Finding the Balance in Cash Balance Pension Plans
Daniel J. Sennott | 2001 U. Ill. L. Rev.
As companies abandon traditional pension plans in favor of the newer cash balance plans, disputes over benefit calculations under the new plans have arisen between employers and employees. Courts have had the formidable task of resolving disputes over the present value of benefits when participants in cash balance plans terminate their participation in the plans early and elect a lump-sum distribution. This note reviews two recent cases that demonstrate how applying traditional calculation formulas to cash balance plan lump-sum distributions perpetuates the "whipsaw" effect-a phenomenon that results when the lump-sum calculation is greater than the current cash balance account value.
This note asserts that the cases of Esden and Lyons may encourage employers to reduce the benefits of all employees with cash balance plans in order to avoid liability with respect to the employees who cash out of their plans early. Even if the cases do not expressly require employers to reduce benefits across the board in order to ensure compliance with ERISA, employers may see this as the simplest, most economically sound and safest response to the decisions. The author offers two suggestions on how Congress can address the "whipsaw" effect-one is that Congress draft legislation specifically governing cash balance plans and the other is that Congress discourage lump-sum payment options.