ACTION ALERT

September 7, 2007
AA 07–02

Your Congressional representative's signature needed by Monday, September 10, on letter to Treasury
Department requesting reconsideration of backloading rules for hybrid and other pension plans

Action Requested: Contact your Congressional representatives by telephone and ask them to sign the letter currently circulating on Capitol Hill urging the U.S. Treasury Department and Internal Revenue Service (IRS) to reconsider their interpretation of the backloading rules. This issue has implications for both hybrid and other types of defined benefit pension plans. The letter now has a bipartisan and bicameral group of signatories including senators Sherrod Brown (D-OH) and George Voinovich (R-OH) and representatives Virgil Goode (R-VA), Bart Gordon (D-TN), David Hobson (R-OH), Stephanie Tubbs Jones (D-OH), Tom Latham (R-IA), Deborah Pryce (R-OH), Patrick Tiberi (R-OH), and Charlie Wilson (D-OH). As many signatures as possible are needed.

In the context of the recently opened determination letter process for hybrid pension plans, the IRS' recent interpretation of the backloading rules would preclude the use of the “greater-of” transition in which participants receive the greater of the benefits calculated under the traditional plan formula or benefits calculated under the hybrid formula. This interpretation of the backloading rules as applied to the generous pro-participant approach to conversions could also negatively affect “greater-of” formulas in other contexts (such as traditional plans with a minimum benefit, or plans that provide the greater of the buyer's plan formula or the seller's plan formula immediately following a corporate acquisition). This Congressional letter to Treasury and the IRS makes clear that elimination of "greater-of" formulas hurts participants by undermining retirement security and confidence in the retirement system.

Background: Under the reopened determination letter process, several Council members were alerted that their hybrid plan could potentially receive adverse determination letters because of this issue. In many cases the plan sponsors have been waiting several years to receive a determination letter and this issue was only newly being raised. While the IRS continues to maintain that this position is consistent with their regulations and the statute (however, nothing in the Pension Protection Act changed the rules regarding backloading), the fact remains that huge numbers of favorable determination letters have been issued in the past with respect to all types of defined benefit plans with "greater-of" formulas.

Council staff along with other business groups met with Treasury and IRS officials and urged them to cease the adverse proceedings and resolve the problem administratively. The Council also urged the chairmen and ranking committee members of the Senate Finance and Health, Education, Labor and Pensions (HELP) committees to send last week a letter to the U.S. Treasury Department supporting such an administrative resolution. Treasury representatives now report that the IRS has ceased proceeding with adverse determination letters at this time and that Treasury is now examining possible administrative solutions. The Council, along with many members of Congress, remain concerned, however, that the solution will not be broad enough to sufficiently address the application of all “greater-of” formulas.

A copy of the letter currently being circulated by members of the Ohio Congressional delegation urges Treasury and the IRS to reconsider their original position and ensure the ability of all companies to continue use of the "greater-of" formula. The Ohio delegation and the Council are seeking to add as many Congressional signatures as possible. The letter is available for Council members to download (please note that this document is password protected and you must insert your Council userid and password in order to access the document). Also posted for your use is a set of talking points on the effect of the backloading interpretation on hybrid and traditional pension plans, a letter from a coalition of trade groups including the Council to Treasury following our July meeting with them on this issue, an August letter to Treasury signed by organizations including the Council and AARP, and the above mentioned letter from the Senate committee leaders. Additionally of interest is a ruling released this week by the U.S. District Court for the Southern District of Illinois in the case of Wheeler et al v. Pension Value Plan for the Employees of the Boeing Company. In the court's memorandum and order, it rejected the plaintiffs' position (also shared by the IRS) that requires backloading to be tested by aggregating multiple benefit formulas where a plan contains more than one formula. The court held that a "greater-of" provision only requires that each formula separately meet backloading tests. This decision is notable because it is the first to address this issue and supports the stance of Congress and the Council.

Please help: Congressional signatures representing all regions of the country will be most influential on the Treasury and IRS officials looking for an administrative resolution. We are urging companies to weigh in with their representatives and senators, explain how the pro-participant “greater-of” conversion formulas are threatened by Treasury and IRS’ current view, and urge them to sign the letter by the close of business on Monday, September 10.

Click here to access the Council’s Capitol Connection Center. By typing in your zip code, you will obtain the direct office phone number for your senators and representative. When you call these offices, request to speak to the "pension aide", who is the staff person who oversees retirement policy issues for the member.

For more information: For assistance with policy questions related to this Alert, contact Lynn Dudley, Council vice president, retirement policy, or Diann Howland, Council senior director, income security & international benefits. For assistance with your Council userid or password, contact Deanna Johnson, Council director, membership. All three can be reached by phone at (202) 289-6700.