WASHINGTON -- The new parent of BankAmerica Corp. and NationsBank Corp. is trying to merge the banks' cash balance plans.
The two banks merged last year, becoming Bank of America Corp. The pension plan merger is expected to be effective next year.
But BofA could face a tough time getting governmental clearance to combine the plans.
Officials from the Treasury Department and IRS have begun scrutinizing plans like NationsBank's that have defined "normal" retirement as occurring at age 65 or after five years' tenure, whichever comes first. Such shortened retirement ages short-circuit various pension rules pegged to the more conventional retirement ages of 60 and 65.
Bank and Treasury Department officials wouldn't discuss the issue; IRS officials didn't return several phone calls seeking comment.
A short retirement age "guts" the Employee Retirement Income Security Act, said a cash balance plan expert who declined to be identified. "Twenty-eight is not a normal retirement age."
Clearance from the IRS usually comes in the form of a "determination letter," which protects employers in case the IRS later questions any aspects of the pension plan. Trouble could develop when Bank of America asks for a determination letter on the merger of the two plans.
The five-year tenure feature comes from the NationsBank plan, and is expected to be part of the combined plan.
Observers say regulators could banish short retirement ages by requiring all employers to define the normal retirement age as 50 or older, and condition plan approval on the use of such a retirement age.
What's wrong with the short retirement age?
For one thing, a retirement age expressed as five years of service lets employers give departing employees just the amount of money built up in their hypothetical cash balance accounts. Typically, in defined benefit plans, they must use complicated calculations to arrive at the lump-sum payments.
Indeed, Under Section 417(e) of the tax code, companies must calculate lump-sum payments by first projecting the account balance into an annuity at the normal retirement age, usually 65, and then figuring out the present value of that annuity by discounting back. The present value of that future retirement benefit is what employers must pay out as a lump sum.
But because the law does not require companies to project benefits beyond the normal retirement age, employers with a retirement age of five years may simply pay the account balance as a lump sum to departing employees.
What's more, an inordinately short retirement age also renders ERISA's anti-backloading rules meaningless. Federal pension law pegs backloading -- stacking benefits for employees who retire only after a lifelong career -- to the accrual rate at normal retirement age. Because the NationsBank plan has a five-year normal retirement age, the company conceivably could give more generous benefits to older employees with longer tenure.
The company credits employees' accounts with contributions ranging from 1% for young workers with little service to 10% for older employees with longer tenure. A 40-year-old with 10 years of service would get 4% of pay; a 60-year-old with 10 years of service would get 8% of pay.
Other plans with short normal retirement ages could face the same scrutiny. They include PricewaterhouseCoopers LLP.
Then, too, NationsBank's cash balance plan is raising eyebrows at the Securities and Exchange Commission because of a provision allowing participants to roll over 401(k) plan money into the cash balance plan.
Because the company lets employees roll over their 401(k) money into the cash balance plan, the bank could be seen as selling employees a security and would, therefore, need to register the plan.
With registration comes disclosure, something bank executives might not relish.
NationsBank would have to give all plan participants detailed information about the plan, including possibly that the investments are derivatives that merely track the returns on the original securities, but do not convey ownership rights. The company also might have to discuss the riskiness of investing in such derivative securities.
"Plans that contain 401(k) rollover features might involve securities law issues. If an offer and sale of a security exists, either a registration or exemption from registration would be necessary," said Mark Borges, an attorney adviser in the SEC's division of corporation finance.