At the recent ALI-ABA seminar on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, IRS officials stated that, due to the recent changes brought about by the Pension Protection Act of 2006, the IRS plans to start moving cash balance plans out of what the IRS referred to as "cash balance plan jail." "Cash balance plan jail" is the whimsical name given to the status of numerous cash balance plans (around 1200 plans) which have been submitted to the IRS for a determination letter over the past number of years, and which remain in a holding pattern, since the IRS had suspended the issuance of determination letters on all cash balance plans that had been converted from traditional defined benefit plans. The IRS said at the conference that one of its "high priorities" is to close out the cash balance plans waiting for a determination letter within a year from now (with governmental and nonelecting church plans not subject to section 411 of the Internal Revenue Code at the forefront of the movement). While this is good news for many, there was some bad news mixed in: officials said "some may not get a favorable determination letter."
You can access a copy of the the recent case of Richards v. FleetBoston Financial Corp here [pdf]. A federal district court in Connecticut has opined in that case that an employee could continue with a claim that the company's cash balance plan violates the age discrimination prohibitions under ERISA.
(Comment: The old adage that "you can't fit a round peg in a square hole" really seems to apply here. Congress needs to fix this sooner rather than later. You can read about how things are going with pension legislation here.
I liked what House Education and the Workforce Committee Chairman Howard P. "Buck" McKeon (R-Calif.) had to say about hybrid plans on the floor of the House in early April:
"[H]ybrid pension plans represent an important component of worker retirement security. In fact, more than 9 million workers today rely on these benefits for a safe retirement. Unfortunately, some continue to paint a misleading picture about these pension plans. . .Not only are hybrid plans especially advantageous for women and lower-paid workers, but they also comprise the only part of the defined benefit system that is growing. Hybrid plans now provide the PBGC with approximately 25 percent of its premium income. And because the total number of defined benefit plans has declined significantly over the last 20 years, it is now more important than ever to encourage employers to stay in the defined benefit system and offer these benefits. . )
For those who can't wait to read it, I am posting a copy of the Memorandum issued by the court in the Sandra Register vs. PNC Financial Services Group Inc. case. The decision, which addresses the issues involved in cash balance plan conversions, was rendered on November 21, 2005 by the Federal District Court for the Eastern District of Pennsylvania. The court granted the defendants' motion to dismiss. PlanSponsor.com has a summary of the case here: "Cash Balance Plan Foes Lose in PA Federal Court."
The Government Accountability Office has issued its report on Cash Balance Plans:
Concluding Remarks from the Report ("CB" stands for "cash balance, "DB" stands for "defined benefit" and "FAP" stands for "Final Average Pay"):
Our analysis illustrates one of the difficult choices facing the Congress in crafting comprehensive DB pension reform legislation, including the controversial issues surrounding the legal status of CB plans, and particularly CB conversions. The current confusion concerning CB plans is largely a consequence of the present mismatch between the ongoing developments in pension plan design and a regulatory framework that has failed to adapt to these designs. Although CB plans legally are DB plans, they do not fit neatly within the existing regulatory structure governing DB plans. This mismatch has resulted in considerable regulatory uncertainty for employers as well as litigation with potentially significant financial liabilities. For many workers, this mismatch has raised questions about the confidence they may have in the level of income they expect at retirement, confidence that has already been shaken by the termination of large pension plans by some bankrupt employers.CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce. However, conversions of traditional FAP plans to CB plans redistribute benefits among groups of workers and can result in benefits for workers, particularly those who are longer tenured, that fall short of those anticipated under the prior FAP plan. Our simulations suggest that grandfathering plan participants who are being converted can protect those workers' expected benefits, and, in fact, such protections, in some form, are fairly common in conversions. Our simulations also show that without such mitigation, many workers can receive less than their expected benefits when converted from a traditional FAP plan, even in cases where the CB plan is of equal cost to the FAP plan it is replacing. As a result, as we noted in our 2000 report, additional protections are needed to address the potential adverse outcomes stemming from the conversion to CB plans. For example, requirements for setting opening account balances could protect plan participants, especially older workers, from experiencing periods of no new pension accruals after conversion while other workers continue to earn benefits.
Our simulated comparison of CB plans with the termination of a FAP plan leads to several important observations. First, the immediate vesting of all unvested workers requirement in a plan termination actually leads to a greater number of workers getting some retirement benefits and highlights the portability limitation of DB plans. Workers in an ongoing DB plan only receive benefits if they are vested. Appealing to a mobile workforce would seem to place an even greater significance on pension portability. Yet even CB plans, which often feature lump sum provisions in their design, do not address this issue because they typically have similar vesting requirements as traditional FAPs.
In our simulations, vested workers under either a typical or equal cost CB plan still fare better than if the FAP plan is terminated. We note further that some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now. There is a crucial balance between protecting workers' benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system. Congress, as it grapples with the broader components of pension reform, has the opportunity not only to protect the benefits promised to millions of workers and eliminate the legal uncertainty surrounding CB plans that employers face, but also to craft balanced reforms that could stabilize and possibly permit the long-term revival of the DB system.
It is interesting that the media is going crazy over this report, noting that "Democratic lawmakers, who last year asked the GAO to examine the matter, [have] seized on the report as fresh evidence that the so-called cash balance pension plans hurt workers." See Pension Plan Switch Hurts Employees. In addition, the article reports:
The GAO study "is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes," Rep. Bernie Sanders, I-Vt., said Friday in a statement.
However, that is not the main message of the report at all. See bolded portion above which states that a CB plan is far better than a terminated FAP plan, and that Congress should "eliminate the legal uncertainty surrounding CB plans" and do everything possible to keep plan sponsors from exiting the DB system. In other words, employers are always free to terminate their DB plans (freezing accruals as of the date of termination) without adopting any plan to replace it. Such a scenario is far worse for the employee than replacing it with the "controversial" cash balance plan, "warts and all."
See also this Plan Sponsor article here with some success stories involving cash balance plans. (One could hardly call them "schemes.")
I received a copy of the Order (access it here [pdf]) denying the defendants' motion to dismiss in the cash balance plan litigation involving the Gannett Retirement Plan. The Order is too sparse in its analysis to provide any meaningful discussion here other than to say that the opinion seems to disagree with Eaton v. Onan Corp., 117 F. Supp. 2d 812, 817 (S.D. Ind. 2000) and Tootle v. ARINC, Inc., et al. (discussed here) on whether 29 U.S.C. section 1054(b)(1)(H) applies to employees who have not yet reached normal retirement age. That provision prohibits the reduction of the rate of a participant's benefit accrual because of age and reads as follows:
. . .[A] defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age.
Read more about cash balance plan litigation and legislative developments at this link here.
This article from Law.com--"Employment Law Forecast: Stormy Weather"--lists the cash balance pension plan litigation as one of the hot topics in 2005 for general counsels to keep an eye on:
. . . [I]n the wake of IBM's massive settlement, other companies with pension plans are wondering whether they, too, could pay a steep price. Bank of America Corp., Allied Waste Industries Inc., Monsanto Company, and AT&T Corp. are among the companies that are defendants in class action suits that challenge cash-balance plans. GCs may soon be making a cost-benefit decision: Is the risk of class action litigation worth the savings from switching from a defined-benefit pension plan to a cash-balance or 401(k) plan?
(Link from George's Employment Blawg.)
Interesting article from Workforce Insights entitled "In the Balance: The Future of Pension Rights." The article discusses the future of the cash balance plan and suggests that the cash balance plan controversy may be headed for the U.S. Supreme Court:
IBM’s cause – which has become the cause of pension sponsors generally – may not end at the Circuit Court in Chicago. The issue seems likely to wind up in the Supreme Court, especially if the split that has already shown up at the District Court level also occurs among the Circuit Courts of Appeals. There also could be legislation.The Treasury has urged Congress to act. It told the lawmakers last February that the split among federal judges "has created uncertainty about the basic legality of these plans. Removing that uncertainty is critical to preserving the vitality of the defined benefit system, which provides retirement income security for millions of American workers and their families."
Lyle Denniston is a veteran Supreme Court reporter, having covered the highest court for 46 years. He thus has covered one out of every four Justices ever to sit on the Court. Denniston is now reporting on the Court for SCOTUSblog, a Web site devoted to news and information about the Court, and for the NPR Boston affiliate, WBUR.
The New York Times is reporting: "IBM Employees Get $320 Million in Pension Suit." According to the article:
Under the settlement, which is subject to approval by the court, IBM would pay at least $300 million to current and former employees and $20 million to employees who had not been at the company long enough to earn a pension. The payment of $300 million settles all disputes that arose when IBM changed its pension plan the first time, in 1995, to an interim design called a pension-equity plan.But the settlement leaves unresolved the two claims in the class-action lawsuit that pertain to cash-balance pensions. IBM intends to appeal those claims. One remaining claim is at the very heart of the case: whether cash-balance pension plans by definition discriminate against older workers.
PlanSponsor.com has a good summary of the development here and reports that the settlement caps IBM's liability with respect to the cash balance plan issue at $1.4 billion if IBM were to lose that issue on appeal.
From the Wall Street Journal article here:
IBM Treasurer Jesse Greene said that "this settlement protects the company and our shareholders." He said that even if it loses the sections it is appealing, "the remedies are within IBM's ability to handle." IBM said it expects to prevail on appeal.
As noted in this previous post here, the House of Representatives on Tuesday (237-162) approved the Gutknecht-Sanders Amendment pertaining to cash balance plans, which reads as follows:
None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hilleshein, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (CivilNo. 99-829-GPM).
For those who are interested in reading the debate which took place on the floor of the House of Representatives over the Amendment, continue reading . . .
AMENDMENT NO. 5 OFFERED BY MR. SANDERS
Mr. SANDERS. Mr. Chairman, I offer an amendment.
The CHAIRMAN pro tempore. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 5 offered by Mr. Sanders:
At the end of the bill, insert after the last section (preceding the short title) the following new section:
SEC. __X. None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
The CHAIRMAN pro tempore. Pursuant to the order of the House of Tuesday, September 14, 2004, the gentleman from Vermont (Mr. Sanders) and a Member opposed each will control 20 minutes.
The Chair recognizes the gentleman from Vermont (Mr. Sanders).
Mr. SANDERS. Mr. Chairman, I yield myself 7 minutes.
Mr. Chairman, this tripartisan amendment is cosponsored by the gentleman from Minnesota (Mr. Gutknecht), the gentleman from California (Mr. George Miller), the gentleman from New York (Mr. Hinchey), and the gentleman from Illinois (Mr. Emanuel). This amendment also has the strong support of the AARP, the largest senior citizen group in this country, representing over 35 million Americans; the AFL-CIO, representing all of organized labor; and the Pension Rights Center.
Mr. Chairman, last year, this amendment passed the House by a vote of 258 to 160. Two years ago, a similar amendment passed by a vote of 308 to 121. By voting for this amendment today, we will be protecting the retirement benefits of some 8 million American workers who have seen their pensions slashed by as much as 50 percent through age discriminatory cash balance pension schemes and the 14 million more American workers who still have traditional, defined benefit plans that could be converted to cash balance schemes. That is the issue today: standing up for those workers and protecting the pensions that they have been promised.
The reason that this amendment is coming up again today is, despite the very strong, tripartisan support that we have seen in the House, this bill has yet to be implemented into law, and it is imperative that we keep fighting and keep standing with American workers who want us to do that.
Mr. Chairman, this amendment is simple and straightforward. In July of 2003, a Federal court ruled that IBM's cash balance pension plan violates Federal anti-age discrimination law. The judge in this case is expected to award damages to IBM employees any day now, after which the company will appeal to the Seventh Circuit Court of Appeals.
Our amendment today would simply prohibit the Federal Government from assisting in overturning this pro-worker court decision. IBM deserves its day in court, like every other litigant, but taxpayer money should not be used to support an age-discriminatory cash balance plan. And this amendment gives Congress the opportunity to make that very clear.
Mr. Chairman, let us be very clear. While this particular lawsuit involves IBM's conversion to a cash balance plan, there are hundreds of other companies that have done exactly the same thing. This is not just IBM; it is hundreds of companies, companies like AT&T, Duke Energy, CBS, Bank of America, Enron, WorldCom and many others. It is not only IBM employees who are hurting but millions of workers from one end of this country to the other who have also been affected, people whose retirement dreams have been shattered when companies change the rules of the game and slash the retirement benefits that were promised to their employees.
This precedent-setting court ruling against cash balance plans confirms what American workers have been saying for years: Cash balance pension conversions discriminate against workers based on age, are illegal and, without adequate protections for older workers, must be stopped. And that is what we are here to do today.
Mr. Chairman, let me just read a brief excerpt from the ruling of Judge Murphy: ``In 1999, IBM opted for a cash balance formula. The plan's actuaries projected that this would produce annual savings of almost $500 million by 2009. These savings would result from reductions of up to 47 percent in future benefits that would be earned by older IBM employees. The 1999 cash balance formula violates the literal terms of the Employee Retirement Income Security Act. IBM's own age discrimination analysis illustrates the problem.'' That was Judge Murphy.
Mr. Chairman, I became involved in this issue several years ago when hundreds of IBM employees in Vermont contacted my office and told me that the pensions that they had been promised by the company had been cut by 20 to 50 percent. In fact, the largest town meeting that I have ever held in Vermont, and I have held many, was for some 700 IBM workers who came out to demand that the company rescind the changes that had been made in their pension plan.
Mr. Chairman, think about it. Think about workers staying at a company through good times and bad times, providing loyalty to their employers because, among other reasons, they expect to receive certain agreed-upon pensions when they retire. And then, Mr. Chairman, one day, out of nowhere, the company sends a document, maybe it is an e-mail, which says, in so many words: Thank you, employees, for your dedicated service to the company, but forget about the promises that we made to you regarding the retirement that you and your family were anticipating. Forget about it. That is gone.
And, in many instances, while pulling the rug out from under their employees, we are seeing older workers, years of service to a company, suddenly find that the pensions that they had been planning on, the retirement dreams that they had been expecting, slashed by up to 50 percent.
Mr. Chairman, for those Members who will tell us that cash balance conversions are good things and should be supported, and there will be some today, I would remind them of a report from the Congressional Research Service that I requested. And very simply, what I asked the CRS to tell me is, what impact would a conversion to cash balance mean for Members of Congress, because I hear over and over again, Members of Congress, they want the American people to have what they have.
[Page:
H7270] GPO's PDF
Well, surprise, surprise. What the CRS reported was that, if Congress converted to cash balance payment plans, our retirement benefits would go down, down, down. So, if any Member today thinks that it is a great idea to force cash balance payment plans on the workers of America, I hope that they will do the same thing for the Members of Congress and cut their pensions by up to 50 percent.
Mr. Chairman, all over this country today, there is enormous pension anxiety. People who have worked for decades are wondering whether the promises made to them will be kept. That is the issue today. Let us vote for this tripartisan amendment.
Mr. Chairman, I reserve the balance of my time.
Mr. ISTOOK. Mr. Chairman, I claim the time in opposition to the amendment.
The CHAIRMAN pro tempore. The gentleman from Oklahoma (Mr. Istook) is recognized for 20 minutes.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, maybe people do not realize what we are actually debating. We are not debating pension plans. We are not debating conversion of pension plans from one type to another. We have before us the amendment by the gentleman from Vermont to this Transportation and Treasury appropriation bill, and maybe people do not realize what the amendment says.
The amendment says that you cannot use any of the money appropriated in this bill to assist in overturning the judicial ruling on a particular court case. That case, which was in the Southern District of Illinois, decided last year, was the action of Kathi Cooper, Beth Harrington and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated v. IBM.
The amendment says, do not use any of the money in this appropriations bill to assist in overturning a court case to which the United States Government is not even a party. It is a case between IBM and some workers at IBM. Not only that, this bill does not contain funding for the judicial system, nor do I believe it is the role of this Congress to say, when I like a court decision, I am going to come here with a bill that says, nobody can overturn this court decision. If I do not like a court decision, I am going to come here with a bill that says, we must overturn the court decision.
Now, we can change underlying law. That is our job. But it is not our job to say, we are going to decide a particular court case. If we want to change the law that governs the entire country, we ought to do it, but not come with a bill that has nothing to do with the judicial system and say, you cannot use this to overturn a court case between IBM and some of its workers.
Now, there is a lot of controversy, we know, about types of pension plans and conversions of pension plans. We have legislation that is being considered. We have the Treasury Department, which is working on potential regulations relating to those conversions. And the Treasury Department works with every company in the country and every individual covered by a pension plan in the country, and you cannot say you do not communicate with each other.
[Time: 15:30]
But, again, that is not what this says. It says, do not help somebody overturn a court case to which you are not a party. Come on, get real. Besides which, there has been other litigation on this case, and other courts came down on the other side. I think there have been four cases around the country. Three went one way; this one went the other.
If we want to talk about the issues, let us bring legislation to talk about what pension laws should be generally, not try to say we are going to overturn a court case with an action before this Congress in the amendment.
One final thing just because I know that the proponents of the amendment are getting into the merits of the case. Basically, that case said, well, it is age discrimination if somebody is going to work for a company longer and so their benefits earn more interest than somebody that works for a shorter period of time. And this court decided that was age discrimination. If money accrues more interest because it is invested longer, they call that age discrimination. I do not. I do not think most people who apply common sense would think that.
But this amendment does not belong on this bill. This is not changing the law of the land. This is trying to change the outcome of a lawsuit that is now on appeal to which the United States is not even a party. We should not be doing that.
I ask for opposition to this amendment.
Mr. Chairman, I reserve the balance of my time.
Mr. SANDERS. Mr. Chairman, I yield 4 minutes to the gentleman from Minnesota (Mr. Gutknecht), a gentleman who has been very active in supporting workers on pension issues.
Mr. GUTKNECHT. Mr. Chairman, I thank the gentleman for yielding me time.
I want to agree in most part with what the chairman said about this issue. It probably is not the appropriate time to have a big debate about pension policy, but I come to a completely different conclusion.
He said this amendment does not belong on this bill. It is a shame that we have to talk about this amendment on this bill, because it really is about pension policy, and it is about age discrimination, and it is about one company in particular. Now, I do disagree with the gentleman from Vermont (Mr. Sanders). I do not think all of these cash balance plans are inherently evil. And, frankly, there have been a number of companies that have converted their pension plans working with the collective bargaining units, working with their employees, giving employees their choice that have done things the right way. So these are not inherently evil things in terms of pension.
As we go forward as a society, as people change jobs more often, the idea of a cash balance plan may make some sense; but it does not make sense when you have a system that works the way it did in the IBM employees' case, and that is where they were given no choice, they were given no say. These were people with vested benefits.
Let me remind Members about what vested says about things. This is the quotation from Webster's Collegiate Dictionary. It says: ``Fully and unconditionally guaranteed as a legal right, benefit, or privilege.''
Now, these employees showed up for work one day, and they thought they had a pension benefit plan that was vested, that was theirs, that was fully and unconditionally guaranteed; and all of the sudden they found out that day that vested does not mean what they thought it meant. And they finally wound up getting this case before a Federal judge in a Federal court. And the Federal court, and I believe the Federal court in this case was absolutely right, said, wait a second. You cannot do this because the way pensions accrue value is you get most of the benefit.
There is sort of an ascending curve in pension benefits, and it is toward the end of your working career when you get the most benefit. So people who had worked for IBM for 20 years and were going to retire in 5 or 6 years, and I will say that IBM under enormous pressure did rescind the original package that they put in front of the employees, they made it a little better for older workers.
But it did not change the basic facts. First of all, the employees were given no choice even if they were vested. What it did and the reason why IBM and a lot of other employees wanted to convert to these cash balance plans is because they understood that it was a way to shave off those benefits for older workers in the last 5 or 6 years that they might be working for the company.
The bottom line is this: what they were really trying to do is get their hands in the pension funds, because they realized and their actuaries realized that most of these pension funds were overfunded, and they could literally move that money from the pension fund to their bottom line by making these conversions.
Companies are now coming and saying, gee whiz, this is going to cost us billions of dollars. Well, yes, it is going to cost billions of dollars because that was the employees' money. It did not belong to the employer. In fact, in some respects pension funds do not belong to the employee or employer. It is money being held in trust. And one company broke that trust, and the
[Page: H7271] GPO's PDF
Federal courts have come down on them very heavily.
I agree with the chairman, we should not have to be offering this amendment today because it is just outrageous for us to think that our own Federal Government would attempt to intervene in a case in which they are not a party to try and overturn a hard-won victory for the employees of IBM. This is an outrage. This is where we, whether Republicans or Democrats, ought to stand together and say it is wrong to steal from pension funds.
Support the Gutknecht-Sanders amendment.
[Begin Insert]
I come to the floor as a cosponsor of this important amendment. IBM employs about 5000 people in my district and there are close to 5000 IBM retirees across the state of Minnesota. Their employees are also my constituents and I, therefore, have a vested interest in ensuring IBM employees are treated fairly.
Fifty years ago a salary was the most important thing to workers. Times have changed. today pensions and other benefits are the main reasons workers choose a particular company. It is important we encourage employers to keep their promises to their employees and not change their pension plans in midstream.
When an employee becomes vested in a pension plan he or she expects to receive those benefits. ``Vested'' according to my Webster's Collegiate Dictionary means ``fully and unconditionally guaranteed as a legal right, benefit, or privilege.'' These expected benefits should not be taken away.
Unfortunately, IBM did just that. Perhaps IBM received bad business advice, but the method by which IBM went about switching to a cash balance pension plan was far from exemplary. Let me remind you we're not talking about a company in dire fiscal straits. We're talking about a very healthy company.
Originally IBM offered only those employees within five years of retirement a choice between the old and new pensions plans. While I am pleased they expanded this choice to cover more employees after the employees rightly expressed their outrage, I believe the court case brought against IBM should proceed without intervention by the U.S. Treasury Department.
I wish IBM had adopted models used by other companies when they switched to alternatives to traditional defined benefit pension plans.
For example, Honeywell, another company with many employees in Minnesota, across America, and around the world, switched to a pension equity plan in 2000. Honeywell offered all their employees a choice between remaining in the old plan and switching to the new plan. This is the model of how I feel companies should proceed in this area.
The Director of Benefits for Eaton Corporation, Ellen Collier, testified in front of the House Education and Workforce Committee this year that her company has given employees the choice between two retirement plans. Motorola, Deloitte & Touche, Northern States Power, Eastman Kodak and many other companies have all given their employees choice between old and new plans.
I understand that cash balance plans are a reality of the modern world and we should not discourage companies from offering them. I, however, do feel there are right and wrong ways to go about converting from one plan to another.
IBM handled this inappropriately and I believe the court case should proceed without federal government involvement.
This amendment overwhelmingly passed the House last year by a vote of 258 to 160 with strong support from both sides of the aisle. It is supported by the AARP. I urge my colleagues to support the Sanders/Gutknecht Amendment.
[End Insert]
Hon. GIL GUTKNECHT,
House of Representatives,
Washington, DC.
DEAR REPRESENTATIVE GUTKNECHT: AARP supports the Gutknecht-Sanders amendment to the Transportation, Treasury and Independent Agencies Appropriations Act for Fiscal Year (FY) 2005 to ensure that the Internal Revenue Service (IRS) does not use any funds in contravention of current law prohibitions on age discrimination in pension plan funds and to specifically prohibit the IRS from issuing regulations or implementing any other measure that would conflict with the July 31, 2003, federal court ruling in Kathi Cooper, et al. v. IBM Personal Pension Plan, et. al.
AARP has long been concerned with the legal basis for the hybrid cash balance formula and the significant age discriminatory issues that arise when employees convert defined benefit pension plans to a cash balance formula. We believe that a careful review of the legal distinction between defined benefit and defined contribution plans such as was conducted by the federal court in Cooper makes clear that the most common designs for hybrid cash balance plans do not fit within the current legal framework of the Internal Revenue Code (IRC), the Age Discrimination in Employment Act (ADEA), and the Employee Retirement Income Security Act (ERISA).
As the court concluded in Cooper, the cash balance plan formula discriminates against older workers, and older workers are particularly disadvantaged when an employer converts from a defined benefit pension plan to a cash balance plan. These longer-term employees have given up wages and accepted a lower pension in the early years of their employment in exchange for the larger future benefits from their employer's traditional defined benefit pension plan. Without adequate protection, older workers will now lose some of the benefits they were promised. Older workers generally have less time to accumulate benefits under a new cash balance formula, have a harder time leaving their current job if compensation and benefits are cut, will have fewer prospects of finding a new job, and are less able to adjust to the changes that may dramatically reduce their retirement security (for example, they have less time to adjust by increasing their savings for retirement).
In September 1999, the IRS imposed a moratorium on corporate plans that convert traditional defined benefit plans to a cash balance formula so the agency could review the matter. The moratorium suspended consideration of approximately 300 pending applications submitted by corporations to convert an existing plan to a cash balance formula. The Treasury initially proposed regulations in December 2002 that would have lifted the moratorium and permitted corporations to establish cash balance plans. However, the IRS withdrew the proposed regulations in July of this year.
In its FY 2005 budget, the Administration proposed legislation that would have addressed some of the concerns related to cash balance plan conversions. AARP was pleased that the legislative proposal recognized the problem with so called ``wear-away'' and recommended a ban on the wear-away of any benefits at any time after a cash balance plan conversion. In recognition of the transition problem faced by workers, the Administration's proposal also included a five-year ``hold harmless'' period after each cash balance plan conversion.
While the proposal is a step in the right direction, it does not go far enough. More can be done to ensure that older workers are adequately protected from the impact of a ``pension pay cut'' in any conversion to a cash balance plan. In fact, many of the recent pension conversions--recognizing the harm to older workers--have provided older and longer-service workers with more generous transition relief, including a choice to remain in the old plan rather than move to the new cash balance plan. This is further confirmation that business can and should do the right thing for their older, longer-service employees.
AARP believes that Treasury should not take any action that would encourage companies to change their pension plans in a manner that is contrary to the age discrimination laws and the federal court ruling. Rather, Congress should act to ensure that older workers are protected in any cash balance conversion. We urge adoption of this amendment.
Thank you for your leadership and dedication to strengthening the private pension system and protecting the pension benefits of workers. Please let me know, or have your staff call Frank Toohey (202-434-3760) of our Federal Affairs office, if we can be of further assistance.
Sincerely,
Michael Naylor,
Director of Advocacy.
Mr. SANDERS. Mr. Chairman, does the gentleman have additional speakers?
Mr. ISTOOK. Mr. Chairman, I have another speaker that may be arriving, but they are not here at this time; and other than that, I know of no other Members seeking time.
Mr. SANDERS. Mr. Chairman, I yield 4 minutes to the gentleman from Illinois (Mr. Emanuel).
Mr. EMANUEL. Mr. Chairman, I thank the gentleman for yielding me time.
I would like to commend the gentleman from Vermont (Mr. Sanders), the gentleman from Minnesota (Mr. Gutknecht), the gentleman from California (Mr. George Miller), the gentleman from New York (Mr. Hinchey) for their leadership on this issue.
We have been down this road before. We dealt with this earlier where a bipartisan group of Members of Congress came together and sent a clear message as it relates to retirement and pensions that you cannot do what IBM and other corporations tried to do. And Congress in that issue was not left versus right. As my colleague from Minnesota (Mr. Gutknecht) always says, it is about right versus wrong. And a bipartisan group came together as it relates to the retirement plans of Americans who negotiated a deal and woke up in the middle of the night and had that deal abrogated, and that is not right.
Now, as my colleague from Minnesota said, there is a right way and a wrong way and you can create a win-
[Page: H7272] GPO's PDF
win situation. For the older workers who have a defined benefit plan, we are going to honor that. And for younger workers, we are going to get you into a 401(k) or what is called typically a defined contribution, that can happen as well. But you cannot wholesale change something people negotiated in good faith, won at the negotiating table and try in a backhanded way to take that money away. And if we had done that, and as my colleague from Vermont (Mr. Sanders) has shown, if Members of Congress had opposed all of the sudden a cash balance type of retirement system, people here with 18, 20 years would lose hundreds of thousands of dollars in their retirement plan. They would not think it is right. And if it is not right for a Congressman, it should not be right for people who are employees of companies who agreed to something. That would be wrong.
Now, we are dealing with two cases here: the particular case of IBM and the general issue of retirement plans. On the IBM case, I think it is appropriate for this amendment because to date the Treasury Department has consistently tried to find a way, and this is the latest vehicle to get involved in this IBM case as it relates to the retirement plan and IBM's attempt to go to a cash balance retirement plan which would cheat older workers of many years of their retirement savings that they agreed to and have knowledge that they have when they retire.
We need to stop Treasury from doing what they have been trying to do for 2 years. I do compliment them for their resourcefulness. They have never missed an opportunity to try to figure out a back door to imposing cash balance as a retirement plan.
Now, in general, the larger subject, and, unfortunately, we in this Congress have not gotten to dealing with retirement plans yet as I in my city, we have United Airlines, we have a crisis in people's retirement plans, but we have a subject here. We as a society have told people, save for your retirement outside of Social Security. It is important for you to save and not just rely on Social Security. And here you have a case of workers who have saved outside of Social Security, done everything they have been told to do, and then corporate America is allowed to walk away and cheat them of that.
You cannot tell people on one hand, you need to save for your retirement, and on the other hand let corporate America steal from it or cheat them of it. You either tell them one thing and have the laws of the land follow it, or you tell them another thing and have the laws of the land follow it.
And the deal we are having here on this, because we have no other venue in dealing with the retirement crisis in America, is that we have to tell people, you are going to save outside of retirement and the laws of the land are going to respect what you have done for your life, which is to plan for you and your spouse's retirement and so you can retire with dignity, with Social Security, health care as well as the retirement plan you have in the private sector. And our laws are not going to undercut what you have done your whole life. And we are not going to allow management, I understand the pressure management is under, but we are not going to allow them to walk away with what they agreed to.
You can create, as Secretary of Treasury John Snow did at CSX when he was in private sector, he went to a cash balance, and did right. He did right to older workers. He did right to younger workers, and he did right to his bottom line and his shareholders; and he did not cheat anybody.
It is high time the folks in the Treasury Department get their greedy little hands off and stop trying to figure out every way to undermine working men and women in this country and retirees from what they have earned rightfully at the negotiating table.
Mr. SANDERS. Mr. Chairman, does the gentleman's status remain the same?
Mr. ISTOOK. Mr. Chairman, I just received a note that there is a Member that is on his way.
Mr. SANDERS. Mr. Chairman, I yield 2 minutes to the gentleman from Massachusetts (Mr. Tierney).
Mr. TIERNEY. Mr. Chairman, I thank the gentleman from Vermont (Mr. Sanders) for yielding me time.
This amendment is, in fact, about fairness. It is fairness to the American workers. A Federal court ruled in 2003 in the IBM case a conversion to cash balance plan, in that instance, which would have reduced pensions for older workers by 47 percent was a violation of Federal age discrimination rules.
Now, even though that provision has become law, it has not stopped consultants from trying to convince the Treasury Department to issue new guidance that would overturn that rule and other Court rulings in favor of employees.
By prohibiting the Federal Government from assisting in overturning these judicial rulings, this amendment protects millions of people. Those people stand the risk of having their pensions from hard work and long hours taken away from them by the conversion. It is only right and fair and just that we pass this amendment. More than 8 million employees and retirees have lost $334 billion in benefits as a result of pension plans being shifted to cash balance plans inappropriately.
A large number of older Americans, in this case defined by people 40 years and older, have lost up to 50 percent of the values of their plans. So I think what is even worse about this is the fact that President Bush's administration has supported treating these workers unfairly by backing cash balance plans.
In December of 2002, the IRS proposed lifting the 1999 moratorium on cash balance plan conversion. This year, the administration's budget proposed to give corporations a green light to violate pension age discrimination laws, while providing inadequate protection to workers affected in the future. These threats by the administration to workers' pensions demonstrate the importance of passing this amendment.
By voting for this amendment, Congress will be taking another important step toward protecting the rights of workers. I urge my colleagues to do just that. Support this amendment and stand up for America's workers.
Mr. SANDERS. Mr. Chairman, how much time is left on both sides?
The CHAIRMAN pro tempore (Mr. Thornberry). The gentleman from Vermont (Mr. Sanders) has 3 minutes remaining. The gentleman from Oklahoma (Mr. Istook) has 16 minutes remaining.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I think it is important to remind people what this amendment is and what this amendment is not.
This amendment is not determining the question of what types of pension plans are permitted by law. This amendment does not determine the question about whether you can convert, if you are a company, from one type of pension plan to another. That is not what we are talking about. This amendment says specifically that you cannot overturn a particular court case between IBM and its workers that is in contradiction of multiple other court cases about whether a retirement plan is age discriminatory or not.
[Time: 15:45]
That case is on appeal. That case is going to be decided under the law as it existed at the time. We are not changing the underlying law. We are not being asked to create a uniform standard for all companies. We are being asked to help people make sure that they do not lose their case on appeal, even if that appeal is contrary to other court decisions, even if that is not a proper role of this Congress. That is what the amendment is about. It is about stopping the overturning of a particular court case.
Mr. Chairman, yes, there is a large part of other issues that are out there that relate to pension plans, and most of the speakers have been talking about those issues. There are many companies that will tell us they made some bad decisions in years past, and because of it, they and their workers are in a tough spot. They may not be able both to pay the benefits they promised to workers in years past and stay in business.
Many companies have gone into bankruptcy because of this; and in bankruptcy court, if it is a reorganization procedure, they can abrogate, or in other words, they can do away with, or change the terms of, prior pension plans. It is a conflict often between people who worked for a company and received certain promises, and they
[Page: H7273] GPO's PDF
want those promises fulfilled and people who currently work for a company, and the company is not going to be able to stay in business if it is stuck with the old pension plan rules.
That is why so many companies want options in this. That is why we are looking at legislation to give companies options. It is a bona fide, honest debate that we need to be having, but it is not what this amendment is about.
This amendment, says, well, you cannot use any money in this particular appropriations bill to help overturn this one case with one set of workers and one company. We should not even be considering an amendment like this, and I oppose it.
Mr. Chairman, I yield 4 minutes to the gentleman from Texas (Mr. Sam Johnson).
(Mr. SAM JOHNSON of Texas asked and was given permission to revise and extend his remarks.)
Mr. SAM JOHNSON of Texas. Mr. Chairman, I rise today to oppose the amendment by the Representative from Vermont.
The gentleman from Ohio (Chairman Boehner) and I are working on legislation to reform the pension system, and this ill-timed amendment will undermine our efforts. I ask my colleagues to refrain from using the appropriations process to undermine our comprehensive reform efforts in the committee of jurisdiction.
The various sponsors of this amendment have had a problem with the conversion of the IBM pension plan 5 years ago. Despite the fact that IBM gave its employees everything they were asking for, the sponsors of this amendment now want to continue pushing this issue past its logical conclusion.
They now want to enshrine in law a flawed court case. The court case essentially found that the time value of money is age discriminatory.
An example might explain this crazy logic. Let us say a 25-year-old and a 52-year-old were hired on the same day to do the same job at the same pay. Their company would make an equal contribution to each employee's pension account.
The Cooper case found that the equal pension contribution is age discriminatory. Why? Because the 52 year old has less time to accumulate interest before retiring.
Yes, the logic of the case is that interest or the time value of money is age discriminatory. It is flawed logic, and it has been found to be flawed in every other court that has reviewed this issue.
Thousands of cash balance pension plans cover millions of Americans.
To the extent that the flawed logic of this amendment is given any support in Congress, it will undermine pension plans. Given the growing reluctance of businesses to sponsor traditional defined benefit pension plans, this amendment is just one more reason for companies to walk away from this type of pension and our constituents who need them.
We need to oppose this flawed amendment.
Mr. SANDERS. Mr. Chairman, I yield 1 minute to the gentleman from Minnesota (Mr. Gutknecht).
Mr. GUTKNECHT. Mr. Chairman, I hate to rise and oppose two of my good friends, but I thank the gentleman from Texas (Mr. Sam Johnson), who has just given a speech; and I just want to contradict a couple of things he said.
First of all, if the IBM company had given IBMers all they wanted, they would not be in court; and if there were not age discrimination, they would not have won; and if it were not for the IRS and the Department of Treasury wanting to get involved in this case, we would not have to offer this amendment.
This is wrong. As my friend said, this is not a matter of right versus left. It is right versus wrong. It is wrong for employers to steal from pension funds. It is that simple.
The reason we are here today is to try and keep this administration from doing something incredibly stupid, and that is, getting involved in this case which the workers have already won, and they are right, because it is the age discrimination.
Cash balance plans are not intrinsically evil. I said that earlier; but when you do it in such a way so that you shave off the end where people really accrue benefits, the courts have correctly ruled.
Mr. SANDERS. Mr. Chairman, I would inquire as to the amount of time left both on sides.
The CHAIRMAN pro tempore (Mr. Thornberry). The gentleman from Vermont (Mr. Sanders) has 2 minutes remaining. The gentleman from Oklahoma (Mr. Istook) has 11 minutes remaining, and he has the right to close.
Mr. ISTOOK. Mr. Chairman, I intend to reserve the balance of my time for closing.
Mr. SANDERS. Mr. Chairman, I yield 2 minutes to the gentleman from Massachusetts (Mr. Olver).
Mr. OLVER. Mr. Chairman, I applaud the gentleman from Vermont (Mr. Sanders) and the gentleman from Minnesota (Mr. Gutknecht) for their leadership and work on this issue.
The gentleman from Vermont's (Mr. Sanders) amendment is very clear. It would prohibit the Federal Government from assisting in overturning or, for that matter, in taking any role thereby in overturning the court decision in this case.
Now, the chairman has characterized this amendment as saying that this court decision cannot be overturned. That is not true at all. IBM and the workers for IBM can contest that, and it can be overturned. The amendment merely says that the U.S. Government cannot take part in the overturning.
The gentleman from Texas has said that this amendment would undermine pension reform. Whatever the chairman's views on the appropriateness of this amendment for this bill, last year this amendment passed this House on this very same bill by a vote of 258 to 160. The chairman was the chairman then. Two years ago, a similar amendment passed the predecessor subcommittee, the Subcommittee on Treasury, Postal Service and General Government, which the chairman was the chairman of also, by a 308 to 121 vote.
So it has been applied to this bill at previous times; and here again, the only issue is that taxpayer money should not be used to support IBM's age discriminatory cash balance plan, as the court decided. It would be an insult to workers if their own Federal dollars were used to cut their own pension plans, and we should overwhelmingly adopt this amendment today as we have done on two previous occasions to the exact same bill in previous years.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
This amendment is not necessary for us to intervene in a lawsuit that is on appeal. Even if we did, we would be intervening against the weight of what other courts have ruled, and we would also threaten the efforts that this body and many people in it are undertaking, trying to resolve the tricky issues of pension plans, conversions of other pension plans between defined benefit and defined contribution plans.
This does not belong on this bill, and I ask Members to oppose the amendment.
[Begin Insert]
Mr. GEORGE MILLER of California. Mr. Chairman, I rise in support of the Sanders Amendment.
The Sanders amendment would ensure that the Treasury Department does not use any of its funds to undermine the Federal court decision in Cooper v. IBM that held that cash balance conversions violate Federal pension and age discrimination law.
We've been here many times before.
In fact, this is the fourth time that the House is voting to protect older workers' pensions under cash balance pension plan conversions. The last two times the amendment passed by 308-121 and 258-160.
Instead of voting to prevent the Treasury Department from undermining workers' pensions, I wish we were voting affirmative legislation to set standards for cash balance plans.
This issue has been going on since 1999.
In 1999, IBM converted its pension plan to a cash balance plan. Luckily, its computer savvy workers quickly figured out that the conversions would reduce their expected pensions. The workers mobilized and got Congress to hold hearings.
The Clinton administration imposed a moratorium on approvals of conversions in September 1999. But then, the new Bush administration tried to issue regulations lifting the moratorium and permit conversions without any worker protections.
Immediately 218 Members of Congress wrote to the President urging him to revise the regulations and protect older workers.
Four times the House and Senate have voted to require Treasury to withdraw its regulations and protect older workers.
[Page: H7274] GPO's PDF
Finally, this year, in 2004, the Bush administration relented and withdrew the regulations. The administration even sent up a revised legislative proposal that contained a modicum of older worker protections through it did not go far enough to protect older workers.
But, still the issue is not resolved. Either Congress or the courts must set standards for cash balance plans and conversions to such plans.
The Republican Congress has done nothing on this issue for almost 6 years. If anything, Republican leader would defer to employer lobbying and simply permit cash balance conversions without any protections for older workers.
That's why the courts may have to be the body that resolves some of these issues.
One court, the Federal district court for the State of Illinois, determined that conversions are illegal. Other courts have disagreed. These cases and others still waiting to be heard will take years to resolve.
This amendment makes clear that the Treasury Department shall not interfere in these cases.
Today worker pension security is in crisis. This administration has done nothing to protect worker's pensions and done everything to undermine them.
They didn't protect workers after Enron and Worldcom from employers loading pension plans with employer stock and letting the executive protect themselves while leaving the workers stuck with worthless stock.
They didn't protect participants in 401(K) plans from a broad range of mutual fund abuses that have decimated retirement nest eggs.
And they are not protecting workers now from rampant pension underfunding. The PBGC, the agency that insures traditional pensions, has a $10 billion deficit. And if the airlines go under, the deficit will increase by another $30 billion. Over 1,000 pension plans are more than $50 million underfunded. And workers don't even know because the PBGC is required to keep the information secret.
The administration and the Republican majority are doing nothing to protect worker pensions.
I urge my colleagues to vote once again and remind the majority that it is the will of the Congress that older workers be protected in cash balance pension plan conversions.
[End Insert]
Mr. ISTOOK. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN pro tempore. All time for debate has expired. The question is on the amendment offered by the gentleman from Vermont (Mr. Sanders).
The question was taken; and the Chairman pro tempore announced that the ayes appeared to have it.
Mr. SANDERS. Mr. Chairman, I demand a recorded vote.
The CHAIRMAN pro tempore. Pursuant to clause 6 of rule XVIII, further proceedings on the amendment offered by the gentleman from Vermont (Mr. Sanders) will be postponed.
CNNMoney.com is reporting: "House backs IBM pension ruling." According to the article:
The House of Representatives voted 237-162 Tuesday to prohibit the government from trying to use regulations to overturn a court case that ruled against the cash balance pension plan of International Business Machines Corp.The move echoed a vote the House took a year ago. But the sponsor of both measures, Rep. Bernard Sanders, an Independent from Vermont, argued that Congress should weigh in on the subject again to make clear its opposition to cash balance plans that do not include protections for older workers.
Opponents of the measure charge that Sanders is trying to "enshrine in law a flawed court case," and warned that such a measure would undermine pension plans generally:
"Given the growing reluctance of business to sponsor additional defined benefit plans, this amendment is just one more reason for companies to walk away from this type of pension," [Rep. Sam] Johnson said.
The Wall Street Journal (subscription required) also reports on the development: "House Votes to Bar U.S. Intervention On IBM Pensions."
You can access the legislation here. The language of the amendment reads as follows:
None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hilleshein, Individually and on Behalf of All ThoseSimilarly Situated vs. IBM Personal Pension Plan and IBM Corporation (CivilNo. 99-829-GPM).
You can read about the amendment in this previous post here. (For background on the cash balance plan controversy, previous posts on the topic are here and here.)
Last week the Committee on Education and the Workforce held a hearing entitled "Examining Cash Balance Pension Plans: Separating Myth from Fact." Plan Sponsor has an excellent summary of the hearing here.
For those who don't have time to read all of the testimony at the hearing, here are some important excerpts:
Opening Statement by Rep. John Boehner (R-OH), Chairman:
The recent wave of litigation surrounding cash balance plans has raised concerns from employers, workers, and policymakers alike. One well-documented court case involves IBM, but the initial ruling runs counter to existing law and a large body of other court decisions. In this case, the judge found the cash balance plan design inherently age discriminatory because equal pay credits for younger workers have a longer period of time to earn interest and accrue benefits before retirement than the same pay credits for older workers. This interpretation essentially means it would be age discriminatory to make equal contributions on behalf of workers with different ages. This is inconsistent with every other pension design and this logic would make a basic savings account, 401(k) plans, and even Social Security benefits automatically age discriminatory. We’re not here to debate the IBM case, but we also need to make sure cash balance plans aren't forced into extinction at the expense of the interests of workers.Most courts have ruled no age discrimination occurs with cash balance plans if the pay and interest credits given to older employee accounts are equal to or greater than those of younger employees. The most recent ruling on this topic, issued just last month in the Tootle case, agrees that cash balance plans are not inherently age discriminatory.
Testimony of James M. Delaplane, Jr., Partner, the Benefits Group of Davis & Harman LLP, Special Counsel, American Benefits Council:
Disregarding the interpretation contained in the proposed regulations and other legal authorities, one federal district court judge dramatically shifted the focus of the debate surrounding hybrid plans by declaring in July 2003 in the case of Cooper v. IBM that hybrid plan designs were inherently age discriminatory. According to the court’s flawed logic, simple compound interest is illegal in the context of defined benefit pension plans. Under the Cooper court’s reasoning, a pension design is discriminatory even if the employer makes equal contributions to the plan on behalf of all its workers and, ironically, even in many instances where the design provides greater contributions for older workers. Such a conclusion flies in the face of common sense. It would hold all 1,200 plus hybrid pension plans, regardless of whether adopted as new plans or through conversion from traditional plans, to be in violation of the pension age discrimination laws.The conclusion that all hybrid plan designs are inherently age discriminatory begs the question why the Internal Revenue Service issued favorable determination letters for fifteen years blessing hybrid plan designs and issued proposed regulations providing that the cash balance plan design is not inherently age discriminatory. It is surprising, at a minimum, that the Cooper decision completely ignored this history. .
Testimony of Ellen Collier, Director of Benefits, Eaton Corporation, on behalf of the Coalition to Preserve the Defined Benefit System:
If Congress does not move quickly to provide legal certainty for hybrid plans, many Americans may soon lose valuable retirement benefits. The current legal landscape is ominous. One rogue judicial decision has made the threat of age discrimination class action litigation a very real concern for employers. Potential damage awards from such suits could reach astronomical figures -- into the hundreds of millions or even billions of dollars – and the potential amounts of these awards continue to grow the longer the plans remain in effect. In Eaton’s case, the cost to modify our plan for alleged “age discrimination” in its design could curtail our ability to commit funds for other important functions, such as for research and development – and this is for a plan that has not yet been in existence for 3 years!
Testimony of Robert L. Clark, Professor, College of Management, North Carolina State University:
. . [P]olicy makers must remember that the pension system is voluntary and employers have many choices. A key concern is what is the appropriate counterfactual if conversions to cash balance plans are not allowed. If cash balance plans are not an option, firms my terminate their defined benefit plans and have no new plan, they might terminate their defined benefit plans and establish a new defined contribution plan, or they may retain the current plan but change the benefit formulas to reduce or eliminate the early retirement subsidies. Would the opponents of cash balance plans prefer one of these options? With this caveat in mind, regulations that are only aimed at preventing cash balance conversions would seem unwise and unlikely to achieve the desired result.
Testimoy of Robert F. Hill, Esq.:
. . . Congress has enacted very specific and very different legal frameworks for defined benefit plans and defined contribution plans. These rules were designed—with a recognition that taxpayers pay hundreds of millions of dollars to subsidize the private tax-qualified pension system--to assure that employees were treated fairly and to avoid abusive practices that undermine the promises made to employees and the employees’ reasonable expectations. The Joint Committee on Taxation has estimated that in 2004 taxpayers will pay about $89 billion in foregone taxes to subsidize the private tax-qualified pension system. It is only right and proper that Congress assure that the taxpayers’ monies provide a system that is fair to all workers, including older workers.
Testimony of Nancy M. Pfotenhauer, President, Independent Women’s Forum:
We believe the emergence of hybrid plans is encouraging news for many and a cause for particular hope among women. In fact, one benchmark study done in 1998 by the Society of Actuaries found that an amazing 77% of women do better under a cash balance approach. They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement. Despite this promise, it is clear that controversy exists about how firms should transition to hybrid plans. Many have questioned the fairness of changing pension approaches for employees over 40 years of age.An alternative perspective, and one that IWF believes has credence, is that any adoption of restrictions that effectively limit the ability of companies to transition to hybrid plans places the financial well-being of the relatively few employees who have had the luxury of staying with one company for a long period of time (decades), have the luxury of taking early retirement, and have the luxury of taking their pension benefit in the form of an annuity rather than as a lump sum, ahead of all of the employees who do not have these options.
On the heels of Treasury's announcement yesterday that it was withdrawing proposed regulations governing cash balance plans, House Workforce Committee leaders announced plans to move forward and look at solutions to solve the cash balance plan quagmire. The announcement is here and provides in part:
“Our Committee is not going to shy away from complex issues and difficult decisions, and that is why we plan to work in a responsible manner to pursue permanent solutions that preserve cash balance pension plans as a viable retirement security option for workers and employers,” Boehner added. “We look forward to working with all parties, including the Treasury Department, in a productive manner to implement responsible solutions and preserve the integrity of the defined benefit system.”“It’s important we proceed with a careful, deliberative approach that starts with a hearing and bipartisan discussions on our Committee as we draft a comprehensive bill this year to strengthen and reform the defined benefit system,” said Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX). “There are plenty of hybrid plans that currently need the certainty we will provide in our legislation and we will work to ensure that defined benefit pensions remain a vital and thriving employee benefit far into the future.”
The IRS and Treasury issued this press release today:
Today, the Treasury Department and the IRS announced the withdrawal of proposed regulations on cash balance pension plans and cash balance conversions.The regulations are being withdrawn to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration's Budget for Fiscal Year 2005. The legislative proposal would require a five-year "hold harmless" period for current employees following a cash balance conversion, would ban benefit "wear-away" after a cash balance conversion, and would clarify the legal status of cash balance plans and other hybrid plans.
What about all of those cash balance plans sitting at the IRS, waiting for determination letters to be issued? Announcement 2004-57 published with the press release contains the following statement:
Beginning September 15, 1999, cases in which an application for a determination letter or a plan under examination involved a cash balance conversion were required to be submitted to the Washington, D.C. office of the IRS for technical advice on the conversion's effect on the plan's qualified status. Many such cases were submitted and are still pending. Treasury and the IRS do not intend to process these technical advice cases while cash balance plan and cash balance conversion issues are under consideration by Congress.
U.S. District Judge Catherine Blake for the federal district court in Maryland has provided her opinion on the whole cash balance plan controversy in Tootle v. ARINC, Inc., et al., holding that a company's cash balance plan did not discriminate against employees because of their age.
Facts of the Case. The company's defined benefit plan ("DB Plan") was converted to a cash balance pension plan ("CB Plan"), effective January 1, 1999. Employees who were eligible to participate in the DB Plan at the time of the conversion and who were transferred to the new CB Plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the DB Plan, as well as bonus "transition credits." A group of almost 300 employees were offered a choice between continuing under the DB plan or switching to the CB plan. Under the CB plan the percentage of the employee's salary that was to be credited to the account (the "contribution credit") increased with the employee's age. For example, an employee under age 25 would receive a contribution credit of 3% of salary, while an employee age 60 or over would receive a contribution credit of 16% of salary.
The plaintiff was offered a choice between the two plans and agreed to the switch. When he was terminated in March 2002, he elected to take a lump sum distribution of $94,772.24 for his accrued benefits under the CB Plan. An actuary for ARINC had calculated that if the plaintiff had remained under the DB Plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42. (The court stated that the "difference of over $14,000 in these two figures may be attributed in part to the transition credits of $11,466 which [plaintiff] received when he switched to the cash balance plan.") The plaintiff brought suit under the Age Discrimination in Employment Act and ERISA and sought class certification for all participants who "suffered age discrimination due to the conversion" of the plans. The plaintiff claimed that the conversion constituted unlawful age discrimination under ERISA, saying that the manner in which accrued benefits were calculated under the CB Plan favored younger workers.
What the Court Had to Say About Cash Balance Plans
1. "The claim of age discrimination arises because money contributed to a younger employee will be worth more (when expressed as an annuity starting at age 65) than the same amount of money contributed to an older employee, because the contribution to the younger employee will have more years to accrue interest before normal retirement age. . . Stated another way, if any employer contributes the same amount to an employee's cash balance account every year, the value of those annual benefits (when expressed as an annuity starting at age 65) decreases with every passing year. . . This inevitably results in a declining benefit accrual rate as an employee ages, in apparent violation of ERISA. In other words, all cash balance plans per se violate the ERISA age discrimination provision, by virtue of their design (See Eaton, 117 F. Supp. 2d at 814-15, 823 (noting that if this argument is accepted "it is likely that hundreds of cash balance plans with millions of participants will be deemed illegal")."
2. "The existing case law on this specific issue is sparse and divided. Compare Cooper, 274 F. Supp. 2d at 1022 (finding violation of ERISA), with Eaton, 117 F. Supp. 2d at 826 (finding no violation of ERISA); see also Campbell, 327 F.3d at 10 (noting problems with this theory of age discrimination). I agree with Judge Hamilton's conclusion in Eaton that ERISA's age discrimination provisions do not bar all cash balance plans. First, the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age. See Eaton, 117 F. Supp. 2d at 826-29. Statutory headings in the text of the original enactment and in a parallel age discrimination provision in the Internal Revenue Code enacted at the same time both refer to accrual of benefits "beyond normal retirement age." See id. at 826 (citing 26 U.S.C. section 411(b)(1)(H) and Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, 100 Stat. 1874, 1975). Statements in the legislative history confirm that ERISA's age discrimination provisions were enacted to protect employees after normal retirement age. See Id. at 827-29."
3. "Applying the ERISA provisions designed for traditional defined benefit plans to cash balance plans could lead to illogical results, as illustrated in this case. On its face the terms of the ARINC cash balance plan appear to favor older employees. All employees are entitled to regular interest credits at the same guaranteed rate, the regular contribution credits are based on a percentage of an employee's salary that increases with age, and the transition credits were provided in terms slightly more favorable to older employees. The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual's account balance, as the ERISA provisions designed for traditional defined contribution plans would direct. Judge Hamilton followed a similar approach in Eaton, adopting the defendant's suggestion to measure benefit accrual by the changes in an individual's account balance from year to year. See 117 F. Supp. 2d at 832-33. Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton ARINC's cash balance plan does not discriminate against employees because of their age."
Comments: This case is very important in that it provides another federal district court's "take" on the cash balance plan controversy, with the count now being 3 to 1 (with 3 courts generally holding that CB Plans do not violate ERISA, and the lone case of Cooper v. IBM et al. holding that they do.) It is interesting to note that Judge Blake in this recent case relied heavily on the reasoning in the Eaton case (holding CB plans did not violate ERISA). Oddly enough, the Eaton case was never even mentioned in the Cooper case which was decided last year.
The Tootle case also seems to be consistent with Treasury's recent proposals which would "clarify that a cash balance plan satisfies the age-discrimination rules if the plan provides pay credits for older participants that are not less than the pay credits for younger participants, in the same manner as any defined contribution plan."
You can read more about the cash balance plan controversy at this link. Also, PlanSponsor.com has a great article on the case here.
Another "whipsaw" cash balance plan case to add to your reading list--West v. AK Steel Corporation Retirement Accumulation Plan, USDC So Ohio, 1:02cv0001. (No link available.) The issue presented in the case was whether the lump sum payments to plaintiffs complied with ERISA. The plan was paying out lump sum distributions equal to the hypothetical account balance. Plaintiffs contended that they should have been paid a higher amount equal to the actuarial equivalent of the annual benefit to which plaintiffs would have been entitled if they had remained in the plan until age 65.
The court held that the plan's payment of lump sum distributions did not comply with ERISA and reiterated the positions espoused in other cases, upholding the resulting "whipsaw" effect. (The Treasury Department has defined this whole "whipsaw" problem in its recent cash balance plan proposals, issued in February of this year:
Three federal appellate courts have addressed the calculation of lump sum distributions under cash balance plans. Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia-Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001). All three courts held that a participant's hypothetical account balance must be projected to normal retirement age using the plan's interest crediting rate, converted to an annuity, and then discounted to a lump sum using the section 417(e) interest rate. If the plan's interest crediting rate is the section 417(e) rate, the present value of the normal retirement age annuity will be the same as the hypothetical account balance. However, if the plan's interest crediting rate is higher than the section 417(e) rate, the present value of the normal retirement age annuity - and the amount of any lump sum distribution - will be greater than the hypothetical account balance. This result is sometimes referred to as "whipsaw."These federal court decisions have followed an analysis set out in IRS Notice 96-8. Many plan sponsors have responded to whipsaw by limiting the interest crediting rate to the section 417(e) rate (or a deemed equivalent). This response effectively makes the section 417(e) rate a ceiling on plan interest credits.
While the West case is not a court of appeals decision, arguments which were rejected in the case are particularly noteworthy. (At one point in the opinion, the court goes so far as to call the defendant's arguments as "creative.") Of interest is the fact that the defendants in the case tried to argue that the "accrued benefit" under the plan was the hypothetical account balance, but the court noted that the plan document clearly defined it as a "single life annuity commencing at normal retirement age." The court did indicate in dicta, however, that "[i]f the plan drafters had intended otherwise. . . they could have indicated that intent in the language of the Plan."
The court went on to reject the defendant's argument that, when projecting the benefit forward to an annuity at age 65 (for purposes of discounting back for the lump sum amount) the interest to be utilized should be governed by section 204(c)(3) of ERISA. Instead, the court held that the rate which should be utilized for projecting the benefit forward to an annuity at age 65 was the rate at which future interest credits would be calculated under the terms of the plan.
As far as the discount rate to be utilized in determining the lump sum benefit, the court relied on IRS Notice 96-8, Regulation section 1.411(a)-11(d), and previous cases which had upheld the Notice and Regulation, and rejected the defendant's argument that Regulation section 1.411(a)-11(d) was invalidated when ERISA section 203(e) of ERISA was amended in 1994.
Please note that under the Bush administration's cash balance plan proposals, whipsaw would be eliminated prospectively, as indicated in the 2004 Blue Book entitled "General Explanations of the Administration's Fiscal Year 2005 Revenue Proposals." :
The proposal would eliminate whipsaw, providing that a cash balance plan may distribute a participant's account balance as a lump sum distribution as long as the plan does not credit interest in excess of a market rate of return. The Secretary would be authorized to provide safe harbors for what constitutes a market rate of return and to prescribe appropriate conditions regarding the calculation of plan distributions. This would permit plan sponsors to give higher interest credits to participants, resulting in larger retirement accumulations.
More cash balance plan reading:
An article by Dallas L. Salisbury, president and CEO of the Employee Benefit Research Institute from BenefitNews.com--"Will cash balance plans survive?"
Judge Patrick Murphy has issued a Memorandum and Order in the case of Cooper v. IBM Personal Pension Plan and IBM Corporation. The Memorandum and Order grants plaintiffs' motion to strike defendants' attempt to assert "an affirmative defense out of time, or, in the alternative, to compel discovery and for extension of time." IBM was arguing against the retroactive relief requested by plaintiffs based upon an argument that IBM was "blind-sided by what is characterized as a drastic change in the law." IBM argued that the Court's declaration that IBM's 1995 PCF and 1999 cash balance plan violated the age discrimination prohibitions of ERISA section 204(b)91)(H) was a "startling new development in pension law" so that the "Court should exercise its discretion and grant only prospective relief."
The Court says the following, in granting plaintiffs' motion to strike:
. . . IBM is by no means in the sympathetic position of the employer in Manhart. Defined benefit plans are highly regulated and strictly scrutinized relative to defined contribution plans. The prohibition against age discrimination existed long before the appearance of cash balance plans. Indeed, the voluminous record in this case unequivocally shows that cash balance plans were a "response" to the long standing restrictive proscriptions that are the woof [warp?] and weave of a defined benefit plan. If this Court is correct, then the class is entitled to retroactive relief. There has not been a change in the law. All that has changed is IBM's clever, but ineffectual, response to law that it finds too restrictive for its business model. . .
Yesterday, the Treasury Department released its legislative proposals regarding cash balance plans in response to a requirement Congress imposed in a recent Appropriations Act (which you can read about here.) The proposal is contained in the 2004 Blue Book entitled "General Explanations of the Administration's Fiscal Year 2005 Revenue Proposals." No actual statutory language has been published as yet.
You can read the Treasury Department's press release here. Remarks by Secretary John Snow: "This proposal will make sure that every company converting to a cash balance plan deals fairly with its older workers. Cash balance plans play an important role in achieving retirement security for millions of American workers and their families. But we must make sure that companies changing from a traditional pension to a cash balance pension include a fair transition for older workers. Cash balance plans can be a better option, particularly for today's younger, more mobile workforce."
By the way, Benefitslink has posted that portion of the Blue Book pertaining to the cash balance plan proposals entitled "Strengthening the Employer Based Pension System" here.
Response to the proposals:
The American Benefits Council: "Treasury's hybrid pension plan proposal offers some good news, some cause for concern."
The ERISA Industry Committee: "Administration Proposes Legislation for Hybrid / Cash Balance Plans."
Towers Perrin in a press release: "Towers Perrin Says Treasury Department's Proposed Legislation to Protect Defined Benefit Plans and Older Workers Reaffirms Legitimacy of Cash Balance Plans."
Finally, a Summary of 2/2/04 Treasury Briefing on Bush Administration Legislative Recommendations Regarding Hybrid Pension Plans Prepared by the Benefits Group of Davis and Harman LLP from Benefitslink as well.
The Wall Street Journal has this article: "Pension Rules Proposed: Measure Aims to Protect Older Workers if Concerns Shift to Cash-Balance Plan." The article reports: "The proposal, part of the Bush administration's budget, is politically charged. Though intended to address concerns of both companies and their older workers, the plan has received only tepid support from employers, and also is drawing fire from employee advocates."
The New York Times: "Treasury Dept. Plans New 'Cash Balance' Pension Regulations."
Reuters via Forbes.com: "US Treasury offers new cash balance pension rules."
The first Law Firm report on the proposal:
Faegre & Benson: "Treasury Proposes Legislation Approving Cash Balance Pension Plans Prospectively."
Some of you may have read a recent article in a newsletter from a major benefits consulting firm which discussed developments in the cash balance plan litigation arena. The article states that "[t]he first appellate court to consider whether the plan design violates federal age discrimination laws has ruled in favor of the plans." The article later describes how in an unpublished opinion, the "Ninth Circuit Court of Appeals ruled on CBS’ adoption of a cash balance plan and the conversion method it used" and "held that the plan and conversion method do not violate ERISA’s fiduciary standards, do not result in an impermissible cutback of benefits and do not violate federal age discrimination laws."
Here is what the unpublished opinion in Godinez et al. v. CBS Corporation et al., 81 Fed.Appx. 949, 2003 WL 22803700 (9th Cir. 2003), actually said:
1. "Appellants' ERISA fiduciary claim fails because ERISA's fiduciary duty provisions are not implicated where the employer, acting as the Retirement Plan's settlor, changes the form or structure of the Plan."
2. "Appellants' claim under 29 U.S.C. section 1054(g) fails because Appellants did not put forth any substantive evidence to show a decrease in their benefit accruals. As CBS carried its burden of production on summary judgment, Appellants were required to present specific evidence in response. . . .The closest Appellants came to offering evidence of a decline in their accrual rate was their experts' promise that future study and analysis of the Cash Balance Plan would establish that the Appellants' pensions would have been larger had CBS continued the Traditional Pension Plan. However, no calculations were provided to the court, and Appellants' conclusory assertions are insufficient to defeat summary judgment. Therefore, the district court did not err in granting summary judgment in favor of CBS on Appellants' claim for decrease of accrued benefits under ERISA."
3. "Appellants' ADEA claim fails because they failed to produce any evidence that conversion to the Cash Balance Plan disproportionately impacted older employees."
When I first read the article, I became intrigued that there might now be a Court of Appeals decision supportive of cash balance plans. However, after reading the unpublished opinion, I do not think the case comes out quite as strongly in favor of cash balance plans as the article seems to imply, ruling instead that there was not any substantive evidence presented in favor of appellants' claims.
For more on the cash balance plan controversy, there are links pertaining to cash balance plan litigation in the right-hand column. You can also access previous posts on the subject here or here.
I enjoyed Alvin Lurie's article posted at Benefitslink.com entitled: "What Will Judge Posner Do Next? Balm or Bomb for Cash Balance Plans?" For those who do not know, the IBM case, Cooper et al. v. The IBM Personal Pension Plan et al., will go to the same court on appeal (the 7th Circuit) that decided the Xerox case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, with Judge Richard Posner being the likely author of any opinion in the IBM appeal. The article addresses the speculation that is running rampant that Judge Posner will not overturn the lower court decision which ruled that the IBM cash balance plan violated ERISA. Mr. Lurie calls the speculation "unwarranted" and predicts that "IBM has a fair chance of prevailing in his court, if the judge has his way." The article distinguishes the Xerox case in which Judge Posner ruled in favor of employees' claims:
But the point of this piece is not to criticize Xerox, but rather to describe it sufficiently to delineate its difference from the "rate of accrual" issue, as relates to the statutory test for age discrimination, which is the focus of the IBM litigation. . . It is immediately apparent that the matter decided in Xerox has no bearing on the discrimination issue in IBM, save that the decisions in both cases are heavily influenced by the "frontloaded" cash balance formats at issue, that is, "interest adjustments to a hypothetical (pay-based) allocation . . . provided through normal retirement age, even though the employee terminates employment . . . before that age." (Treas. Reg. Sec 1.401(a)(4)-8(c)(3)(iv).) Neither the issue of the proper discount rate that so dominated the Xerox decision nor the matter of the effect of pre-retirement cashouts has pertinence to IBM."
Please note that Judge Posner will be the featured judge for Howard Bashman's "20 questions for the appellate judge" in December.
Also, a previous post here at Benefitsblog notes that, in a CNBC interview with Judge Posner entitled "Richard Posner discusses his position on law, pragmatism and democracy" on July 28, 2003 (prior to the issuance of the opinion in the Xerox case) Mario Bartiromo for CNBC asked Judge Posner about his views regarding employees suing pension funds over reduced payments. His response was that with all of the litigation and all of the "detailed regulations of pension funds," Congress might have to "step in at some point and change the rules."
Unfortunately, Congress has not changed the rules, but suspended the rules (which you can read about here, here and here), creating a great deal of further legal uncertainty for these types of plans.
As discussed in previous posts, last week Congressional conferees completed their reconciliation of the House and Senate versions of the Treasury/Transportation appropriations legislation which included controversial language pertaining to cash balance plans. According to the American Benefits Council, the final report includes the following language:
Within one hundred and eighty days of enactment, the Secretary of the Treasury shall present to the Congress a proposal for legislation which would provide transition relief for older and longer-service participants affected by conversions of their employers' traditional pension plans to cash balance pension plans: Provided, that none of the funds made available in this Act may be used by the Secretary of the Treasury or his designee to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, or any amendments reaching results similar to such proposed amendments.
Thus, according to this language, the Treasury Department would be precluded from promulgating regulations on age discrimination in defined benefit plans – including hybrid plans – during the 2004 fiscal year that ends September 30, 2004.
The U.S. Chamber of Commerce's response to the proposed language is here. (Link via Benefitslink.com.)
The New York Times is reporting that Xerox has reached a settlement with former plan participants of the Xerox cash balance plan in the amount of $239 million: "Xerox Settles Pension Suit With Retirees."
The proposed settlement is contingent on court approval and involves former plan participants who left Xerox's employ between the years 1990 and 2000 and elected to take a lump sum when they left in lieu of a pension commencing when they reached age 65. According to the article, Xerox said it would not have to contribute additional money to the plan to cover the payout until at least 2005.
Quote of Note: "Xerox had said it might appeal the case to the Supreme Court but acknowledged with the settlement that it had abandoned that idea. A spokeswoman, Christa Carone, said the company wanted 'to avoid any further uncertainty or legal expenses" stemming from the dispute.'"
You can access the press release from Xerox here.
If you would like to learn more about the case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, you can access some links to articles discussing the case under "Cash Balance Plan Litigation Links" over on the right. (Scroll down some.)
The following articles discuss reaction to the agreement made by Congressional conferees to adopt the Harkin's Amendment relating to cash balance plans (discussed here and here):
Also, from the Wall Street Journal:
From Plan Sponsor: "Cash Balance Regs "On" Again - But…"
From the American Benefits Council: "Council Condemns Inclusion of Cash Balance Provision in Appropriations Bill"
From ERIC: "ERIC Statement on Passage of Harkin Cash Balance Amendment"
Reuters is reporting on what transpired late yesterday as representatives from the House and the Senate hashed out how to go forward with the Sanders' and the Harkin's measures addressing cash balance plans. (Previous post on the issues here.) The article by Reuters--"U.S. lawmakers hit cash balance pension rules"--indicates the following:
Negotiators from both chambers had to reconcile the two approaches as part of the annual spending bill that funds the Treasury Department. They basically embraced the Senate provision and dropped the House language involving the court case.
The article stated further:
. . . lawmakers also said the Treasury must offer legislation within 180 days on how best to convert traditional pensions to the newer cash balance plans -- giving the administration another chance to set out a regulatory framework for such changes that Congress might embrace.
You can read about the Senate provision here.
More on this later . . .
The American Benefits Council states on their website that "Congressional appropriations conferees are expected to meet no later than November 12 to reconcile the House and Senate versions of the Treasury/Transportation appropriations bill (H.R. 2989) containing harmful cash balance plan provisions." They also state that "[a]s part of the Council's continuing effort to strip these provisions from the final conference report" they have developed a draft letter for plan sponsors to complete and fax to the appropriations conferees and congressional leadership staff. You can access this information on their website.
At the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" (discussed in previous posts here and here) Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, encouraged practitioners to write their Congressmen regarding cash balance plans, since he said that there seems to have been very little support for cash balance plans expressed on the House or the Senate floor when the Sanders and the Harkin's measures were passed.
The American Benefits Council also has a legal opinion on cash balance plans prepared by Richard Epstein which you can access here. Highlights of the opinion are as follows:
(1) "In the House floor debate, the proponents of Section 742 [Sanders Amendment] portrayed CBF pension plans as a witch's brew of age discrimination, breach of contract, and theft of employe pension assets, which they claimed the Cooper decision remedies. Their portrayal of CBF plans and Cooper does not withstand scrutiny. . ."
(2) "The apparent aim of this provision is to block the Treasury Department from issuing further regulations on ERISA section 204(b)(1)(H) or from participating in the Cooper litigation or other litigation insofar as it wishes to register its disagreement with Cooper. Even the requirement that the Department be silent on the entire matter would be deeply troublesome. Even more troublesome is that the agency may be allowed to speak on one side of the issue but not the other (i.e. it may not assist in overturning, but could assist in upholding Cooper) . . . . It is a generally accepted principle of constitutional law that the Congress may not through its legislation trample on the prerogatives of the Executive Branch in the discharge of its duty to see that the laws are faithfully executed. . . ."
(3) "The IBM plan and all other CBF plans satisfy ERISA section 204(b)(1)(H) by using the same rate of interest throughout the plan. The district court, however, ruled that the rate of benefit accrual referred to in that provision is the same as the employee's total benefit accrued, thereby requiring the same dollar amount of interest for the 24- and 64-year old employees in the above example. The district court, in effect, confused velocity with distance. It is as though the court decreed that two people, one 24 and the other 64, running at the same speed, will be deemed to have run at the same speed only if both cover the same distance by the time each reaches age 65, 40 years apart. That, however, is a conceptual muddle and a physical impossibility. Congress clearly did not mandate such a nonsensical result."
(4) "The result in Cooper cannot be justified on a public policy basis to avoid discrimination against older employees. To the contrary, it effectively mandates reverse age-discrimination, on an unprecedented scale."
("CBF" stands for "cash balance formula.")
The irony of all of this is that tomorrow will be a big day for deciding issues pertaining to reverse age-discrimination: Congressional appropriations conferees will be deciding the fate of the Sanders and Harkin's measures while at the same time the U.S. Supreme Court will hear oral arguments in the General Dynamics case to decide the fate of reverse age-discrimination claims.
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a "hypothetical account" for each employee and credits the account with hypothetical "pay credits" and "interest credits." However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)
Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:
(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)
(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury's cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the "Sanders Amendment" here and the Senate amendment called the "Harkin Amendment" here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.
(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are "stuck" at the national office (400 or so of them, according to Mr. Sweetnam) due to the "freeze" on determination letters. Under this "freeze," determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.
What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was "well-reasoned" so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a "risk analysis" and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be "topped up" to the highest rate of benefit accrual of any other younger employee under the plan so that any "risk analysis" should include this possibility.
Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:
(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.
(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.
(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.
Yesterday, I noted that the Senate had voted to block the Treasury Department from issuing regulations governing cash balance plans. The amendment--referred to as the "Harkin's amendment" as introduced by Senator Tom Harkin (D-IA)--is Amendment No. 1905 to H.R. 2989, the Transportation, Treasury, and Independent Agencies Appropriations Act of 2004. The Amendment reads as follows:
(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)You can find out more about the bill at this link. You can access the Congressional Record here and here.SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.
As most will recall, an opinion was issued last summer--Cooper et al. v. the IBM Personal Pension Plan and IBM Corporation--holding that the IBM cash balance plan violated certain provisions of ERISA.
According to the Congressional Record, Senator Harkin made these comments about the measure before its passage:
I offer this analogy. Let's say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked