Pension Rights Center Seeks Withdrawal of Cash-Balance Ruling
WASHINGTON – The Department of the Treasury and the Internal Revenue Service have issued a ruling that could result in devastating losses of pension benefits for thousands of older employees, contrary to the intent of Congress. The ruling also contradicts current tax law and a long-standing regulation. In a letter sent to Treasury Secretary Henry Paulson today, the Pension Rights Center criticized the agencies for Revenue Ruling 2008-7, which legitimizes a corporate practice known as “wearaway,” a practice that hurts older workers in certain cash-balance plans and that Congress has recognized as unfair. The Center called on the Treasury Department to withdraw the ruling and alerted the chairs and ranking members of labor and tax committees in Congress to the potential harm that the ruling could have on employees.
Wearaway occurs when a company freezes pension benefits of older employees during a conversion from a traditional defined-benefit pension plan to a cash-balance arrangement. Such a freeze, which can last for many years, can lead to the loss of as much as half of an employees’ expected benefits. Acknowledging the inequities of wearaway, Congress banned the practice for future cash-balance conversions when it passed the Pension Protection Act of 2006 (PPA). However, a number of lawsuits challenging the practice in past conversions are still pending. Many of these cases hinge on the claim that wearaway violates what are called “backloading” rules of the federal private pension law, the Employee Retirement Income Security of Act of 1974 (ERISA). Congress left it to the courts to determine the legality of conversions that occurred prior to the enactment of the PPA.
The Center’s letter points out that Revenue Ruling 2008-7, which was issued after months of intensive corporate lobbying, could undercut the employees’ cases because it interprets provisions in the Internal Revenue Code in such a way as to legalize wearaway. These provisions are virtually identical to ERISA provisions and could render the lawsuits moot.
“The Revenue Ruling not only defies congressional intent, but is wrong on the law, and ignores the controlling regulation,” said University of Alabama School of Law Professor Norman Stein, coauthor of the letter and senior advisor to the Center. “It should be withdrawn immediately.”
“While there is no legal justification for the Revenue Ruling, there is plainly a political justification,” said Center Director Karen Ferguson. “This ruling serves the interests of corporations and not the employees, who were not given a fair opportunity to be heard. It is particularly outrageous because it retroactively endorses the very worst of all cash-balance practices.”