Faegre & Benson Asks Treasury for Age Discrimination and Interest Rate Whipsaw Relief for Variable Annuity DB Plans

Most large law firms, and some other types of professional firms, have chosen to use cash balance plans as part of the retirement program for their partners or shareholders. But a significant minority have instead used variable annuity plans. Prior to the Pension Protection Act of 2006, variable annuity plans were seen by some as being able to provide a more favorable return on contributions.

Notice 2007-6 announced positions under the age discrimination and minimum lump sum provisions as amended by the PPA. In statements made in subsequent practitioner meetings, positions announced by Treasury representatives with respect to variable annuity plans were very unfavorable—compared to the positions Treasury is taking with respect to cash balance plans.

Variable annuity plans can be, and frequently are, designed to produce benefits that are the functional equivalent of the benefits that could be provided by a cash balance plan structure. Regrettably, Treasury's positions do not permit variable annuity plans to take advantage of the favorable PPA provisions that apply to functionally equivalent cash balance plans:

• Variable annuity plans would not have the ability to test for age discrimination on a functionally equivalent basis.
• Variable annuity plans would not have the ability to pay functionally equivalent lump sums—without being at risk of an interest rate whipsaw.

On March 28, 2007, Faegre & Benson submitted a letter requesting Treasury to provide parity of treatment for variable annuity plans that are the functional equivalent of cash balance plans. It is important that Treasury act quickly because the adverse positions would apply retroactively—in the case of the age discrimination position, from June 29, 2005, and in the case of the minimum lump sum position, from August 18, 2006.