conversion of DB to DC

[lexi]

I am desperate for some help regarding the following scenario:

We have a DB plan that is converting into a DC plan. However, there are some EE working under a CBA and some EE who are over 65 years-old who are going to stay in the "old" DB plan without being moved over into the new DC TSA plan. So, in effect, a 64 year-old EE will be moved over while his/her 65 year-old colleague WILL not.

In addition, under the new TSA plan, the participants will receive 18% more in contributions than under the old DB plan. So, in effect, the 65 year-old EE will not receive as much as their younger counterparts under the TSA because of their age.

Now, here are my questions:

1) Does this differential in contributions for 64 year-old EE and 65 year-old+ EE violate the ADEA since the 65+ EE technically are receiving exactly what they are entitled to under the old plan even though they do not have the same level of benefits under the new plan? They are going to be in the new TSA DC plan, but they are not going to be grandfathered in at the same 18% rate. However, they are going to receive everything they were promised under the old DB plan--there is no cutback or discrimination under the old plan. They will continue to accrue service credits under both the old and new plans but the level of benefits isn't going to change from what they were promised under the old DB plan.

2) Has anyone read any articles about converting DB plans to DC plans in any notable magazines like the ASPA or Journal Of Pension Compliance that might be helpful in this matter? Anything that deals w/ converting a DB plan to a DC plan would be helpful at this point.

Thank you in advance to anyone who can help me w/ this issue.

[AndyH]

lexi, you have some facts incorrect and some concepts messed up.

We have a DB plan that is converting into a DC plan

No you do not. It sounds like the old plan is being kept but only some participants are going to earn benefits.

A "conversion" is not permitted. The closest thing is the termination of a DB and replacement with a DC but that is not what you are describing.

In addition, under the new TSA plan, the participants will receive 18% more in contributions than under the old DB plan. So, in effect, the 65 year-old EE will not receive as much as their younger counterparts under the TSA because of their age.

If you have a DB plan, you don't know what their "contributions" are because it is not a defined "contribution" plan. If it happens to be of the cash balance variety then it might be more quantifiable but you still don't know the value of ancillary benefits and benefit options and features.

Sorry, but your question #1 makes no sense to me and your #2 is not valid because you do not have a "conversion".

You may have a situation where some people are no longer earning benefits under a DB plan but instead may earn benefits in the future under a DC plan and that is a permitted change provided that an ERISA 204(h) notice is properly issued and the plans as redesigned meet the coverage and nondiscrimination requirements of the law.

My suggestion is to go back and use this to learn more of the correct facts. You do not have them.

[lexi]

Actually, I do have my facts "right" but there are many more facets of the conversion than what I outlined; it is actually 4 tiered and involves a lot of moving parts; i tried to boil it down to its essence.

Thank you for your help. (I guess.)

quote name='AndyH' date='Jul 11 2006, 05:11 PM' post='135103']

lexi, you have some facts incorrect and some concepts messed up.

We have a DB plan that is converting into a DC plan

No you do not. It sounds like the old plan is being kept but only some participants are going to earn benefits.

A "conversion" is not permitted. The closest thing is the termination of a DB and replacement with a DC but that is not what you are describing.

In addition, under the new TSA plan, the participants will receive 18% more in contributions than under the old DB plan. So, in effect, the 65 year-old EE will not receive as much as their younger counterparts under the TSA because of their age.

If you have a DB plan, you don't know what their "contributions" are because it is not a defined "contribution" plan. If it happens to be of the cash balance variety then it might be more quantifiable but you still don't know the value of ancillary benefits and benefit options and features.

Sorry, but your question #1 makes no sense to me and your #2 is not valid because you do not have a "conversion".

You may have a situation where some people are no longer earning benefits under a DB plan but instead may earn benefits in the future under a DC plan and that is a permitted change provided that an ERISA 204(h) notice is properly issued and the plans as redesigned meet the coverage and nondiscrimination requirements of the law.

My suggestion is to go back and use this to learn more of the correct facts. You do not have them.

[AndyH]

Well, I tried. Maybe it is an issue of terminology rather than facts but something is missing.

A "conversion" from a DB plan to a 403(b) plan as I would understand the term is not permitted.

[Guest mjb]

Age discrimination in private plans is governed by ERISA not the ADEA. ERISA 204(b)(1)(H) prevents a reduction in DB benefit accrual on account of an increase in age. 204(b)(2) prohibits a reduction of the rate of allocation of contributions on account of attainment of any age. You need to review the case law under these sections to see if there is any correlation to your facts, if your plan is subject to ERISA. If the plan is not subject to ERISA you need to review the equal benefit rule under the ADEA. As noted there is no conversion of DB to DC. The DB benefit accrual will be frozen and the employer will make a contribution to to the DC plan. I dont see any discrimination in terminating a DB plan and replacing it with a DC plan since there is no discrimination in replacing one type of plan with another.

[lexi]

Thank you so much; your answer was extremely helpful. I appreciate your taking time out of your day to help me out.

[Guest JRawls]

I am desperate for some help regarding the following scenario:

We have a DB plan that is converting into a DC plan. However, there are some EE working under a CBA and some EE who are over 65 years-old who are going to stay in the "old" DB plan without being moved over into the new DC TSA plan. So, in effect, a 64 year-old EE will be moved over while his/her 65 year-old colleague WILL not.

In addition, under the new TSA plan, the participants will receive 18% more in contributions than under the old DB plan. So, in effect, the 65 year-old EE will not receive as much as their younger counterparts under the TSA because of their age.

Now, here are my questions:

1) Does this differential in contributions for 64 year-old EE and 65 year-old+ EE violate the ADEA since the 65+ EE technically are receiving exactly what they are entitled to under the old plan even though they do not have the same level of benefits under the new plan? They are going to be in the new TSA DC plan, but they are not going to be grandfathered in at the same 18% rate. However, they are going to receive everything they were promised under the old DB plan--there is no cutback or discrimination under the old plan. They will continue to accrue service credits under both the old and new plans but the level of benefits isn't going to change from what they were promised under the old DB plan.

2) Has anyone read any articles about converting DB plans to DC plans in any notable magazines like the ASPA or Journal Of Pension Compliance that might be helpful in this matter? Anything that deals w/ converting a DB plan to a DC plan would be helpful at this point.

Thank you in advance to anyone who can help me w/ this issue.

There is no "conversion" technically allowed. The employer or plan sponsor must start a new DC plan. Ifthat plan gives everyone 18% of salary, it would not violate ADEA. Courts have ruled that "Cash Balance" plans, i.e. DB plans that did not terminate but tried to use the same plan assets to support a liability structure similar to DC plan accruals violate ADEA. Congress has considered legislation to statutorily fix this for the last 4+ years at least. So far, no bills.