New guidance from the Treasury Department and the IRS on the legality of "wearaway" provisions of cash balance conversions has provided more certainty on the controversial issue, said Kyle Brown, retirement counsel at Watson Wyatt Worldwide. “What we had is a period of uncertainty,” Mr. Brown said. “Now we have guidance, although it is complicated guidance that we will have to work through.”
“There were a lot of people who were arguing that wearaway, under any circumstances, is illegal,” Mr. Brown said. “They haven’t convinced the courts of that, and they haven’t convinced the IRS.” Under the Treasury/IRS guidance, issued Friday, wearaways that begin on the date of the conversion to the new plan don’t violate backloading prohibitions.
Mr. Brown said the Treasury/IRS guidance, available on the Treasury Department’s website at www.ustreas.gov, also indicates that applies to plan conversions adopted before June 29, 2005. The Pension Protection Act of 2006 prohibited the use of wearaway provisions after that date.
He said employers, plan sponsors and participants all are winners as a result of the guidance because it specifies when the use of wearaway provisions would violate the backloading law that prohibits plan employees from accruing too much of their retirement benefits toward the end of their employment tenures.
Wearaway provisions are controversial because they prevent employees from accruing additional benefits during a period of time during the transition from defined benefit plans to cash balance plans.
