(Archived Content)
FROM THE OFFICE OF PUBLIC AFFAIRS
JS-161Today, the Treasury Department and the IRS announced that they will withdraw recently proposed regulations that created an obstacle to the provision of transition relief for conversions to cash balance pension plans. The proposed regulations cover the provision of disproportionate benefits to highly compensated employees.
A tax-qualified pension plan, including a cash balance plan, may not provide disproportionate benefits to highly compensated employees. The proposed nondiscrimination regulations would have applied that rule to different types of cash balance plans.
Comments have raised serious concerns as to the effect of the proposed nondiscrimination regulations on cash balance plan conversions. In many conversions, employers provide transition relief to certain workers - for example, by providing workers a choice whether to accrue future benefits under the traditional plan or the cash balance plan, providing workers the greater of the benefit under the traditional plan or the cash balance plan, “grandfathering” current workers under the traditional plan, or giving “transition credits” to certain workers. Employers provide this transition relief to protect the interests of their workers.
“The proposed nondiscrimination regulations would have had the unintended effect of making it more difficult for employers to provide workers with transition relief in cash balance conversions,” stated Treasury Assistant Secretary for Tax Policy Pamela Olson. “When the effect was identified, Treasury and IRS decided to withdraw the proposed nondiscrimination regulations immediately so they do not prevent employers from reducing the impact of cash balance conversions on their employees.”
Treasury and the IRS intend to re-propose nondiscrimination regulations in the future that do not create a regulatory impediment to the provision of transition relief for cash balance conversions. This action does not affect the proposed age-discrimination regulations for cash balance plans and cash balance conversions.
The text of Announcement 2003-22 follows.
Part IV-Items of General Interest
Cash Balance New Comparability Regulations
Announcement 2003-22
On December 11, 2002, Treasury and the IRS published proposed regulations under §§ 411(b)(1)(H) and 411(b)(2) of the Internal Revenue Code (the “Code”). 67 Fed. Reg. 76123. These proposed regulations interpret the statutory age-discrimination rules for all qualified plans, including cash balance pension plans.
At the same time, Treasury and the IRS published proposed regulations under Code § 401(a)(4). The proposed § 401(a)(4) regulations provide that an “eligible cash balance plan” (as defined in the proposed § 411(b)(1)(H) regulations) may not demonstrate that the benefits under the plan do not discriminate in favor of highly compensated employees using the rules for defined benefit plans unless the plan complies with a modified version of the special § 401(a)(4) regulations related to cross-testing by defined contribution plans and certain arrangements involving combinations of defined contribution and defined benefits plans. This restriction on the use of inconsistent testing methods between §§ 411(b)(1)(H) and 401(a)(4) was intended to ensure that plan sponsors could not avoid the “new comparability” rules applicable to a defined contribution plan and those combination arrangements through the use of a cash balance plan (which has a benefit accrual pattern similar to that of a defined contribution plan).
However, comments submitted on the proposed § 401(a)(4) regulations have raised serious concerns about their effect on cash balance conversions. Specifically, comments have indicated that the proposed § 401(a)(4) regulations would make it difficult - or, in certain cases, impossible - for plan sponsors converting long-standing traditional pension plans to cash balance plans to provide different types of transition relief to plan participants. The practices that would be problematic under the proposed § 401(a)(4) regulations include, among others, providing plan participants who meet certain age or service criteria with a “choice” whether to accrue future benefits under the traditional plan formula or the cash balance plan formula; providing such participants, at retirement, the greater of the benefit under the traditional plan formula or the benefit under the cash balance plan formula; “grandfathering” current plan participants under the traditional plan formula; and providing “transition credits” to certain plan participants.
These consequences for plan participants who receive and plan sponsors who provide transition relief in cash balance conversions were not intended. Therefore, Treasury and the IRS will withdraw the proposed § 401(a)(4) regulations.
Treasury and the IRS remain concerned about the potential for plan sponsors to avoid the requirements of the new comparability regulations through the use of a cash balance plan. Treasury and the IRS intend to issue new proposed regulations that will address this specific concern without creating impediments to conversion practices implemented in the interests of fairness to plan participants. Comments are requested on this issue.
Comments may be submitted on or before July 27, 2003, in writing, and should reference Announcement 2003-22. Comments may be submitted to CC:PA:RU (Announcement 2003-22), room 5226, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC20044. In addition, comments may be hand delivered between the hours of 8 a.m. and 4 p.m. Monday to Friday to: CC:PA:RU (Announcement 2003-22), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C. Alternatively, comments may be submitted via the Internet at Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.