WASHINGTON -- IBM Corp.'s cash balance pension plan faces possible scrutiny by the Labor Department and the EEOC.
Hundreds of IBM plan participants complained to the Labor Department after Big Blue converted its traditional defined benefit plan to a cash balance plan on July 1. As a result, officials there have begun collecting preliminary information to determine whether to launch a full-blown investigation.
And, a group of older IBM employees is expected to file an age discrimination complaint this month with the Equal Employment Opportunity Commission, said Christopher G. Mackaronis, an employment discrimination lawyer at Bell, Boyd & Lloyd, Washington. Mr. Mackaronis expects to be hired by the group.
EEOC Commissioner Ida Castro "is very interested in the issue (of age discrimination and cash balance plans) and has begun to look at it," said Reginald Welch, a spokesman. He said EEOC officials have met with numerous "external stakeholders" including lawmakers, plaintiffs' lawyers and advocacy groups, on the issue.
Rep. Bernie Sanders, I-Vt., where IBM is the largest private employer, believes the company's cash balance plan is discriminatory. He is pushing regulators to scrutinize the plan.
Mr. Sanders also is introducing legislation that would penalize companies that convert their traditional pension plans into hybrid cash balance pension plans but don't offer workers the choice of staying in the old plan.
Under his proposal, targeted at IBM, companies that don't offer employees a choice of plans would be treated as if they had terminated their old pension plans. That means they'd be hit with a reversion tax of up to 50% on the surplus pension assets used to set up the new cash balance plan.
IBM could have to pony up an estimated $4 billion in excise taxes on its $8 billion-plus pension surplus because of its failure to let all workers opt to stay in the old plan. IBM offered the old plan only to a small group of employees within five years of early retirement.
The legislation would be effective retroactively to plans that convert after June 29, a day before IBM's cash balance plan became effective. Mr. Sanders plans to introduce the legislation when Congress returns after Labor Day.
Mr. Sanders' proposal also would revoke part of the preamble of Section 401(a)(4) in the tax code, which suggests the IRS does not believe cash balance pension plans violate age discrimination laws.
Mr. Sanders also had asked IRS Commissioner Charles O. Rossotti to wipe out that sentence, but Mr. Rossotti is expected to stand by the preamble, sources said. The agency is expected to tell Mr. Sanders and other lawmakers it has found no evidence so far to believe cash balance plans are discriminatory, sources said.
Negative reception
Although the IRS' response is a cause for joy among pension plan sponsors that have such plans and pension consultants that sell such plans, it is expected to incur the wrath of lawmakers and pension activists.
"I think (the Internal Revenue Service) is going to get embarrassed," said one Capitol Hill staffer who asked not to be identified.
Already, Sen. James Jeffords, R-Vt., chairman of the Senate Health, Education, Labor and Pensions Committee, has scheduled a hearing on cash balance plans for Sept. 21, where the IRS response is expected to come up.
Cash balance plans build up benefits more evenly over a career than traditional defined benefit plans, and tend to favor younger employees. Older, midcareer participants, therefore, can lose out when companies switch to cash balance.
"They (IBM) drastically cut pension and health-care benefits simultaneously and at this late age, there is no way someone near 50 can make up for what is lost," said Lynda French, who works in the software and service group of IBM's Austin, Texas, group.
Ms. French's husband, Tom, who just turned 49, missed being eligible to stay in the old plan by less than two months. He expects to see his retirement benefits cut because he will have to participate in the new cash balance pension plan.
Meanwhile, an issue in the Labor Department's investigation is IBM's alleged failure to give plan participants sufficient information about their benefits to decide, for example, whether to opt for a monthly pension check or take a lump sum from the pension plans.
Information needed
IBM employees nearing retirement -- who have the choice of staying in the company's traditional pension plan -- also have complained they do not have enough information to decide whether to switch to the cash balance plan, or stay put.
Janet Kruger, who quit IBM July 16 after 23 years, heads a loosely knit group of employees and former employees called the IBM Employees Benefits Action Coalition. She said she hasn't been able to get the company to tell her what her accrued vested benefit was under the traditional pension plan so she can figure out whether to opt for a lump sum, or to take annuities.
A Labor Department spokeswoman declined to discuss if the agency is investigating the IBM pension plan, although a senior department official has said privately the agency is interested in such an investigation.
Norman Stein, a professor of law at the University of Alabama, Tuscaloosa, informally has counseled many IBM plan participants. Said Mr. Stein: "I would be surprised if the Labor Department weren't looking into it and figuring out if there's a problem, and if there is a problem, what to do about it."
Former IBM employee Ms. Kruger also said she has received an estimate of her benefits but IBM has told her that final numbers won't be available until after June 2000.
"I think it is a violation of the ERISA laws to not tell you what you are entitled to . . . until well over a year after you leave," she said.
But Jana Weatherbee, an IBM spokeswoman, said the company has informed all participants of their accrued benefit at retirement age. And they also can call or e-mail officials in the company's human resources department.
"We want to make sure everyone understands this, and if they don't get the information they can ask to speak to someone else so they get their questions answered," she said.
Brian T. Ortelere, a pension lawyer with Pepper Hamilton LLP in Philadelphia, said pension plan sponsors have a fiduciary duty to make certain that participants understand the information about benefits they are given.
