the House of Representatives voted to approve a measure that could prolong the U.S. Treasury Department's stalemate over the treatment of cash balance pension plans. The measure, introduced by Representative Bernard Sanders (I-VT) as an amendment to the Treasury-Transportation Appropriations bill (H.R. 2025), seeks to withhold any funding to the Treasury Department "used to assist in overturning the judicial ruling" in the case of Cooper v. IBM. The measure initially passed by voice vote; a formal recorded vote was requested but was not completed at press time.

As we have long reported, in the case of Cooper v. IBM the U.S. District Court for the Southern District of Illinois ruled that the IBM cash balance plan violated the age discrimination provisions of ERISA by design, throwing all hybrid plans into legal uncertainty. This ruling remains contrary to the legislative history of ERISA and most legal precedent.

Rep. Sanders was able to insert a similar amendment during the 2003 appropriations process. Senator Tom Harkin (D-IA) followed suit in the Senate and the measure was enacted early in 2004. This was a key element in the Treasury Department's decision to withdraw its proposed regulations governing cash balance plans.

The Council will now turn its attention to the Senate in an effort to prevent a similar amendment from being approved in that body. For more information, contact Diann Howland, Council vice president, retirement policy, at (202) 289-6700.

Stock Option Expensing Valuation Changes

On September 15, top financial officers for the companies Cisco, Genentech and Qualcomm, speaking at a meeting of the Financial Accounting Standards Board (FASB), advocated a new valuation method to be used for expensing stock options. As previously reported in our March 31, 2004 Benefits Byte, FASB has proposed that companies be required to expense stock options.

The speakers described their proposed valuation method, which they termed the Fair Value Index-Adjusted Method, as based on the Black-Scholes method but adjusted for the options' (1) non-transferability, (2) non-hedgeability, (3) blackout restrictions, and (4) the dilutive impact that employee stock options have on outstanding shares.

FASB has recently made a few changes to its expensing proposal, including eliminating the stated preference for the Binomial Lattice Method of stock option valuation and generally allowing for the non-expensing of up to a 5 percent discount for stock purchased through Employee Stock Purchase Plans. With the recent elimination of the preference, the FASB proposal does not currently have a preferred valuation method.

One of the criticisms of FASB's original proposal was that the binomial method requires companies to estimate the expected volatility of their stock (it is one of the inputs in the valuation model). Advocates of the Fair Value Index-Adjusted Method argued that it is hard to objectively estimate volatility and indicated their newly proposed method would use the average volatility of the S&P 500 Index, adjusted for the individual company's "beta," which is a widely used measurement of a company's anticipated future volatility relative to an index. According to the officers, Bloomberg computes an adjusted beta relative to the S&P 500 Index for every listed company and that companies can easily compute their own adjusted beta.

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.