They are increasingly combining a 401(k) plan with a profit-sharing and a cash-balance plan
. "Some business owners say, 'We want to maximize what we can contribute, but we want to have only one plan,'" he says.
Yu, 2005, Cash-Balance Plan
Conversions: Evidence on Excise Taxes and Implicit Contracts, Journal of Risk and Insurance, 72: 321-352.
Two major differences between a traditional defined-benefit plan and a cash-balance plan
Meanwhile, cash-balance plan
sponsors only recently have received some guidance by the Treasury Department and IRS with respect to issues under the Pension Protection Act of 2006.
"Rather than leave that cash 'just sitting there,' Hiller said, Zell is making use of it to fund the buyouts and -- in a program he announced Tuesday -- to make a one-time, cash contribution of 2% of employees' salaries to a new cash-balance plan
early this year.
Courts have disagreed over whether or not the cash-balance plan
discriminates against older workers and Congress has not moved to eliminate this uncertainty.
had discriminated against its older employees when it converted to a cash-balance plan
One of the most important issues facing the pension world today involves companies replacing their traditional, defined-benefit pension plans with cash-balance plans
. Although cash-balance plans
have been around since 1985, they went virtually unnoticed until IBM wanted to establish a cash-balance plan
in 1999 and some employees sued.
In the past, however, some companies used the shift from a traditional pension to a cash-balance plan
to reduce sharply the pensions they paid longtime employees.
Under the plan - effective from 30 June 2003 - the airline will switch its non-pilot US employees to a cash-balance plan
, which states the retirement benefit as an account balance rather than a monthly payment.
Long-time employees are likely to lose substantial benefits when an employer changes from a defined-benefit plan to a cash-balance plan
. Workers in their 40s and 50s can see as much as a 30 to 50 percent reduction in their final benefits, with a resulting need to work extra years just to achieve the originally anticipated benefit.
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.