House-Passed Version of Pension Legislation Drops Wearaway Prohibition

October 27, 2000

by Dave Baker

Dow Jones Newswire is reporting that the "wearaway" provisions contained in the Senate version of the pension reform bill were dropped from the House version shortly before the bill was passed by the House yesterday.

The version produced by the Senate Finance Committee generally prohibited employers from converting traditional defined benefit plans to cash balance plans unless all participants' accrual of benefits continued thereafter-- thereby prohibiting the "wearaway" effect otherwise caused when an older worker already has accrued more benefits under the old plan than he will receive under the cash balance plan formula. Under current law such a participant in effect accrues no further benefits until the cash balance plan formula catches up, "wearing away" the participant's head-start.

Ironically, the Senate Finance Committee's bill had been criticized by some for not protecting an older worker's "early" retirement benefits under the provisions of the old plan-- it prevented wearaway only of the participant's "normal" retirement benefit as prescribed in the plan. Yesterday's House-passed version seems to protect neither type of benefit.