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A Cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypotheticality of the individual accounts was crucial in the early adoption of such plans because it enabled conversion of traditional plans without declaring a plan termination. The employees' accounts earn a fixed rate of return that can change over a period of time from year to year. Although it works much like a defined contribution plan, it is actually a defined benefit plan for legal purposes. In 2003, over 20% of workers with defined benefit plans were in cash balance plans, according to Bureau of Labor Statistics data. Most of these plans resulted from conversions from traditional defined benefit plans. However the status of such plans is currently in legal limbo due to court decisions (see below), and the number of conversions has slowed. In 2005 congress was considering legislation to clarify the status of cash balance plans. A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. ...
A hypothesis (= assumption in ancient Greek) is a proposed explanation for a phenomenon. ...
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For ERISA defined benefit pension plans, the plan may be terminated by the []employer if the employer can demonstrate that it is fully funded and can purchase annuity contracts for the accrued benefits for all its employees or it may be terminated by the PBGC (Pension Benefit Guaranty Corporation) if...
The Bureau of Labor Statistics (BLS) is the unit of the United States Department of Labor which is the principal fact-finding agency for the U.S. government in the field of labor economics and statistics. ...
Cash balance conversions have been controversial and have raised the ire of workers and their advocates. In 2005 the Government Accountability Office (GAO) released a report analyzing the effects of cash balance conversions on worker benefits. They found that in a typical conversion the cash balance plan would provide lower benefits for most workers than if the defined benefit plan had remained unchanged and the worker had stayed in their job until retirement age. This decline in benefits tends to be largest for older workers. This is because in a traditional plan, where benefits are based on final average pay, the "value" of the benefits accrues much faster for older workers than for younger workers. In contrast, in a DC or cash balance plan, all workers contribute at the same rate, and a dollar contributed by a younger worker is actually more valuable because it has more time to compound before retirement. Thus some argue that cash balance plans hurt workers. The Government Accountability Office (GAO) is the audit, evaluation, and investigative agency of the United States Congress. ...
On the other hand, this may not be the relevant comparison. If the alternative to cash balance conversion is that the plan is frozen or terminated (with the vested balance going to the worker), all workers would be much worse off than in a cash balance conversion. This is a realistic possibility; tens of thousands of defined benefit plans have been frozen and/or terminated in the last two decades, far more than have been converted to cash balance plans. Likewise, for the many employees who leave their job before retirement (whether voluntarily or not), many would be better off under the cash balance conversion than under the original defined benefit plan. In addition, about half of cash balance conversions have grandfathered in some or all of the the existing participants in the defined benefit plan.
Types of pensions
The ubiquitous 401(k) plan is an example of a defined contribution plan because the Internal Revenue Code §414(i) states [t]hat the term defined contribution plan means any plan that provides retirement benefits to a worker based solely on the amount contributed to the (worker’s individual) account and any (investment) income, gains net of any expenses and losses.-1...
Fundraising is the term referring to the process of soliciting and gathering money by requesting donations from individuals, businesses, charitable foundations, or governmental agencies. ...
Retirement is the status of a worker who has stopped working. ...
In accounting, an expense is a general term for an outgoing payment made by a business or individual. ...
Under the definition of accrued benefit under Code §411(a)(7)(ii) in the case of a plan that is not a defined benefit plan, [the term accrued benefit] means the balance [in] the employee’s [individual] account. On the other hand for defined benefit plans, Section §411(a)(7)(i) states that “accrued benefit” means “the employee’s [] annual benefit” as it is “determined under the plan … expressed in the form of an … [annuity] … commencing at normal retirement age.” Finally, the Code’s definition for defined benefit plans are all plans that are not defined contribution plans. A definition may be a statement of the essential properties of a certain thing, or a statement of equivalence between one expression and another, usually more complex expression that gives the meaning of the first. ...
A pension is a steady income paid to a person (usually after retirement). ...
A pension is a steady income paid to a person (usually after retirement). ...
Cash balance plans are defined benefit plans that look like defined contribution plans. A worker’s right to a pension in a defined benefit plan represents a contingent and hence uncertain financial obligation to the employer sponsoring the plan. Section 412 of the Code requires the employer to make annual contributions to the plan to ensure that the plan assets will be sufficient to pay the promised benefits later at retirement. As part of this process the plan is required to have an actuary perform annual “actuarial valuations” in which the present value of each worker’s “accrued benefit” is estimated and then each present value for each worker covered by the plan is added up so that the minimum annual contribution can be determined. The examples and perspective in this article may not represent a worldwide view. ...
Modal logic, or (less commonly) intensional logic is the branch of logic that deals with sentences that are qualified by modalities such as can, could, might, may, must, possibly, and necessarily, and others. ...
Employment is a contract between two parties, one being the employer and the other being the employee. ...
Retirement is the status of a worker who has stopped working. ...
Actuaries (from the Latin verb agere to do, drive) are business professionals who deal with the financial impact of risk. ...
The largest and the smallest element of a set are called extreme values, or extreme records. ...
The “actuarial present values” for the “accrued benefit” for each worker is the lump sum dollar amount that represents the financial value of the employer’s liability on the date of the valuation. It does not include the future accrual of pension benefits nor does it include the effect of projected future salary increases. Thus the lump sum value for each worker is not based on that worker’s projected final salary at retirement, but only the worker’s salary on the date of valuation. This page is about the dollar currency. ...
Finance addresses the ways in which individuals, business entities and other organizations allocate and use monetary resources over time. ...
In the most general sense, a liability is anything that is a hindrance, or puts one at a disadvantage. ...
Valuation can mean: Valuation (finance) Valuation (mathematics) This is a disambiguation page — a list of articles associated with the same title. ...
In general, accrual is derived from the verb accrue, which describes the grouping or gathering of things together. ...
The examples and perspective in this article may not represent a worldwide view. ...
Design of Plans Some cash balance plans communicate to workers that these “actuarial present values” are “hypothetical accounts” because upon termination of service, the employer will give the former worker the option to take “all his money” from the pension plan out. In reality, if both the worker and employer agree, even in a normal defined benefit plan a former worker may take away “all his money” from the pension plan. There are no legal differences in this “portability” aspect between a traditional defined benefit plan and a cash balance plan. Communication is the process of exchanging information usually via a common system of symbols. ...
Termination as a technical term has different meanings. ...
Reality in everyday usage means everything that exists. ...
The examples and perspective in this article may not represent a worldwide view. ...
A tradition is a story or a custom that is memorized and passed down from generation to generation, originally without the need for a writing system. ...
For use in social policy, see the article social welfare. ...
A typical “design” for a cash balance plan would provide each worker a “hypothetical account” and pay credits in the current year of say 5% of current salary. In addition, the cash balance plan would provide an interest credit of say 6% of the prior year’s balance in each worker’s “hypothetical account” so that the current year’s balance would be the sum of the prior year’s balance and the current year’s pay credit and an interest credit on prior year’s balance. For a worker who starts at age 25 with a $2000 a month starting salary, he would start with a zero account balance and the first year’s pay credit would be $1200 leaving him with an end of first year balance of $1200 in his “hypothetical” account. Because his beginning of first year balance was zero, his interest credit for the first year is also zero. In his second year, with a 3.5% salary increase his monthly salary would be $2070 on his 26th birthday. The 5% pay credit for this second year would be $1242. Because his second year “hypothetical account” starts the year with a $1200 balance, the interest credit at 6% would be $72. Adding the beginning balance of $1200 to the $1242 pay credit and $72 interest credit would give an ending balance in the “hypothetical” account of $2514 ($2514 = $1200 + $1242 + $72) for the second year. Repeat this process for each ensuing year until termination. This creates a hypothetical account balance from which the legally required benefit -- an annuity payable for life of the worker starting at normal retirement age -- can be calculated. This is due to requirement that benefits be definitely determinable found in the IRS Regulations Section 1.401. The term credit can have several meanings in different contexts. ...
Lump Sum calculation cases In 1993, the Third Circuit decided in Goldman v. First National Bank of Boston that the terminated worker did not demonstrate that the adoption of the cash balance plan violated age discrimination rules. In 2000, the Eleventh Circuit in Lyons v. Georgia Pacific and the Second Circuit in Esden v. Bank of Boston decided that the employer violated rules for calculating lump sums, and a district court in Eaton vs. Onan Corp. decided that adopting the cash balance plan did not violate age discrimination rules. In early 2003, the First Circuit in Campbell v. BankBoston did not decide that the employer violated the age discrimination rules against a former worker because the former worker made a procedural error and brought the issue up late. To discriminate is to make a distinction between people on the basis of class or category without regard to individual merit. ...
Then in summer of 2003, the Seventh Circuit in Berger v. Xerox Corp. Retirement Plan, decided that the lump sum calculation for workers terminating service prior to retirement who were covered by the defendant cash balance pension plan cannot violate the rules for defined benefit plans and in a district court in Illinois in Cooper vs. IBM Personal Pension Plan, decided that the very design of the cash balance plan – the issue that the Campbell court only reached in dicta – had indeed violated the age discrimination rules because the “rate of benefit accruals” did “decrease” on account the “attainment of any age.” A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute. ...
The Lump Sum cases all held that because cash balance plans were defined benefit plans, they had to abide by the rules for defined benefit plans when the employer calculates the lump sum actuarial present value by first accruing the account balance to normal retirement age and then converting the account balance at retirement age into a life annuity before then discounting back to the current date. Because these cash balance plans were designed to “look like” defined contribution plans, the defendants asserted that these cash balance pension plans were not true defined benefit plans but were “hybrid” plans instead. Therefore, because, they were “hybrids” and looked like defined contribution plans and because workers are only entitled to the actual balance in defined contribution plans, the plaintiffs should get lump sums equal only to their “hypothetical” account balances. In Berger v. Xerox, Judge Richard Posner in a stinging phrase – “for hybrid read unlawful” – held that the lump sum amounts should have been larger. So the cash balance plan is not an exotic “hybrid” plan in the eyes of the law but remained in the defined benefit part of the pension taxonomy. Retirement is the status of a worker who has stopped working. ...
The plaintiff, claimant, or complainant is the party initiating a lawsuit, (also known as an action). ...
Judge Richard Allen Posner (born January 11, 1939, New York City) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ...
This process of taking the account balance forward from the terminated worker’s current age up to the worker’s normal retirement age, before discounting back to the current age is sometimes called the “whipsaw.” If the interest rate used for discounting back is lower than the rate used for interest credits on the hypothetical account balances, then the legally required lump sum values would be higher than the worker’s account balance in his hypothetical account.
The Age Discrimination cases Proponents of cash balance plans advocate that these plans do not violate the age discrimination statutes applicable to defined benefit pension plans. The statutes forbid – in virtually the same words – any plan from reducing “the rate of benefit accrual” for any worker on account “of the attainment of any age.” Ageism is discrimination against a person or group on the grounds of age. ...
Although the Code defines the “accrued benefit” for any worker covered by defined benefit plans as “expressed in the form of an annual benefit commencing at normal retirement age” and defines “normal retirement benefit” as the “greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age,” the supporters of such cash balance plans still argue that the terms “accrued benefit” and “rate of benefit accrual” are ambiguous or undefined .
In Onan Corp., District Court Judge Hamilton agreed with the supporters of cash balance plans and held that the cash balance plan design did not violate age discrimination because the terms “rate of benefit accrual” and “accrued benefit” were not defined in the relevant statutes. He then engaged in an exercise of statutory construction that Professor Ed Zelinsky found fault with. As I discussed above, the terms “accrued benefit” and “rate of benefit accrual” have long been very familiar and unambiguous to pension actuaries. How else could actuaries have constructed the initial balances in each worker’s “hypothetical” account for these new cash balance pension plans? Besides §411(a)(1)(7) of the Code defines “accrued benefit.” Thus pension actuaries are very familiar with changes in accrual rate factors used in a traditional defined benefit pension plan’s formula. Edward Zelinsky is a professor a Cardozo Law School in New York City, in the USA. He is known for his articles on Cash Balance Plans. ...
In mathematics, a divisor of an integer n, also called a factor of n, is an integer which evenly divides n without leaving a remainder. ...
In Cooper, District Court Judge Murphy came to the opposite conclusion because to him, the terms accrued benefit and rate of benefit accrual were not ambiguous. Because benefits accrued at a decreasing rate solely based on increases in age, the plan design of the cash balance plan violated the age discrimination statutes. If this rule is upheld, then all “flat rate pay credit” design cash balance plans would violate age discrimination. A plan sponsor could avoid these problems by setting up a cash balance plan with steadily increasing – or age graded – rates for pay credits. This has the same economic effect as adopting a “career average salary” traditional defined benefit plan. Social welfare can be taken to mean the welfare or well-being of a society. ...
Economics (deriving from the Greek words οίκω [okos], house, and νÎμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ...
Congressional Developments Because of the troublesome age discrimination suits and misunderstanding and frustration by older workers covered by such plans. Congress, notably Senator Charles Grassley of Iowa Republican has a proposal to statutorily fix the problem. It involves outlawing "wearaway". As of this writing, the legislation is still in committee. Charles Ernest Chuck Grassley (born September 17, 1933) is the senior United States Senator from Iowa. ...
Republican is a term used generally to describe a number of different organisations, principles, or political movements, and/or the persons supporting these. ...
See Also The examples and perspective in this article may not represent a worldwide view. ...
The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums...
= References Judge Richard Allen Posner (born January 11, 1939, New York City) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ...
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