Section of Taxation
Employee Benefits Committee Comment

COMMENTS CONCERNING AGE DISCRIMINATION ISSUES IN
CASH BALANCE PENSION PLANS

Table of Contents | Executive Summary

The following comments (the “Comments”) are the individual views of the members of the Section of Taxation who prepared them and do not represent the position of the American Bar Association or the Section of Taxation.

These Comments were prepared by individual members of the Committee on Employee Benefits of the Section of Taxation of the American Bar Association (the "Section"). Substantive contributions were made by Harry Conaway, Susan Daley, Elizabeth Drigotas, Margery Friedman, Judith Mazo, Priscilla Ryan, Pamela Scott, Steven Spencer, and Robert Stevenson. The Comments were reviewed by Pamela Baker of the Committee on Employee Benefits, David Cowart of the Section’s Committee on Government Submissions and by Elaine Church, Council Director.

Although members of the Section who participated in preparing these Comments have clients who would be affected by the federal tax principles addressed by these comments or have advised clients on the application of such principles, no such member (or the firm or organization to which such member belongs) has been engaged by a client to make a government submission with respect to, or otherwise influence the development or outcome of, the specific subject matter of these Comments.

Contacts:

Pamela Baker
 		 Phone: (312) 876-8989 Fax: (312) 876-7934
Diane J. Fuchs
 		 Phone: (202) 857-4457 Fax: (202) 261-0057
Seth H. Tievsky
 		 Phone: (202) 327-8375 Fax: (202) 327-6714
Thomas R. Hoecker
 		 Phone: (602) 382-6361 Fax: (602) 382-6070
Kyle N. Brown
 		 Phone: (301) 581-4616 Fax: (301) 581-4729
Pamela C. Scott
 		 Phone: (914) 745-4278 Fax: (914) 745-4310

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Table of Contents

I. Executive Summary
II. Background
III. Interest Credit Issue
IV. Single Sum Distribution Issue
V. Basic Conversion Issue
VI. Optional Forms and Ancillary Benefits in Conversions
VII. “Wear-away” Issue
 

I. Executive Summary

On October 20, 1999, the Internal Revenue Service (the "Service") and the Treasury Department published a notice soliciting public comment on cash balance plans, including issues relating to age discrimination in cash balance plans. In response to that solicitation, this Comment will address five principal questions (with related subsidiary issues):

  1. Does the operation of the interest credit in cash balance plans inherently discriminate because of age?
     
  2. Does the method of calculating the single sum distribution in some cash balance plans discriminate because of age?
     
  3. Does the conversion of final average pay defined benefit plans to cash balance plans discriminate because of age?
     
  4. Does the treatment of some ancillary benefits and optional forms of benefit associated with the cash balance formula in some types of conversions discriminate because of age?
     
  5. Does the "wear-away effect" which can result from such conversions discriminate because of age?
     
    • Does enhancing the transition benefits available to some members of the protected class have age discrimination implications?
       
    • What consideration should be given if factors other than age (such as declining interest rates) exacerbate the "wear-away" effect?

The Comment will provide some factual and legal background, then discuss the foregoing issues.

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