For business owners and professional groups, cash-balance pension plans might present an opportunity to maximize or catch up on their retirement-planning strategies, reduce taxable income, and take advantage of asset and creditor protection.
Considered to be hybrids, cash-balance pension plans are a type of retirement plan that offers the unique characteristics of traditional defined-benefit plans, with annual contributions and promised retirement benefits, and the individual account features and portability of defined-contribution plans.
Although cash-balance pension plans were created in 1985, they have gained momentum since the IRS provided clarity regarding the ICR in late 2010.
Democratic lawmakers, who last year asked the GAO to examine the matter, seized on the report as fresh evidence that the so-called cash-balance pension plans
Despite the growing importance of cash-balance pension plans
in the private retirement system in the United States, we have little evidence on the characteristics of firms that are using these hybrid plans.
The Treasury Department has decided to delay issuing contentious regulations on cash-balance pension plans
until Congress passes legislation on them.
A Senate hearing was held by the Health, Education, Labor, and Pensions Committee in September 1999, chaired by Republican Senator James Jeffords of Vermont, to review the legality of cash-balance pension plans.
Glenn Burkins, "EEOC, Responding to Age-Bias Claims, Will Study Cash-Balance Pension Plans," Wall Street Journal September 15, 1999, p.
Schultz and Glenn Burkins, "Critics of Cash-Balance Pension Plans Will Testify Before Senate Panel Today," Wall Street Journal; September 21, 1999, p.
Controversial bills have been introduced in congress that would limit corporate use of cash-balance pension plans
, which many large companies have gone to, especially in the high-technology industry.
The Pension Protection Act of 2006 (PPA) made permanent the pension provisions of the Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA), including higher dollar limits, an increase in the combined deduction limits brought about by eliminating Internal Revenue Code (IRC) section 404(a)(7), and new rules for cash-balance pension plans.
In the past, plan sponsors might have been hesitant to convert an existing traditional defined benefit plan into a cash-balance plan because many courts had ruled that these plans were discriminatory on the basis of age; however, PPA provides legal certainty for employers and plan sponsors that establish a cash-balance pension plan by clarifying that they do not violate discrimination laws if certain conditions are met.