Is Cross-Testing a Mistake? Cash Balance Plans, New Comparability Formulas, and the Incoherence of the Nondiscrimination Norm

Abstract

The increasing tendency of large employers to convert their traditional defined benefit pension plans to the cash balance form has engendered substantial controversy. The rise of "new comparability" plans has yet to generate the same level of concern, perhaps because such plans have largely been embraced by smaller employers, except among pension mavens. It is the premise of this article that both controversies raise a common issue: the propriety of cross-testing, i.e. analyzing defined benefit arrangements as if they were defined contribution plans and vice versa, permitted by the nondiscrimination regulations. This article reviews the background for these new hybrid plans and the cross-testing approach, their treatment under the nondiscrimination regulations and the debate over age discrimination they have raised. The author argues that cross-testing is appropriate, as the relevant concern should be the substance of the allocation of pension resources rather than the form by which that allocation is achieved. Further, an exploration of its merits reveals the theoretical and practical incoherence of the nondiscrimination mandate. The author concludes that the nondiscrimination mandate has outlived its usefulness and should be abolished and contends that cross-testing has properly introduced a modicum of flexibility to the body of law which over-regulates qualified plans.