Author: jfortenberry@fortenberrylaw.com

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The regulations are being withdrawn to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration’s Budget for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.

The Board of Trustees for the Financial Accounting Foundation issued this press release today–“Financial Accounting Foundation Trustees Issue Statement Opposing Legislative Proposals to Curb FASB Independence“:

. . . [We] strongly oppose any current or proposed legislation that would undermine the independence of the FASB by preempting, overriding, or delaying the FASB’s ongoing effort to improve accounting for equity-based compensation. We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard setting and the credibility of U.S. financial reporting will be dangerously compromised. If Congress sends the message that special interests are able, through legislation, to overturn expert accounting judgment arrived at through open and thorough due process, necessary and timely improvements in financial reporting will likely become impossible. We also strongly oppose such legislation because it will severely impede the important ongoing efforts by the FAF Trustees and the FASB to achieve international convergence of high quality accounting standards that will enable global capital markets to better serve the needs of U.S. companies and investors.

The IRS has issued final 401(a)(9) required minimum distribution regulations pertaining to defined benefit plans and annuity contracts here (via Benefitslink.com.) The preamble states that these final regulations make a number of “significant modifications” to the proposed and temporary section 401(a)(9) regulations. Effective Date:

As provided in the temporary and proposed regulations, these final regulations apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003. However, in order to fulfill the commitment in Notice 2003-2 [via Benefitslink.com] to allow plans to continue to use certain provisions from the pre-existing proposed regulations and to provide plan sponsors sufficient time to make any adjustments in their plans needed to comply with these regulations, a distribution from a defined benefit plan or annuity contract for calendar years 2003, 2004, and 2005 will not fail to satisfy section 401(a)(9) merely because the payments do not satisfy the rules in these final regulations, provided the payments satisfy section 401(a)(9) based on a reasonable and good faith interpretation of the provisions of section 401(a)(9). For a plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001 proposed regulations, the 2002 temporary and proposed regulations, or these final regulations, a distribution will be deemed to satisfy a reasonable good faith interpretation of section 401(a)(9).

Catching up from the past week . . .

This is an article worth reading from the Boston Globe: “Temps become permanent fixtures.” According to the article, the “permanent temp” represents a growing trend in the workplace which can present benefits challenges for the employer:

A major drawback to many temporary assignments, however, remains the lack of health insurance and other benefits. Lawmakers and policymakers are only beginning to look at whether the nation needs to change its benefits system — based on the assumption of longtime service to a single employer — to address the growing temporary work force. Meanwhile, some companies are revamping benefit plans to cover temp employees, in part because of the growing role of short-term labor in corporate work forces.

Securities class action lawsuits declined in 2003 according to this report from the Stanford Law School Securities Class Action Clearinghouse. Thanks to the Securities Law Beacon for the pointer.

I guess I missed this news last week: “Wanted: Psychologist to ease pressure of working at SEC.” The Securities Litigation Watch has the job posting here and some humorous comments about the development here.

Roth CPA.com has a summary of new Revenue Ruling 2004-55 dealing with the taxation of employer-paid, short-term and long-term disability plans.

And, finally, how about this very “fun” Revenue Ruling 2004-37 (via Benefitslink.com) on “determining the source of a pension payment to a nonresident alien individual from a defined benefit plan where the trust forming part of the plan is a trust created or organized in the United States” and is “qualified”? (Read that as a cure for insomnia!)

A good article on off-shore outsourcing in the legal field is here.

Dr. Paul Kengor has written a beautiful tribute to Ronald Reagan here: “Ronald Reagan’s Rainbow.”

An important Information Letter from the DOL discusses the issue of whether or not an “affiliated service group” within the meaning of section 414(m) of the Internal Revenue Code is a “single employer” for purposes of the MEWA rules of section 3(40) of ERISA. Conclusion: “‘[A]ffiliated service group’ status under section 414(m) of the Code would not, in and of itself, support a conclusion that a group of two or more trades or businesses would be a single employer for purposes of section 3(40) of ERISA.”

Revenue Ruling 2004-57 (via Benefitslink.com) and Announcement 2004-52 (also via Benefitslink.com) focus on this issue: Does a plan fail to be an eligible governmental plan under section 457(b) of the Internal Revenue Code solely because the plan is offered and administered by a labor union for the benefit of those State employees who are union members? Answer: No, if certain conditions are met:

[A]n eligible governmental employer may adopt, for its collectively-bargained employees, a plan created by the union for employees of the governmental employer and offered and administered by the union, provided that the plan is “established and maintained by” the governmental employer. . . If the governmental employer has adopted the plan in a manner that reflects the employer as having established and maintained the plan, a plan does not fail to be an “eligible governmental section 457(b) plan” merely because the plan is created, offered and administered by a union even if it is in addition to another plan that is offered and administered by the governmental employer.

Read the guidance for more details . . .

Dechert LLP has an article here on a case that is making waves in Pennsylvania: Ignatz v. Commonwealth of Pennsylvania. An excerpt from the article:

In a surprising and troubling decision, the Commonwealth Court of Pennsylvania recently decided in Ignatz v. Commonwealth of Pennsylvania that amounts deferred by an employee under an unfunded, non-qualified plan of deferred compensation are subject to personal income tax in the year earned. Notwithstanding clear federal law to the contrary, in a question of first impression for Pennsylvania, the Commonwealth Court determined that such deferred compensation is constructively received when earned.