Opinion ID: 770714
Heading Depth: 2
Heading Rank: 1

Heading: Cash Balance Plans and the issue of Whipsaw.

Text: 5 Under a cash balance pension plan, a hypothetical account is established in each participant's name. Benefits are credited to that account over time, driven by two variables: (1) the employer's hypothetical contributions, and (2) hypothetical earnings expressed as interest credits. Employer contributions are usually expressed as a percentage of salary, the rate of which may vary with employee tenure. Interest credits may be at a fixed interest rate, but more often they are tied to an extrinsic index-for example, U.S. Government securities of a specified maturity-and they vary accordingly. Each year an employee receives a statement of her account balance, and can therefore see the value of her pension benefit. These features are designed to mimic the simplicity of a defined contribution plan. 4 5 6 However, notwithstanding that cash balance plans are designed to imitate some features of defined contribution plans, they are nonetheless defined benefit plans under ERISA. 6 The regulatory consequences of this classification are wide-reaching. First, ERISA § 3(23) provides different definitions of accrued benefit for defined benefit and defined contribution plans. Only for a defined contribution plan is accrued benefit defined as simply the balance of the individual's account. ERISA § 3(23)(B); I.R.C. § 411(a)(7)(A). Second, defined benefit plans are subject to a series of parallel statutory constraints-under ERISA and I.R.C.-from which defined contribution plans are exempted. Those relevant to this case include: limitations on backloading of accruals, see ERISA § 204(b)(1); I.R.C. § 411(b)(1); the valuation rules of I.R.C. § 417(e) as made applicable by I.R.C. § 411(a)(11)(B), see also ERISA §§ 203(e), 205(g); and the definitely determinable benefits requirement of I.R.C. § 401(a)(25). 7 It is undisputed that the governing statutes and regulations were developed with traditional final-pay defined benefit plans in mind; they do not always fit in a clear fashion with cash balance plans and they sometimes require outcomes that are in tension with the objectives of those plans. In the argot of pension law practitioners, this case involves the phenomenon of whipsaw. 7 In brief, the rules governing distributions from defined benefit plans are framed in terms of the normal retirement benefit-typically, a single-life annuity payable at normal retirement age. Any distribution in optional form (such as a lump sum) must be no less than the actuarial equivalent of such benefit. For a cash balance plan this calculation involves projecting the cash balance forward and then discounting back to present value. The projection rates may be defined by the plan; but the discount rate is prescribed by statute. If the plan's projection rate exceeds the statutory discount rate, then the present value of the accrued benefit will exceed the participant's account balance. Unless this higher figure is paid out, the IRS takes the view that an impermissible forfeiture has occurred in violation of ERISA § 203(a) and I.R.C. § 411(a)(2). See Notice 96-8, 1996-1 C.B. 359-61. We agree. 8 The IRS's consistent interpretation of the statutes and its own regulations is reasonable and is entitled to deference. We therefore conclude that the district court erred in giving effect to the terms of the plan rather than enforcing the statutory and regulatory scheme as authoritatively interpreted by the IRS. 9