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Cash Balance and Other "Hybrid" Plans

Pension Protection Act of 2006 legalizes future conversions of traditional pension plans to cash balance and other "hybrid" plans. It also legalizes the design of future cash balance and other hybrid plans. 

Cash balance and other hybrid plans have been very controversial. This is principally because when a company changes from a traditional pension plan to a hybrid plan, older, longer-service employees can lose a significant portion of their promised pension benefits. The biggest losses come from a practice called "wearaway" where benefits of older employees are effectively frozen for a number of years.

Employees have challenged both cash balance conversions and the design of cash balance plans on the ground that they violate federal pension and age discrimination laws. 

The Pension Protection Act of 2006 bans wearaway, including wearaway of subsidized early retirement benefits, in future cash balance conversions. That means that employees will receive the benefits they have earned under the traditional pension plan as of the date of the conversion, plus any rights to special early retirement benefits that they earn after the conversion. These benefits will be added to the benefits that they earn under the cash balance plan. The Act does not include provisions that give employees the choice of remaining under the traditional plans.

The Act also establishes that the design of cash balance plans set up in the future will not be considered to be age discriminatory. In addition, it requires that contributions to cash balance plans vest within three years. 

The Act does not affect the legality of either cash balance conversions that occurred before its effective date or the legality of the design of current cash balance plans. This provision is in part effective retroactively to June 29, 2005. However the vesting rules become effective on January 1, 2008.

Read the cash balance language in Section 701 of The Pension Protection Act of 2006 Public Law 109-280