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1 1 (July 29, 2005)

handle is hein.crs/crsuntaabpu0001 and id is 1 raw text is: Order Code RS22214 July 29, 2005 CRS Report for Congress Received through the CRS Web Cash Balance Pension Plans: Selected Legal Issues Erika Lunder Legislative Attorney American Law Division Jennifer Staman Law Clerk American Law Division Summary Over the past few years, cash balance pension plans have received significant attention. In particular, three issues have been controversial: the negative effect of a plan conversion on older employees due to wear-away, the whipsaw effect that may occur when computing a lump-sum payment of benefits prior to normal retirement age, and the claim that these plans violate federal laws prohibiting age discrimination. This report discusses the wear-away and whipsaw issues, a proposal by the Treasury Department that addresses them, and relevant legislation introduced in the 109th Congress (H.R. 2830 and S. 1304). For information on the age discrimination issue, see CRS Report RL33004, Cash Balance Pension Plans and Claims ofAge Discrimination. Federal laws, including the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC), distinguish between two types of pension plans: defined benefit plans and defined contribution plans.' In a defined benefit plan, an employee is promised a future benefit that is traditionally expressed as an annuity beginning at normal retirement age. The annuity is typically determined by a formula that factors in the employee's years of service and the average salary of his or her highest salaried years. In a defined contribution plan, the employee is promised that the employer will currently make a specified contribution to the employee's pension account. The contribution is generally a percentage of the employee's salary. A cash balance plan is a hybrid pension plan in that it is a defined benefit plan that looks like a defined contribution plan because the employee's promised future benefits are stated as his or her account balance! The account is hypothetical (i.e., each employee does not actually have an account), but is used to conceptualize the amount of benefits the Congressional Research Service + The Library of Congress 1 For more information, see CRS Report RL30196, Pension Issues: Cash-Balance Plans, by Patrick Purcell.

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