Controversial Pension Plans Give IRS Pause
Responding to a growing controversy, the Internal Revenue Service will drastically slow down new approvals of pension plans that may provide larger benefits to younger workers at the expense of veteran employees.
The IRS directed its regional division chiefs in Los Angeles, New York, Baltimore, Dallas and Cincinnati to ask for technical advice from Washington before allowing any company to change its pension plan to so-called cash-balance plans.
The cash-balance pensions allow a much faster buildup of pension benefits for younger workers, who are then able to leave a job and take a relatively generous cash payout for the value of their pension rights.
Some plans have been changed to cash balance without a major effect on older workers. However, at some firms, the increased money available for the younger workers has been shifted from the pensions of older employees. Some workers in their 40s, with 15 or 20 years of service, face major reductions in the value of the pensions they will receive when they ultimately retire.
The IRS memo sets a new national policy that requires close examination of each pension plan application, rather than quick approval that had been routine in the past. A recently leaked IRS memo from one regional office raised doubts about the acceptability of the plan changes. But the new memo from IRS headquarters is much more sweeping in its impact. It tells all regional officials “to request technical advice” before ruling on any application to change a pension plan.
As a result, companies that want to change their pension plans to a cash-balance system will wait longer. The requirement that each case be referred to IRS headquarters for technical advice could add six months to a year to the process of approval, knowledgeable sources said.
The seemingly arcane pension issue is becoming a hot political topic, with dozens of members of Congress voicing their concern over the treatment of older workers.
The Senate has scheduled hearings next week on cash-balance pensions, and the Equal Employment Opportunity Commission has labeled the subject a top-priority issue. EEOC Chairwoman Ida Castro met with 10 members of Congress earlier this week and said she wants to get feedback from employer groups, unions, civil rights groups and other federal agencies “to determine the best course of action.”
Corporations contend that cash-balance pensions are a good tool for attracting young, technically skilled workers in a tight labor market. These workers do not expect to stay with a single job for 30 or 40 years. The cash-balance system means a bigger short-term buildup of money in their accounts.
Some companies have allowed workers to decide whether to select the new program or remain in a traditional pension system, which typically has a big buildup in benefits in the last five years before retirement.
Controversy arose when some firms, such as IBM, put the new system into effect without allowing all workers to choose. IBM, which adopted a cash-balance program in July, indicated that workers 50 and over could stay in the old retirement system. This drew vociferous complaints from many workers in their 40s, who expect their IBM pensions to be cut by 30% to 40% under the plan.
The new IRS memo was welcomed by Rep. Bernard Sanders (I-Vt.), who has been one of the congressional leaders in raising the issue. “I’m not saying a cash-balance plan itself is good or bad,” he said. “The important thing is to give people a choice. If young workers, want it, that’s OK. But don’t do it at the expense of people who worked at the company for 25 or 30 years by cutting their pensions 30% or 50%.”
The IRS is involved because pension plans need to comply with federal rules that allow pension balances to build up without being subject to taxes, and allow companies to deduct their contributions.
The tax rules say that a worker’s pension benefits “may not decrease on account of increasing age or service.” The question is whether some of the cash-balance plans violate that provision of the tax law.
EEOC involvement could be triggered by the agency’s mandate to enforce the law that forbids discrimination against workers aged 40 and over.
