|
|
Cash
Balance and Other Hybrid Plans
Age
discrimination.
The bill clarifies, on a prospective basis, that cash balance plans and pension
equity plans (PEPs) are not inherently age-discriminatory, as long as benefits
are fully vested after three years of service and interest credits do not exceed
a market rate of return. This provision is effective for “periods beginning on
or after June 29, 2005.”
Conversion requirements. The bill prohibits any wearaway upon the conversion of a defined benefit plan to a hybrid plan, generally effective for conversions occurring on or after June 29, 2005. The wearaway prohibition applies to both normal and early retirement benefits.
Whipsaw relief. A cash balance plan does not violate Code section 417(e) merely because it pays a lump sum equal to the account balance, as long as the plan’s interest credit does not exceed a market rate of return. This relief is available for distributions made after the date of enactment.
No inference as to prior years. Because the bill’s cash balance and hybrid plan provisions are prospective only; they do not provide protection for the legal status of these plans for prior years. However, the bill includes a statement that “nothing in the amendments made by this section shall be construed to create any inference with respect to” the application of prior law to hybrid plans. Thus it appears the courts will have the final say about the validity of cash balance and other hybrid plans for prior years. In this regard, sponsors were recently helped by a federal court of appeals decision from the Seventh Circuit that concluded cash balance plans do not violate federal age discrimination laws (Cooper v. IBM, No. 05-3588 (7th Cir. August 7, 2006)).