WASHINGTON -- Lawmakers, lobbyists and employer groups expect the Clinton administration to outline its legislative principles on cash-balance pension plans in a letter from Treasury Secretary Lawrence Summers and Labor Secretary Alexis Herman.
They could be waiting a long time.
Some senior officials in the Clinton administration say they are unaware of such a letter and that the various players -- the Treasury Department, the Internal Revenue Service and the Labor Department -- have not reached a consensus on what the administration's position on cash balance plans should be.
"If enough people know about (the letter), the chances are they won't do it," said Brian H. Graff, executive director of the American Society of Pension Actuaries, Arlington, Va.
Such a letter was drafted several months ago, according to an administration official close to the situation.
"There is a draft lying around somewhere, and it's been changed a thousand times," said the official, who did not wish to be identified.
The letter was one of several options discussed by the administration, but nothing came of it because the agencies couldn't agree on how to interpret current law.
"It's still an option," the official said, conceding there is less likelihood of such a letter being issued now.
The draft reiterated the administration's position that employees be given more information about changes in pension plans when such changes result in cuts in future benefits. The draft also proposed banning "wearaways" -- both of subsidized early retirement benefits and of normal retirement benefits, the official said.
A wearaway or pension plateau occurs when employees do not accrue new benefits for a period of time after their traditional defined benefit pension plan has been converted to a cash balance plan.
That the administration might oppose "wearaways" surprises most observers. The Treasury Department for years has approved them in traditional plans in which employers chose to reduce future benefits for various reasons, such as a change in actuarial assumptions or benefit formulas.
For example, if an employer raised the interest rate it uses for calculating lump sums from to 6% from 5%, the value of the lump sums would decline. While participants would continue to build additional pension benefits, the lump sum value would be frozen for some time. That type of wearaway was addressed and approved by the IRS in revenue ruling 81-12, issued almost two decades ago.
Moreover, the Older Workers Benefit Protection Act, passed in 1990, specifically excluded subsidized early retirement benefits from age discrimination law on the grounds such benefits decline in value over time.
In a June 5 memo to clients, the Washington office of William M. Mercer Inc. suggested the administration's cash balance letter would be sent out by the third week of June.
"Recent meetings with federal officials have convinced business groups that the administration will not find that cash balance plans discriminate based on age, but will state that the `wearaway' approach used in some transitions might be discriminatory," the memo states.
For months, lawmakers have been clamoring for the administration to take a position. Just last week, Sen. Charles E. Grassley, R-Iowa, chairman of the Senate Special Committee on Aging, wrote to Mr. Summers, urging the administration to state its position on cash-balance pension plans before Congress winds down in a few months.
"We have been waiting for the Treasury Department to give us their views on cash balance plans for over a year now. Every time we ask them about it, they tell us, `It's complicated,' and `We're working on it,' " Mr. Grassley said.
That is not to say that lawmakers do not know the administration's viewpoint on cash balance plans. At a hearing of the Senate Health, Education, Labor and Pensions Committee last fall, IRS Chief Counsel Stuart L. Brown said that while the conversion of traditional pension plans to cash-balance pension plans might hurt older workers, they do not necessarily discriminate based on age.
IRS regulations issued in 1988 state that "a plan will not violate the prohibition against age discrimination solely because of a positive correlation between increased age and a reduction or discontinuance in benefit accruals or account allocations under the plan," Mr. Brown testified.
Meanwhile, employers that already have received the IRS' blessing to convert to a cash balance plan might get snagged inadvertently when they make changes to their plans to comply with various changes in pension law since 1994.
Companies usually must apply for a fresh determination letter or IRS clearance whenever they make changes in their pension plans.
Applications to Washington
The IRS last fall notified its regional office that all companies applying for the IRS sanction of the conversion of their traditional pension plan to a cash balance plan would have to send those applications to the national office in Washington for technical advice.
But the IRS also issued a memo to its regional offices, stating that all determination letters issued after October 1999 must include a caveat saying the clearance by the IRS does not apply to those plans that have converted to cash balance plans.
"It doesn't matter if they have a prior letter. The thinking is yes, they got a determination letter that might protect them five years ago, but the IRS is revisiting some issues such as age discrimination and wearaway, so just because a plan is protected, it doesn't mean it is protected permanently," said Paul V. Strella, a consultant in Mercer's Washington office.
The IRS has given pension plans until year end to amend their plans to comply with what is known as the GUST amendments. GUST is an acronym for various changes in pension law that were part of the General Agreements on Tariffs & Trade law changes in 1994, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Small Business Job Protection Act of 1996 and the Taxpayer Relief Act of 1997.
And while there is no requirement for employers to get the IRS' blessing for a pension plan, Mr. Strella suggested it would be prudent to do so. "I don't think anyone properly advised would not submit their plan for the GUST amendments. I don't think the cash balance delay is a reason not to submit your plan," he said.