INTRODUCTION
The cash-balance pension plan is corporate America's newest effort to shift more of the risk for retirement benefits to employees.There are mainly two types of pensions: defined benefit and defined contribution. Under a defined benefit plan, the benefit that an employee receives is normally based on the length of a workers employment and the wages that were received. Additionally, each employee does not have a separate account in these programs, as the money to support the pensions is generally administered through a trust established by the employer. In a defined contribution plan the employer makes regular deposits into an account established for each employee. The employee is not guaranteed to receive a given amount during retirement but only the amount in the account (Legal Information Institute, Online). Traditional/defined benefit pension plan contribution calculations are based on the assumption that employees will stay with the company for decades. The cash balance pension plan is a pay as you go system with annual contributions based on pre-defined pension benefits for a specific year. This type of pension plan violates Federal laws, challenges the tax code, and disadvantages older workers. These factors indicate that cash balance pension plans socially and economically discriminate against employees with longer lengths of service and therefore should not be encouraged as a viable pension option.
FEDERAL LAWS
Pensions are governed primarily by federal statutory law. Congress passed the Employee Retirement Income Security Act (ERISA) under its Constitutional mandate to regulate interstate commerce. ERISA was passed in response to the mismanagement of funds in direct benefit plans. All employers who engage in interstate commerce and provide defined benefit plans to their employees must abide by ERISA guidelines. ERISA is highly complicated and provides detailed regulations for many aspects of defined contribution plans. ERISA also establishes the Pension Benefit Guaranty Corporation (PBGC) to insure defined benefits plans. Employers must pay premiums so that their plans are covered by the PBGC (Legal Information Institute, Online).
The Equal Employment Opportunity Commission (EEOC) reported that in 2000 it received approximately a 2% increase in charge filings alleging Age Discrimination in Employment Act (ADEA) violations in cash-balance pension plans. This increase in cash balance related discrimination charges has prompted the EEOC to create an internal task force to guide it in its review of cash-balance pension plans. The task force's mandate is "to recommend to the commission whether cash-balance pension plans -- which reduce the expected retirement benefits of older employees, while increasing the benefits to younger workers -- are unlawful under the ADEA" (Anonymous, Online).
THE TAX CODE
To encourage employers to provide pension plans that follow Congressionally-established guidelines, Congress has authorized tax breaks to employers who follow the guidelines. Title 26 (the Internal Revenue Code) establishes numerous qualifications and requirements in order for an employer to receive special tax treatment (Legal Information Institute, Online). Although the IRS approved the underlying structure for cash balance plans in the mid-1980s, it intends to issue guidance early next year on cash balance pension plans because of the rising concern of employees. Legal cases involving this issue have been brought against AT&T and Onan Corporation and IBM employees are internally battling their Board. While the tax courts have not yet ruled on these cases, the rulings will have significant implications for the future of cash balance pension plans. Presently, the IRS position on cash balance conversions is that the plan should be disqualified because it violates the backl oading rules, in part because it simultaneously operates several benefit formulas, and uses different interest rates to calculate benefits for workers and pensioners (Anand, Online). Additionally, the IRS has mandated that all determinations and examinations of cash balance plan conversions be reviewed by its national office in order to formulate policy on various qualification issues.
The American Academy of Actuaries, a Washington-based professional association, has urged the IRS to provide formal guidance that would let employers provide the types of arrangements that CIGNA, Aetna and other companies have provided. This guidance is necessary because the IRS is currently being accused, by critics who believe conversions to cash balance plans often hurt older workers, of encouraging discriminatory practices which violate the Age Discrimination in Employment Act and the Employee Retirement Income Security Act (Sayan, Online). Specifically, ADEA prohibits employers from changing pension contribution calculations in ways that reduce the benefits of older members of defined benefit plans. Cash balance plan supporters say cash balance plans can increase pension benefits for the majority of workers, by making it easier for workers who change jobs to take defined benefit pension assets with them. However, some older workers, lawyers and legislators say a cash balance plan sponsor that pays the same rate on the assets of older and younger workers discriminates against the older workers by leaving them with lower benefits.
DISCRIMINATION
In order to fund cash balance plans, employers are changing pension contribution calculations in ways that reduce benefits to older members participating in traditional pension plans. Traditional plans typically provide each participant with a compensation credit of a certain percentage of wages for every year of service. The compensation factor is not based on compensation in the year of service. Instead, it is based on the average of, say, the three, five, or 10 years ending with separation from service. Therefore, the usual pattern of increasing wages with increased years of service yields a continuous rise in the compensation element. This type of plan rewards employees with longer lengths of service because the compensation credit is geared to the participant's career-high earnings level (Lurie, Online).
Cash balance pension plans develops a lump sum amount that becomes the basis of the benefit paid to each participant. The formula credits each participant annually with a contribution credit, which is based on a percentage of current compensation. Cash balance plans establish book entries that track individual contribution and interest credits based on market appreciation or depreciation and actual dividends. Additionally, the employer is not required to actually make contributions to a cash balance plan, instead the contributions are geared to actuarial calculations designed to produce the requisite funds to satisfy the employer's liabilities under the plan (Lurie, Online). Few cash-balance plans are implemented from scratch. They are installed as conversions of traditional plans. The conversion process is complex, and employees often cannot figure out what the impact will be until later. In a number of cases, workers have been enraged to find that their benefits will be reduced under this type of plan.
Edward A. Zelinsky, a law professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York, asserts in a recent paper that cash balance plans violate age discrimination laws. Zelinsky asserted that cash balance plans violate age discrimination laws by reducing pension wealth of older workersand that older workers would fare better under conventional defined benefit plans (Pensions FY Investments, June 26 in Williams, Online). Zelinsky went on to say that historically, the Internal Revenue Code, the Employee Retirement Income Security Act and the Age Discrimination in Employment Act all prohibit age discrimination in retirement plans (Williams, Online). Zelinsky further pointed out that the discrimination element test is the rate of an employees benefit accrual. Therefore, when an employee's defined benefit accrual is stopped or the rate of benefit accrual is reduced "because of the attainment of any age," discrimination is in fact occurring. Because of the impact of such widespread discrimination, national and trade media, Congress, litigation attorneys, special interest groups, academicians, government agencies, employees of a few cash balance sponsors, cash balance sponsors themselves and pension practitioners have all voiced their opposition and lend their efforts to opposing cash balance pension plans.
CONCLUSION
The cash-balance pension plan is corporate America's newest effort to shift more of the risk for retirement benefits to employees. Its design, plan administration, and overall proven and anticipated effect on millions of Americans has alarmed many institutions, companies and individuals representing government, law and financial structures. This type of pension plan has been proven to violate Federal laws, continues to challenge the tax code, and not only disadvantages but discriminates against older workers. These factors indicate that cash balance pension plans socially and economically discriminate against employees with longer lengths of service and therefore should not be encouraged as a viable pension option.
WORKS CITEDAnand, Vineeta. It's A No-Win Situation For Cash Balance. Pensions & Investments. Chicago. Jun 25, 2001. Available Online. July 10, 2001.
Anonymous. Markup: The Pension Scorecard For Key Legal Cases, Legislation And Regulations. Pension Benefits. New York. March 2001. Available Online. July 10, 2001.
Legal Information Institute. Pension Law: An Overview. Available Online. July 25, 2001.
Lurie, Alvin D. Age Discrimination Or Age Justification? The Case Of The Shrinking Future Internet Credits Under Cash Balance Plans. The Tax Lawyer. Washington. Winter 2001. Available Online. July 10, 2001.
Sayan, Serdar and Arzdar Kiraci. Parametric Pension Reform With Higher Retirement Ages: A Computational Investigation Of Alternatives For A Pay-As-You-Go-Based Pension System. Journal of Economic Dynamics & Control. Amsterdam. June/July 2001. Available Online. July 10, 2001.
Williams, Fred. Law Professor Criticizes Cash Balance Defenders. Pensions & Investments. Chicago. March 19, 2001. Available Online. July 10, 2001.
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