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Retirement Planning Information

Frequently Asked Questions about Cash Balance Pension Plans

Is there a federal pension law that governs cash balance plans?

Yes. Federal law, including the Employee Retirement Income Security Act (ERISA), the Age Discrimination in Employment Act (ADEA), and the Internal Revenue Code (IRC), provides certain protections for the employee benefits of participants in private sector pension and health benefit plans.

If your employer offers a pension plan, the law sets standards for fiduciary responsibility, participation, vesting (the minimum time a participant must generally be employed by the employer to earn a legal right to benefits), benefit accrual and funding. The law also requires plans to give basic information to workers and retirees. The IRC establishes additional tax qualification requirements, including rules aimed at ensuring that proportionate benefits are provided to a sufficiently broad-based employee population.

The U.S. Department of Labor, the Equal Employment Opportunity Commission (EEOC), and the IRS/Department of the Treasury have responsibilities in overseeing and enforcing the provisions of the law. Generally, the U. S. Department of Labor focuses on the fiduciary responsibilities, employee rights, and reporting and disclosure requirements under the law, while the EEOC concentrates on the portions of the law relating to age discriminatory employment practices. The IRS/Department of the Treasury generally focuses on the standards set by the law for plans to qualify for tax preferences.

Is an employer required to give participants a choice of remaining under the old formula rather than automatically switching them to the new formula?

Neither ERISA nor the IRC requires employers to give employees the choice of remaining in the old formula. Employers have several options, including:

  • Allowing employees to remain under the old formula, while restricting new hires to the new formula

  • Stipulating that certain employees who have reached a specific length of service or who have reached a certain age may choose to stay with the old formula

  • Providing no choice, replacing the old formula and applying the new formula to all participants

The law permits employers to have such flexibility, but whatever option applies has to satisfy legal requirements. For example, the option may not violate prohibitions against discrimination on the basis of age.

Under each of these options, benefits already earned by the participants, as of the effective date of the amendment that converts the old formula to a cash balance formula, may not be reduced.


What information is an employer required to give participants to explain the new cash balance plan formula, and when should they receive this information?

Many employers voluntarily provide helpful information about these conversions in advance of the change becoming effective.  Participants have a right to contact the plan administrator and ask for more information or help in understanding the change and any choices they have in conjunction with the change.

Plan administrators are required to give at least 15 days' advance notice of plan amendments that significantly reduce the rate at which plan participants earn benefits in the future.

After the plan is amended, the plan administrator is required to provide all plan participants with a Summary of Material Modifications to the plan or a revised Summary Plan Description. This document will summarize the changes to the plan.

In addition, under the Age Discrimination in Employment Act (ADEA), an employer requiring an employee to sign a waiver of rights and claims when choosing between plans is required to provide enough information to enable the employee to make a knowing and voluntary decision to waive ADEA rights. In most cases, an employee must be given at least 21 days’ to sign the waiver and at least 7 days’ to revoke the agreement.