The Bush administration has proposed rules that would help employers avoid liability for age discrimination when converting traditional pension plans to cash balance plans. We’ll explain what this is about.
How Do Cash Balance Plans Work?
Under cash balance retirement plans, employers contribute a percentage of employee pay plus interest to each employee’s account. Benefits are then paid out in a lump sum if the employee leaves the company after a certain period of time, typically five years. These plans are cheaper for employers to administer than other retirement plans.
Unlike with 401(k) plans, employees don’t own their cash balance accounts and don’t make the investment decisions. And, unlike traditional pension arrangements, employees aren’t guaranteed annual benefits on retirement.
Age Discrimination Alleged
According to a recent U.S. General Accounting Office report, 19% of Fortune 1000 companies offered cash balance plans in 2000. But the Equal Employment Opportunity Commission has also reported that more than 800 claims of age discrimination have been filed over the conversion to cash balance plans.
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The problem is that older workers closer to retirement typically receive less money than they would under a traditional pension program. Generally, when a company converts to a cash balance program, workers are only credited with the amount they earned under the old plan and lose future benefits they would have received under the old plan. What’s more, older workers have less time to accrue the new benefits than younger workers because the benefits are a percentage of what’s earned each year and older workers have fewer years left to work.
Avoiding Liability
The proposed regulations state that cash balance plans satisfy age-discrimination rules as long as the pay credits to an employee’s account are not less than the pay credits that would be made if the employee were younger. Further, the plan must be age-neutral before, during, and after the conversion process. This means each employee following a conversion must start with a cash balance account that’s calculated on an age-neutral basis. And a “wear-away period”—during which older workers may go several years without earning any benefits after the conversion because the balance of their old pension account is higher than what can be earned in the new plan—wouldn’t run afoul of age-bias rules.
For More Information
The government is accepting public comments on the proposed regulations and will hold a public hearing in April 2003 before finalizing the rules.