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CCH® PENSION — 03/09/10

Pre-PPA plan not required to use statutory discount rate to calculate opening account balance

A defined benefit plan that converted to a cash balance plan in 2000 (prior to the enactment of the Pension Protection Act of 2006) did not violate ERISA's bar on reducing accrued benefits when it used a higher discount rate to calculate the accrued benefit portion of the participants' opening account balance than the applicable rate provided under Code Sec. 417(e)(3), the U.S. Court of Appeals in St. Louis (CA-8) has ruled in Sunder v. U.S. Bancorp Pension Plan.

Higher rate used

Under the terms of the plan, an 8% discount rate was used to determine the participants' opening account balance. At that time, the statutory rate under Code Sec. 417(e)(3) was just over 6%.

A plan was required to use the statutory rate when calculating the present value of accrued benefits when making cash-out distributions. The plan did use this rate when cashing out early retirees. However, at the time the plan was converted, there was no ERISA provision governing the creation of an opening account balance.

The opening account balance for each participant under the new plan was based on the accrued benefit under the old plan, and certain other additional factors. Thus, according to the court, use of the statutory discount rate to calculate the benefit accrued under the old plan for purposes of determining the opening balances would have resulted not merely in no decrease in total accrued benefits, but in an actual windfall for the participants.

Effect of PPA

The court noted that the result might have been different after passage of the Pension Protection Act of 2006. Under Code Sec. 411(b)(5)(B)(iii), as added by the PPA, the benefit under the new converted plan can be no less than the sum of the accrued benefit under the old plan plus the accrued benefit after conversion under the new plan. However, this provision was not in effect in 2000.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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