Treasury Withdraws Proposed Pension Plan Regulations

Treasury Department Press Release

The U.S. Treasury Department and the Internal Revenue Service have announced that they will withdraw recently proposed regulations that created an obstacle to the provision of transition relief for conversions to cash balance pension plans. The proposed regulations cover the provision of disproportionate benefits to highly compensated employees.

A tax-qualified pension plan, including a cash balance plan, may not provide disproportionate benefits to highly compensated employees. The proposed nondiscrimination regulations would have applied that rule to different types of cash balance plans.

Comments have raised serious concerns as to the effect of the proposed nondiscrimination regulations on cash balance plan conversions. In many conversions, employers provide transition relief to certain workers - for example, by providing workers a choice whether to accrue future benefits under the traditional plan or the cash balance plan, providing workers the greater of the benefit under the traditional plan or the cash balance plan, “grandfathering” current workers under the traditional plan, or giving “transition credits” to certain workers. Employers provide this transition relief to protect the interests of their workers.

“The proposed nondiscrimination regulations would have had the unintended effect of making it more difficult for employers to provide workers with transition relief in cash balance conversions,” stated Treasury Assistant Secretary for Tax Policy Pamela Olson. “When the effect was identified, Treasury and IRS decided to withdraw the proposed nondiscrimination regulations immediately so they do not prevent employers from reducing the impact of cash balance conversions on their employees.”

Treasury and the IRS intend to re-propose nondiscrimination regulations in the future that do not create a regulatory impediment to the provision of transition relief for cash balance conversions. This action does not affect the proposed age-discrimination regulations for cash balance plans and cash balance conversions.

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