Washington (Dec. 12, 2002) -- The Treasury Department and the Internal Revenue Service have issued proposed regulations which address the application of the pension plan age discrimination rules to cash balance plans.

"The proposed regulations would provide long-needed guidance on significant questions about cash balance plans" which have become popular with many employers over the past decade, said Treasury assistant secretary for tax policy Pam Olson.

A cash balance pension plan combines the benefit formula of a defined contribution plan with the investment security of a defined benefit plan. The proposed regulations would apply to cash balance plans the same rule that applies to defined contribution plans. Consequently, a cash balance plan would generally satisfy the age discrimination rules if the pay credits to an employee’s account are not less than the pay credits that would be made if the employee were younger.

The proposed regulations also address "conversions" of traditional pension plans to cash balance plans. Under these rules, the plan must be age-neutral before the conversion, age-neutral after the conversion, and age-neutral in the process of the conversion. This means that each employee following a conversion must start with a cash balance account calculated on an age-neutral basis. Assuming that is the case, a "wear-away" period, during which cash balance benefits catch up with benefits under the traditional plan, would not run afoul of the proposed rules.

-- Electronic Accountant Newswire staff

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