After seven years of uncertainty, the status of Cash Balance plans became a lot more clear by January 2007. All three branches of government have recently taken significant steps to provide guidance for Cash Balance plan sponsors, but this guidance to date still falls short of resolving every issue.

In August 2006, Congress passed the most comprehensive pension reform legislation since the adoption of ERISA over 30 years ago. Among other changes, The Pension Protection Act of 2006 (PPA) provides rules for Cash Balance and other hybrid plans to follow to avoid charges of age discrimination. The good news is the benefit formula used by most Cast Balance plans will meet these rules by providing pay and interest credits to older workers that are at least as great as those provided to younger workers. In addition, a plan can now pay out the account balance without worrying about the "whipsaw" problem. The bad news is the new rules are generally prospective only with no protection against age discrimination or whipsaw claims from the past.

PPA will accelerate the minimum vesting schedule for Cash Balance plans. Starting with the 2008 plan year participants will need to be 100% vested in their accrued benefit after no more than three years. New Cash Balance plans and those converting to Cash Balance need to satisify additional requirements. The IRS will be spending much of 2007 providing regulations to help apply the new rules of PPA.

By declining to hear the IBM Cash Balance case on January 16, 2007, the United States Supreme Court effectively upheld a lower court decision that the Cash Balance plan was not age discriminatory. When combined with the prospective relief under PPA, many of the legal issues of the past seem to have been clarified, but there are still some open Cash Balance cases winding their way through the court system.

The Internal Revenue Service announced in December 2006 it was lifting the seven-year moratorium on issuing determination letters for conversions of traditional defined benefit plans to Cash Balance plans. The IRS feels the new pension law resolves many of the open issues of the past, and hopes to clear out the determination letter logjam by the end of 2007.

More then ever, a Cash Balance plan is a good way to provide benefits that provides less risk to an employee then a defined contribution plan but more then a traditional defined benefit plan.

For a review and assessment of your Cash Balance Plan alternatives contact CashBalance@BoltonPartners.com.