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PROPOSED PENSION REGULATIONS WOULD INVALIDATE THE MAJORITY OF FORTUNE 100 DEFINED BENEFIT PLANS
Quirks in Proposed Rules Would Trip Up Plans Never Questioned Before: Coalition Recommends Modifications
WASHINGTON, April 9, 2003 – Using a broad new interpretation of age discrimination, proposed pension regulations would invalidate more than two-thirds of surveyed Fortune 100 companies defined benefit plans, a representative of the Coalition to Preserve the Defined Benefit System said today at a two-day public hearing conducted by the Treasury Department and Internal Revenue Service.
“The flaws in the proposed regulations will trip up pension plans that have never before been questioned and are clearly not discriminatory,” said Kathy Cissna, director of retirement plans at R.J. Reynolds, who was speaking on behalf of the group of 57 defined benefit plan sponsors ranging from small organizations to some of the largest U.S. companies. “Were afraid that the proposed regulations will force even more companies to abandon defined benefit plans, which provide a critical source of retirement income to millions of American workers.”
Of the 72 surveyed Fortune 100 companies with defined benefit plans, 50 would fail the proposed regulations while 22 would pass, according to the Coalition-sponsored analysis. Eighteen companies do not currently have defined benefit plans, and 10 of the companies could not be reached, due to time considerations. The analysis, conducted by Watson Wyatt, mainly looked at the formulas of the primary defined benefit plan(s) for salaried workers. It was not an exhaustive review of plan amendments, grandfather provisions or secondary plans. Cissna added that had a total review been possible, the failure rate would likely be considerably higher.
“Despite the good intentions and dedication shown by the agencies in developing the rules, we believe the regulations as proposed would invalidate many long-standing structures and features of todays pension plans,” said Cissna. “The rules would also limit flexibility and innovation in pension plan design and further complicate plan administration.”
One of the Coalitions major concerns with the proposed regulations is the restrictive general rule that applies to defined benefit plans, and the extremely divergent way in which the proposed rules treat defined contribution and cash balance plans on one hand, and all other defined benefit plans on the other hand, Cissna said. About 80 percent of all retirement plans today are defined contribution or cash balance plans.
“This general rule will often force employers with defined benefit plans to spend ten times more on older employees than on younger employees, despite the fact that equal contributions for such employees are sufficient to satisfy age requirements for defined contribution and cash balance plans,” said Cissna. “Workforce rules should not require economic biases in favor of older workers any more than younger workers.”
While commending federal regulators for their decision earlier this week to withdraw the portion of the proposed regulations that would have imposed new comparability nondiscrimination tests on cash balance plans, Cissna also called on them to consider several changes to the proposed regulations:
- Test age discrimination for all retirement plans on the same basis. There should not be a different and more onerous age discrimination rule that applies to only 20 percent of the employer-sponsored plans in existence.
- Adopt an accrued-to-date test rather than an annual test for determining accrual rates.
- Allow offset pension plan designs to test for discrimination on the basis of the gross benefit, not the net benefit.
- Maintain the existing rules for benefit delivery to employees who are older than the plan's normal retirement age, particularly in situations where the plan does not suspend benefits or offset for in-service distributions.
“With these suggested changes, the government can ensure that workers are protected against age discrimination while at the same time avoiding extreme disruption of the defined benefit system,” said Cissna. “At this fragile moment for the defined benefit system, we must ensure rational and consistent age discrimination treatment for pension plan designs and amendments.”
For more information about the Coalition to Preserve the Defined Benefit System or to obtain a copy of the testimony, go to www.preservedb.com.
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