Treasury offers new plan on converting pensions to cash-balance programs

WASHINGTON -- The US Treasury Department yesterday put forward a new proposal on how companies could convert their traditional pension plans to cash balance ones, a type that some say discriminates against older workers.

"Cash balance plans play an important role in achieving retirement security for millions of American workers and their families. But we must make sure that companies changing from a traditional pension to a cash balance pension include a fair transition for older workers," said Treasury Secretary John Snow in a statement.

The Treasury Department proposed regulations for cash balance conversions in December 2002, but lawmakers on Capitol Hill voted to block them. Treasury believes cash balance plans make more sense for "today's younger, more mobile workforce."

In a traditional pension plan, benefits are typically based on a formula factoring length of service and the highest salaries earned, boosting payouts for older workers. Cash balance plans, which factor in a worker's average salary over the years, may reduce benefits for older employees.

In Treasury's plan, unveiled as part of the proposed 2005 federal budget, benefits earned by the worker under the the cash balance plan would have to be at least as much as under the old plan, for five years after the conversion.

To enforce the provision, Treasury said it would levy a 100 percent excise tax on any shortfalls between the benefits required under the new rules and those actually provided by a company.

"We believe that, faced with such an excise tax, employers will provide the benefits required under the proposal," Treasury said in an explanatory paper.

The excise tax would not apply if the company gave workers a choice between a cash balance plan and a traditional pension or if it grandfathered in current workers.

Treasury also proposed that cash balance plans satisfy anti-age discrimination laws if they treat older workers at least as well as younger ones. The issue of whether the plans inherently discriminate by age is the subject of several legal challenges now.

The plan drew a cautious response from one leading Democrat, Representative George Miller of California, who said it "leaves a lot of unanswered questions and possibly dangerous loopholes."