The Treasury Department has proposed regulations that
assert that cash balance plans do not discriminate against older
employees, and when its proposal is finalized, the agency plans
to lift the ban on determination letters for plan conversion from
traditional to cash balance. This guidance will help big
companies to move from defined benefit plans to cash balance
ones, and may encourage smaller employers to set up hybrid plans.
American Society of Pension Actuaries executive director Brian H.
Graff says that the decision is probably the most important to
strengthen defined benefit plans since ERISA. Companies will be
able to incorporate pension plateaus, or wearaways, for some
employees during conversion--freezing the traditional plan
accounts and setting up new ones with opening balances that are
worth less than the old plan's benefits. Treasury's guidance
requires employers to be sure that the opening account balance in
the new plan equals at least the current value of the old plan's
benefits, using "reasonable and age neutral" interest rate
assumptions. "Reasonable" is not defined, but companies using
interest rates that are inordinately high will probably have to
deal with the Internal Revenue Service. Those representing
employees who lost benefits in previous switches say they will go
on fighting hybrid plans.