Pending pension reform would attempt to clear up the legal ambiguity surrounding
hybrid plans and would impose new restrictions on conversions of traditional
defined benefit plans to hybrid plans. But the new rules may leave existing plans in
Clarification in House and Senate Pension Legislation
Pension reform legislation pending in the House and recently passed by the Senate would
prospectively settle the legal status of hybrid plans.
Under the Pension Protection Act (PPA, H.R.2830), hybrid plans would not violate age
discrimination law as long as the accrued benefit for an older worker was the same as the
accrued benefit for a similarly situated younger worker. The clarification would be effective
after June 29, 2005.
In the Senate, the Pension Security and Transparency Act (PSTA, S.1783) also aims to clar-ify
the legal status of hybrid plans. Under that act, a "qualified cash balance" plan — a
plan that met specific vesting and interest-crediting requirements — would not violate age
discrimination law simply because younger participants had more time to earn pay and
interest credits. The act would become effective after July 31, 2005.
Although the PPA and PSTA include "no inference language" — language providing that
the legislation does not govern earlier hybrid plan designs or conversions — their prospective
nature could leave existing hybrid plan sponsors vulnerable to charges of age discrimination
in the past.
Senate Bill Includes New Mandates and Conversion Standards
The PSTA would legally sanction qualified cash balance plans. To be qualified, a cash balance
plan would have to fully vest all participants after three years of service and meet
interest-crediting requirements. The interest-crediting rate could not fall below the federal
midterm interest rate or rise above the interest rate on amounts conservatively invested in
long-term corporate bonds. Hybrid plans that violated these conditions would not be protected
under the PSTA.
The PSTA would also impose new restrictions on future conversions of traditional defined
benefit plans to hybrid plans. All such conversions would have to be to a qualified cash
balance plan. Employers would have to meet one of the following conversion standards:
- Disallow any wear-away of the participant's early or normal retirement benefit and
- Give all affected participants the larger of the accrued benefit under the old plan
formula or the benefit under the new plan formula for the first five years after the
- Give participants who were 40 or older and whose combined age and service equaled
at least 55 either the larger benefit under the old or new formula, or let them choose
between the old and new formulas
- Allow all participants to choose between the old and new formulas, or give them
whichever benefit would be larger
- Provide additional credits or a higher opening account balance to bring the benefits up
to what would be provided under the first two conversion techniques, under regulations
issued by the U.S. Department of the Treasury
If plan sponsors allowed participants to choose between the traditional and the hybrid plan,
other requirements would kick in. The plan sponsor would have to give participants sufficient
information to project benefits under both plan formulas and model the effects of their
decisions. The information would also have to describe circumstances in which the participant
might not receive expected benefits. And plan sponsors could not make other benefits,
such as retiree health benefits or 401(k) benefits, conditional on the participant's election.
The Senate approved the PSTA, and the House Ways and Means Committee approved the
PPA this month. Even if the House and Senate approve these pension reform bills, important
and contentious differences remain to be resolved, especially relating to hybrid pension
Enacting any hybrid plan provisions this year could have significant consequences for
sponsors of existing hybrid plans, as well as for plan sponsors that have been waiting for
legal clarification of hybrid plans before settling on a benefits strategy.