<nobr>Jul 20, 2007</nobr>

ERIC, Along with Other Trades, Submits Suggestions on "Greater Of" Backloading Issues

ERIC, along with other trade associations, July 18 submitted a jointly signed letter to the Treasury Department proposing possible solutions to the issues surrounding "greater of" cash balance conversions related to the Internal Revenue Service's application of ERISA's backloading tests. The letter outlines potential solutions to the problems created by the IRS's interpretation of the current regulations. The letter was drafted in response to a Treasury request that was made following several meetings with Department officials.

Under the "greater of" approach, the employees in the traditional pension plan continue to earn benefits under the traditional formula after the transition and are given the "greater of" the benefits under that formula and the new cash balance formula. The "greater of" approach is more generous than any other approach, including choice, "A+B," or just leaving employees in the traditional formula. IRS has indicated that because in the year in which one formula becomes more valuable than the other, whereby the employee's benefit could possibly increase by more than the 133-1/3 percent permitted, the design violates the backloading rules.

ERIC has been actively engaged on this issue for more than five years, having first raised it in meetings with IRS officials in 2001, and filing comments detailing our concern. At that time, ERIC was assured the issue would be resolved. Since that time, Treasury has indicated approval of the "greater of" approach multiple times. If adopted, ERIC is concerned that the IRS proposal could result in the disqualification of numerous other pension plans -- not just cash balance plans -- since pension plans have long used the "greater of" approach to deliver generous benefits to employees. This likely would force many plans to use some other conversion method, resulting in less generous benefits for employees and decreased employer flexibility.

Please contact Rosemary Becchi or Mike Chittenden with any questions on this issue.

Text Files:

c7d60000000f.filename.BackloadingLetterFinal.pdf

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