Category Archives: Cash Balance

Today in ERISA History

June 5, 2000 – The Senate holds hearings on cash balance plans. While this may not seem historic in 2012 when cash balance plans have become an accepted type of plan design, in 2000, during the Senate hearing, cash balance plans are called a fatally flawed plan design that violate the Internal Revenue Code, the Age Discrimination in Employment Act, and ERISA.

The hearings were held before the Senate’s Special Committee on Aging, and generates a 257-page report with the title “The Cash Balance Condundrum: How to Promote Pensions Without Harming Participants“, S. Hrg. 106-849.

And The Lilly Ledbetter Litigation Begins

It took just 8 days for the ERISA-related litigation over the Lilly Ledbetter Fair Pay Act of 2009 to begin. When President Obama signed the Lilly Ledbetter Act into law on January 29, 2009, it was heralded among the non-ERISA community as creating a new world of equal pay for equal work. Among the ERISA-related community, it was heralded as an asteroid the size of Texas headed directly at the plan universe.

This is because: (1) one of the major components of defined contribution and defined benefits plans is compensation; (2) one of the major components of defined benefit and cash balance plan litigation is the Age Discrimination in Employment Act of 1967 (ADEA); and (3) the Lilly Ledbetter Act amended Section 7(d) of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 626(d)) by adding Section 7(d)(3), which states:

    “(3) For purposes of this section, an unlawful practice occurs, with respect to discrimination in compensation in violation of this Act, when a discriminatory compensation decision or other practice is adopted, when a person becomes subject to a discriminatory compensation decision or other practice, or when a person is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.”

On February 6, 2009, eight days after Ledbetter became law, Wayne Tomlinson, the plan participant who brought a lawsuit against El Paso and the El Paso Pension Plan over the conversion of the El Paso Pension plan from a defined benefit plan to a cash balance plan, filed a motion to alter or amend the court’s decision granting summary judgment to El Paso and the El Paso Pension Plan. Specifically, Mr. Tomlinson is asking the court to alter or amend its decision of January 21, 2009, which held that his charge of age discrimination was untimely based on the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007). Since the Lilly Ledbetter Act was designed to rectify that Supreme Court decision, Mr. Tomlinson is asking the U.S. District Court for the District of Colorado to reconsider the decision in his case.

Charlie Sullivan, a professor at Seton Hall Law School, has written a good analysis of whether Ledbetter is retrospective or prospective. (hat tip to Prof. Richard Bales of the Workplace Prof Blog)
[tag]pension protection act, ppa, Lilly Ledbetter, El Paso, Tomlinson, cash balance, ADEA, ERISA[/tag]

Cash Balance Plan Basics Explained

The January 2009 edition of the Journal of Accountancy has a good general article on cash balance plans. Written by Raymond D. Berry of Grant Thorton LLP in Chicago, Plan Design in the Balance: Weighing the Pros and Cons of Cash Balance Plans provides a general explanation of what a cash balance plan is, and how cash balance plans differ from defined contribution plans. It starts:

    A cash balance plan is considered a defined benefit plan and must follow the rules relating to those plans. However, a cash balance plan looks like a defined contribution plan to the participant. A hypothetical account is maintained for each participant, the company makes annual notional contributions, and interest is credited on the account. The contribution to the account is either a flat dollar amount or a percentage of compensation. The interest credited is either a fixed rate (for example, 5%) or tied to an index, such as the 30-year Treasury bond rate. Like any defined benefit plan, benefits are based on the plan’s formula and not on the actual investment earnings on plan assets. Actual investment earnings of the plan assets also do not affect the account balance. Thus, the company rather than the employee bears the investment risk. This is in contrast to a money purchase type of plan where there are actual individual accounts for which the plan sponsor must also make annual contributions. However, a money purchase plan is a defined contribution plan and the plan participant, not the plan sponsor, bears the investment risk.

The article also includes some handy charts, including one of my favorite charts which shows how the interest credit and pay credit works for a participant.

[tag]pension protection act, ppa, IRS, cash balance, Raymond Berry, Journal of Accountancy, ERISA[/tag]

IRS Issues a Correction to the Proposed Cash Balance Regs

The IRS issued a correction to the Proposed Regulations on Hybrid Retirement Plans, commonly known as the proposed cash balance plan regulations, which the Service issued on December 27, 2007. Besides correcting a few grammatical errors, the IRS has made a significant change in Proposed Treas. Reg. section 1.411(a)(13)-1. (hat tip to BenefitsLink.com)

The correction states:

    1. On page 73683, column 3, in the preamble, first paragraph of the column, line 15, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.
    §1.411(a)(13)-1 [Corrected]
    4. On page 73691, column 1, §1.411(a)(13)-1(d)(3)(ii), line 18, the language “larger annual benefit at normal” is corrected to read “smaller annual benefit at normal”.
    5. On page 73691, column 2, §1.411(a)(13)-1(d)(3)(iii)(B), line 9, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.

When these changes are incorporated into the text of the proposed cash balance regulations, the preamble now states:

    The proposed regulations use the term statutory hybrid benefit formula to describe the portion of a defined benefit plan that is an applicable defined benefit plan described in section 411(a)(13)(C)(i) or the portion of the plan that has a similar effect. Specifically, the proposed regulations would define a statutory hybrid benefit formula as a benefit formula that is either a lump sum-based benefit formula or a formula that has an effect similar to a lump sum-based benefit formula. For this purpose, under the proposed regulations, a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accrued benefit payable at normal retirement age (or at benefit commencement, if later) is expressed as a benefit that includes periodic adjustments (including a formula that provides for indexed benefits described in section 411(b)(5)(E)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or at commencement of benefits, if later) for the participant, when compared to a similarly situated, younger individual who is or could be a participant in the plan. Thus, a benefit formula under a plan has an effect similar to a lump sum-based benefit formula if the right to future adjustments accrues at the same time as the benefit that is subject to the adjustments.

When incorporated into proposed Treas. Reg. §1.411(a)(13)-1(d)(3), it now states:

    (d) Definitions–(1) In general. The definitions in this paragraph (d) apply for purposes of this section.
      (2) Lump sum-based benefit formula. The term lump sum-based benefit formula means a lump sum-based benefit formula as defined in Sec. 1.411(b)(5)-1(e)(3).
      (3) Statutory hybrid benefit formula–(i) In general. A statutory hybrid benefit formula means a benefit formula that is either a lump sum-based benefit formula or a formula that is not a lump sum-based benefit formula but that has an effect similar to a lump sum-based benefit formula.
        (ii) Effect similar to a lump sum-based benefit formula. Except as provided in paragraph (d)(3)(iii) of this section, a benefit formula under a defined benefit plan that is not a lump sum-based benefit formula has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accumulated benefit (within the meaning of Sec. 1.411(b)(5)-1(e)(2)) payable at normal retirement age (or benefit commencement, if later) is expressed as a benefit that includes the right to periodic adjustments (including a formula that provides for indexed benefits under Sec. 1.411(b)(5)-1(b)(2)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan. A benefit formula that does not include periodic adjustments is treated as a formula with an effect similar to a lump sum-based benefit formula if the formula is otherwise described in the preceding sentence and the adjustments are provided pursuant to a pattern of repeated plan amendments. See Sec. 1.411(d)-4, A-1(c)(1).
        (iii) Exceptions–(A) Post-retirement benefit adjustments. Post-annuity starting date adjustments of the amounts payable to a participant (such as cost-of-living increases) are disregarded in determining whether a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula.
          (B) Certain variable annuity benefit formulas. If the assumed interest rate used for purposes of the adjustment of amounts payable to a participant under a variable annuity benefit formula is at least 5 percent, then the adjustments under the variable annuity benefit formula are not treated as being reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan, and thus such a variable annuity benefit formula does not have an effect similar to a lump sum-based benefit formula.
          (C) Contributory plans. A benefit formula under a defined benefit plan that provides for a benefit equal to the benefit properly attributable to after-tax employee contributions does not have an effect similar to a lump sum-based benefit formula. See section 411(c)(2) for rules for determining benefits attributable to after-tax employee contributions.

The IRS was accepting comments on the Proposed Regulations on Hybrid Retirement Plans until March 27, 2008.

[tags]Pension Protection Act, ppa, IRS, cash balance, hybrid retirement plan, 1.411(b)(3), ERISA[/tags]

IRS Provides Guidance on Qualified Optional Survivor Annuities (QOSAs)

Today, among several items released by the IRS, is guidance on QOSAs. QOSAs are Qualified Optional Survivor Annuities. Section 1004 of the Pension Protection Act amended Code section 417 to require that plans subject to Code section 401(a)(11) must offer participants a specific optional form of benefit as an alternative to a Qualified Joint & Survivor Annuity. Specifically, for a participant who waives a QJSA, the plan must provide the participant the opportunity to elect a QOSA. The plan must also provide a written explanation to the participant of the terms and conditions of the QOSA.

In Notice 2008-30, the IRS defines a QOSA as:

    as an annuity for the life of a participant with a survivor annuity for the life of the participant’s spouse that is equal to a specified applicable percentage of the amount of the annuity that is payable during the joint lives of the participant and the spouse, and that is the actuarial equivalent of a single life annuity for the life of the participant. A QOSA also includes a distribution option in a form having the effect of such an annuity.

Plans affected by this requirement are defined benefit plans, and defined contribution plans which are subject to the funding standards of Code section 412 or that do not satisfy the requirements to be exempt from Code section 401(a)(11).

Effective for distributions from a plan that is subject to Code section 401(a)(11) with annuity starting dates in plan years beginning after December 31, 2007, Notice 2008-30 clarifies that the amendment saving provision contained in Section 1107 of PPA does not provide relief from the requirements of Code section 411(d)(6) for a plan which operates and amends according to Section 1107 of PPA. Section 1107 of PPA provides that a plan may operate as if the amendment were in effect during the period from the effective date of the changes made by PPA until the date of the actual amendment. Section 1107 of PPA permits a plan sponsor to delay adopting a plan amendment until the last day of the first plan year beginning on or after January 1, 2009. Notice 2008-30 states that:

    an amendment that implements a QOSA is not eligible for any relief, pursuant to Code section 1107 of PPA ’06, from the requirements of Code section 411(d)(6). Thus, for example, a plan amendment that implements a QOSA may eliminate a distribution form or reduce or eliminate a subsidy with respect to a distribution form only to the extent such reduction or elimination is permitted under section 1.411(d)-3.

Q&A 15 of Notice 2008-30 applies a special rule for participants who elect a distribution with a retroactive annuity starting date pursuant to Treas. Reg. 1.417(e)-1(b)(3)(iv) which is before the effective date of Section 1004 of PPA. For such a participant, the date of the first actual payment of benefits based on the retroactive annuity starting date is substituted for the annuity starting date for purposes of applying the rules of this paragraph.

Notice 2008-30 also provides guidance on the level of spouse survivor annuity which must be provided under a QOSA, that spousal consent is not required for the participant to elect to receive a distribution in the form of a QOSA as long as the QOSA is actuarially equivalent to the plan’s QJSA, and that the plan is not required to offer participants a QOSA as an alternative to a Qualified Preretirement Survivor Annuity (QPSA). The plan is not required to provide a QOSA which is actuarially equivalent to the plan’s QJSA as long as the QOSA is at least actuarially equivalent to the plan’s form of benefit that is a single life annuity for the life of the participant payable at the same time as the QOSA.

Notice 2008-30 also provides guidance on PPA section 824 relating to rollovers from eligible retirement plans to Roth IRAs, and PPA section 302 relating to interest rate assumptions for lump sum distributions.

[tags]Pension Protection Act, PPA, Roth IRA, rollover, QOSA, Qualified Optional Survivor Annuity, QJSA, QPSA, IRS, ERISA[/tags]

Compelling Decision From Court in CIGNA Cash Balance Class Action Case

Difficult, time-consuming, and expensive litigation with uncertain results – such as this case represents – is assuredly not a sensible way to manage the Nation’s retirement system for either employers or employees.

        - Judge Mark R. Kravitz
        U.S. District Judge, District of Connecticut
        February 15, 2008

A partial decision is in from the U.S. District Court of Connecticut on Amara v. CIGNA Corp., No. 3:01CV2361 (D. Ct. Feb. 15, 2008), the class action case arising out of CIGNA’s conversion of their traditional defined benefit plan into a cash balance plan in 1998. In a 122-page opus on cash balance conversions, Judge Mark R. Kravitz weaves precedent and prose into a very well-written opinion which is both a fascinating and compelling discussion of these three issues:

    1. whether CIGNA’s cash balance plan is age discriminatory or otherwise violates certain non-forfeiture and anti-backloading rules under ERISA;
    2. whether CIGNA gave notices and other disclosures required by ERISA; and
    3. whether the information CIGNA provided its employees about the conversion and the cash balance plan in summary plan descriptions and other materials satisfied ERISA requirements.

The Court concluded that:

    1. CIGNA’s plan is not age discriminatory and does not violate the non-forfeiture and anti-backloading rules under ERISA;
    2. in effectuating the conversion to the cash balance plan, CIGNA did not give a key notice to employees that is required by ERISA; and
    3. CIGNA’s summary plan descriptions and other materials were inadequate under ERISA and in some instances, downright misleading…. ERISA also emphasizes the importance of disclosure by employers to employees regarding the details of the company’s pension plan, to enable employees to plan for their retirement and to make decisions of profound importance for their lives. This is where CIGNA failed to fulfill its obligations; the company did not provide its employees with the information they needed to understand the conversion from a traditional defined benefit plan to a cash balance plan and its effect on their retirement benefits.

Specifically, the Court determined that:

    1. CIGNA’s cash balance plan did not violate the anti-backloading and non-forfeiture rules in ERISA sections 203(a) and 204(b)(1)(B) (Count One);
    2. CIGNA did not violate the age discrimination provisions I ERISA section 204(b)(1)(H) (Count Three); and
    3. CIGNA was not required to provide notice to rehired employees of the modification of the rehire rule under ERISA section 204(h) (Count Four);
    4. To the extent Plaintiffs maintain an anti-cutback claim under ERISA section 205(g) as part of Count Five, the Court also finds no cutback of accrued benefits occurred under Part B (Count Five);
    5. CIGNA failed to provide notice of a significant reduction in the rate of future benefit accrual under Part B in violation of ERISA section 204(h) (Count Four);
    6. CIGNA failed to adequately disclose material modifications to its pension plan and features that may result in reductions, losses, or forfeitures of benefits that a participant might otherwise reasonably expect to receive, in violation of ERISA section 102 (Count Two); and
    7. CIGNA failed to disclose the extent to which optional forms of benefits were subsidized, as required by Treas. Reg. 1.401(a)-20, Q&A 36, and whether plan participants’ Part A minimum benefit exceeded their Part B account balance, as CIGNA had promised to do in its disclosures regarding Part B (Count Five).

The Court then granted judgment to CIGNA on Counts One, Three, Four (to the extent Count Four addressed the rehire rule), and Five (to the extent Count Five addressed the cutback of accrued benefits). The Court granted judgment to the participants on liability only on Counts Two, Four (to the extent Count Four addresses CIGNA’s 204(h) notices), and Five (to the extent Count Five addressed failures of disclosure).

The Court has ordered the parties to provide briefs no later than March 17, 2008, with responses to those briefs to be filed no later than March 31, 2008, so stay tuned because there will be more to come. The briefs are to address what remedies are available to the parties, and are appropriate in light of the Court’s findings on liability. The Court also ordered the parties to file briefs regarding the issue of how to address any remaining claims, including individual claims.

Additional Informational:

[tags]Pension Protection Act, ppa, cash balance, Amara, CIGNA, retirement, Stephen R. Bruce, Mark R. Kravitz, ERISA[/tags]

IRS Discusses 3 Accrual Rules of 411(b)(1) in Rev. Rul. 2008-7

On Friday, the IRS issued Revenue Ruling 2008-7, discussing the backloading rules for pension plans and Code section 411(b)(1). In 21 pages, the IRS provides an analysis of a traditional pension plan which converted into a cash balance pension plan prior to the effective date of the new conversion requirements under the Pension Protection Act. The issue in this revenue ruling is stated as:

    Does the defined benefit plan described below that was converted from a traditional benefit formula to a lump sum-based benefit formula satisfy the accrual rules of section 411(b)(1)(A), (B), and (C) of the Internal Revenue Code for the 2002 plan year?

The revenue ruling provides a very thorough discussion, almost a tutorial, on the three accrual rules of Code section 411(b)(1)(A), (B), and (C), which a defined benefit plan must satisfy with respect to benefits accruing under the plan. Code section 411(b)(1)(A) is the 3% method. Code section 411(b)(1)(B) is the 133 1/3% rule. Code section 411(b)(1)(C) is the fractional rule. Several pages of discussion, including examples, are provided to each of the three accrual rules.

The amendment converting the traditional defined benefit plan to the cash balance plan was effective for plan year beginning on or after January 1, 2002, and the IRS limited the holding in this revenue ruling specifically to the 2002 plan year.

[tags]Pension Protection Act, ppa, 411(b)(1), Rev. Rul. 2008-7, fractional rule, 133 1/3% rule, cash balance plan, defined benefit, ERISA[/tags]

Decision in Cash Balance Conversion Case May Have Missed the Boat

The 1st Circuit Court of Appeals has delivered a very interesting opinion involving a grab bag of cash balance conversion issues. In Gillis v. SPX Corp. Individual Acct Retirement Plan, No. 07-1777 (Dec. 19, 2007), the 1st Circuit affirmed the district court’s granting of summary judgment in favor of the plan sponsor, stating that they found neither of the participant’s arguments persuasive.

In 1998, SPX sponsored two cash balance plans when it acquired the General Signal Corporation, who sponsored a traditional defined benefit plan. Participant Gillis was a participant in the General Signal Corporation’s traditional defined benefit plan. As part of the acquisition, SPX converted the value of the Participant’s already-accrued benefits in the General Signal Corporation’s traditional defined benefit plan into an opening account balance for the cash balance plans.

After the acquisition, SPX created a third cash balance plan. This cash balance plan was designed to provide benefits to employees who, as of January 1, 1999, were at least 45 years old and who had completed at least 5 years of continuous service with the company. The Court stated the reason behind the creation of this plan was to prevent the possibility of a cutback in benefits for employees who had been working toward the early retirement benefit in the General Signal Corporation (GSX) plan but who had not met the age 55 and 5 years of service requirement for the early retirement benefit at the time of the merger.

The Court states that “under its pension plan, SPX guaranteed that: (1) an employee’s already accrued benefit under the previous GSX pension plan would not be reduced; and (2) upon retirement, the plan administrator would calculate an employee’s potential benefit under each of the three SPX plan options, and grant the employee the highest of the three payment amounts.” The Court does not state where this guarantee was stated or how it was provided to participants.

Participant qualified for the early retirement benefit in the General Signal Corporation traditional defined benefit plan before the acquisition by SPX. In 2002, at age 59, the Participant elected to retire early. The plan administrator calculated the Participant’s lump sum benefit payout under the 3 different SPX plans, and notified the Participant of his payout under the SPX Accrued Benefit plan, which is the plan with the highest payment amount. The Participant challenged the decision by the plan administator on which plan provided for the greatest payment amount, and both sides filed for summary judgment with the district court.

The district court granted summary judgment in favor of the plan sponsor. The 1st Circuit affirmed the district court’s decision, applying a de novo standard of review which means the Court will only reverse the district court’s decision if they find the plan administrator’s determination was arbitrary, capricious, or an abuse of discretion.

At issue was whether the plan administrator’s calculations properly determined the early retirement benefit subsidy. In determining which of the three plans provided the greatest lump sum benefit, the plan administrator calculated the Participant’s benefit as already including the early retirement benefit subsidy granted by the General Signal Corporation’s traditional defined benefit plan, deciding it was already included in the Participant’s opening account balance in SPX’s plan. The Court stated this decision was proper, as including the early retirement subsidy would have resulted in a double-counting windfall to the Participant.

In the classic cash balance conversion case, the Court addresses whether the participant received the greater of two amounts – the benefit provided by the traditional defined benefit plan and the benefit provided by the cash balance plan. In this case, the 1st Circuit sidesteps that issue in an interesting fashion. After stating that the Court need not decide whether the issue is properly before the court because the issue fails on the merits, the Court decides that the Participant failed to submit credible evidence to the district court “demonstrating that the amount he would have accrued under the previous GSX pension plan, calculated as of the age of 65, was more than the amount he would have accrued under the SPX plan, again assuming a retirement age of 65.” Thus, the ‘greater of’ issue is not addressed by the Court and instead the Court begins their analysis with whether the Participant received the ‘greater of’ one of the hypothetical account balances in the cash balance plans.

Another issue in classic cash balance conversion cases is whether the conversion resulted in impermissible age discrimination. The Court rejects this claim with one sentence, stating that since the Court concluded that the Participant’s benefit was not improperly cutback, it necessarily rejects Participant’s claim that any improper cutback was the result of age discrimination.

Additional analysis:

    S. Cotus of the Appellate Law & Practice blog in CA1: In an ERISA Case, There Was No Cutbacks of Benefits.

      “Gillis v. SPX Corporation, No. 07-1777. Most people spend the entire day at the office talking about ERISA cases around the water cooler. After all, talking about this stuff is how men bond. In some offices, the people that can’t talk ERISA are fired simply because they don’t seem like team players. This is an ERISA pension case that will keep people talking in bars for years to come. It is so exciting that I put it under the fold. If you don’t read about it, you might be considered a “little weird” by the other guys.”

[tags]Pension Protection Act, ppa, cash balance, 1st Circuit, Gillis, SPX, GSX, ERISA[/tags]

IRS Rings in the New Year with New Cash Balance Regs and DB Lump Sum Regs


Just in time for the New Year, the IRS has released two major pieces of guidance in the form of proposed regulations. The first is Proposed Regulations on Hybrid Plans, providing guidance on changes made to cash balance plans by the Pension Protection Act and recent litigation. The release of this guidance is well-timed, as I was just finishing work on our Cycle C cash balance plans and can now incorporate this guidance into that plan document before it is released. I am also still working on a law review article about the AK Steel case, which is directly mentioned in these proposed regulations and which I blogged about here.

The other major piece of guidance is the long-awaited guidance on the Measurement of Assets and Liabilities for Pension Funding Purposes. In 74 pages, the IRS has provided proposed regulations on determining plan assets and benefit liabilities for purposes of the funding requirements which apply to single employer defined benefit plans. These regulations state that they are applicable to plan years beginning on or after January 1, 2009. They also state:

However, in the case of a plan for which the effective date of section 430 is delayed in accordance with sections 104 through 106 of the Pension Protection Act of 2006, Public Law 109-280, the regulations are proposed to apply to plan years beginning on or after the date section 430 applies with respect to the plan. For plan years beginning in 2008, plans are permitted to rely on the provisions set forth in these proposed regulations for purposes of satisfying the requirements of section 430.

New Code section 430 generally applies to plan years beginning on or after January 1, 2008. (hat tip to BenefitsLink.com for copies of the proposed regulations)

Look for more on both of these proposed regulations in future posts.

[tags]Pension Protection Act, ppa, lump sum, defined benefit, cash balance, hybrid plan, ERISA[/tags]

Cash Balance Jail Affects Participants


The Sixth Circuit Court of Appeals this week, in Jensen v. Moore Wallace North America, included cash balance jail in their reasoning on why participants in Moore Wallance North’s cash balance plan were not entitled to the plan’s surplus. Jenson v. Moore Wallace North America, No. 06-4388, (6th Cir. Aug. 21, 2007). (hat tip to AltLaw.org)

Cash balance jail is pension geek speak for the moratorium imposed by the IRS on issuing determination letters for cash balance. This moratorium began quietly with a Field Directive issued by the IRS’ Director of Employee Plans on September 15, 1999. In that directive, the Director of Employee Plans required that all open determination letter applications and examination (audit) cases involving defined benefit plan converting to cash balance plans be submitted for technical advice.

In 2003, the moratorium became official when the IRS issued Announcement 2003-1, stating that plans subject to the 1999 Field Directive would not be processed pending issuance of regulations addressing age discrimination in cash balance plans. As of today, those regulations have not been issued.

On August 17, 2006, Congress passed the Pension Protection Act, statutorily validating hybrid plans, including cash balance plans. Earlier this year, in Notice 2007-6, the IRS lifted the moratorium and announced that determination letter applications will now be processed for plans caught in cash balance jail, with many applications completed before the end of 2007.

This brings us to the Sixth Circuit’s decision on August 21, 2007, affirming the district court’s dismissal of the participants’ class action suit seeking $200 million in surplus plan assets. The Court states that they affirm the lower court’s decision because Moore Wallace North America has not terminated or discontinued the plan, and because the wasting-trust doctrine does not apply.

The Court’s reasoning on why the plan is not terminated is this:

To satisfy ERISA’s requirements for terminating a pension plan, the plan administrator must (1) issue to “affected part[ies]” a “written notice of intent to terminate,” which includes the “proposed termination date,” 29 U.S.C. § 1341(a)(2); see also 29 C.F.R. § 4041.21(a)(1); (2) issue “notice to each person who is a participant or beneficiary under the plan . . . specifying the amount of the benefit[s]” to which the individual is entitled, 29 U.S.C. § 1341(b)(2)(B); see also 29 C.F.R.§ 4041.21(a)(2); (3) file a standard termination notice with the PBGC, 29 U.S.C. § 1341(b)(2)(A);see also 29 C.F.R. § 4041.21(a)(3); and (4) distribute the plan assets, 29 U.S.C. § 1341(b)(2)(D); see also 29 C.F.R. § 4041.21(a)(4). The administrator has 180 days from the expiration of the PBGC’s 60-day review period, see 29 C.F.R. § 4041.26(a), to distribute the assets, see id. § 4041.28(a)(1). But if, prior to filing the termination notice with the PBGC, the administrator seeks a request from the IRS for a determination of the plan’s tax-qualification status upon termination, ERISA extends the asset-distribution deadline to 120 days after the IRS provides a favorable determination. Id.

The Court found that the plan never terminated as a matter of law because the plan did not complete the 4 steps required for termination. Because the plan never terminated as a matter of law, any possible claims the plaintiffs might have had stemming from the termination are eliminated. The reason the plan did not complete these 4 termination steps is because it was languishing in cash balance jail.

On April 13, 2001, the plan administrator requested a determination letter from the IRS. Due to the 1999 Field Directive referring determination letter applications for technical advice in cases where the application involved a defined benefit plan which converted to a cash balance plan, the IRS did not issue the plan a determination letter. Instead, the Moore Wallance North America plan went to sit in cash balance jail.

On May 14, 2004, the plan administrator notified retirees with annuitized benefits that the company would not terminate the plan. The Court does not state if the IRS was officially notified that the determination letter application was being withdrawn or if the plan remains in cash balance jail.

On December 22, 2004, the participants filed their class action lawsuit against Moore Wallace North America, contending that the plan had, in fact, terminated, and they were entitled to the surplus assets of roughly $200 million. The district court disagreed, and granted the company’s 12(b)(6) motion to dismiss.

The theoretical question not addressed by the Court is whether the plaintiffs should have a cause of action against the IRS due to the plan’s determination letter application languishing in cash balance jail. Without the 1999 Field Directive and the moratorium, the plan would have been issued a determination letter in 2001 or 2002, and the plan would have terminated, entitling the plaintiffs’ to the surplus. Because of cash balance jail, this did not happen, and the plaintiffs were directly harmed.

[tags]Pension Protection Act, ppa, pension, retirement, cash balance, 1999 Field Directive, Announcement 2003-1, Notice 2007-6, defined benefit, ERISA[/tags]