Department of the Treasury, Internal Revenue Service: Statement  
in Preamble to Regulations That Cash Balance Plans Are Not	 
Age-Discriminatory (21-MAR-01, GAO-01-511R).			 
								                                                                 
This correspondence focuses on the Internal Revenue Service's	 
(IRS) inclusion of a statement in its final regulations on	 
pensions that indicated that the IRS would not regard cash	 
balance pension plans as age discriminatory. Specifically, GAO	 
determined whether (1) the Department of the Treasury followed	 
normal operating procedures in promulgating the regulations and  
(2) certain federal regulations were violated. GAO found nothing 
improper about the inclusion of the preamble sentence. Treasury  
followed its normal procedures and the sentence reflected the	 
agency's views at the time. GAO also found that Treasury's	 
addition of the sentence did not violate Administrative Procedure
Act or Omnibus Budget Reconciliation Act of 1986 requirements.	 
Nevertheless, while the coordination requirement technically was 
inapplicable, the underlying expectation was for consistency	 
among the three agencies having roles in administering statutes  
generally prohibiting pension plans from discriminating based on 
age. Under the circumstances, Treasury should not have opined on 
whether cash balance plans were age discriminatory in a public	 
manner without having coordinated that position with the	 
Department of Labor and the Equal Employment Opportunity	 
Commission. The preamble sentence may have misled the public and 
practitioners into believing that the sentence reflected the	 
coordinated views of all three of the responsible agencies.	 
Moreover, the statement may have limited the other agencies'	 
policy options on this issue.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-511R					        
    ACCNO:   A00710						        
    TITLE:   Department of the Treasury, Internal Revenue Service:    
             Statement in Preamble to Regulations That Cash Balance Plans Are 
             Not Age-Discriminatory                                           
     DATE:   03/21/2001 
  SUBJECT:   Administrative law 				 
	     Agency proceedings 				 
	     Discrimination					 
	     Employee retirement plans				 
	     Interagency relations				 
	     Retirement pensions				 
	     Tax law						 
	     Administrative law 				 
	     Agency proceedings 				 
	     Discrimination					 
	     Employee retirement plans				 
	     Interagency relations				 
	     Retirement pensions				 
	     Tax law						 

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GAO-01-511R

Preamble to Final Regulations on Pension Plans United States
General Accounting Office

Washington, DC 20548

B- 284580 March 21, 2001 The Honorable Tom Harkin United States Senate

Subject: Department of the Treasury, Internal Revenue Service: Statement in
Preamble to Regulations That Cash Balance Plans Are Not AgeDiscriminatory

Dear Senator Harkin: The preamble to final regulations on pension plans
issued by the Internal Revenue Service (IRS), Department of the Treasury, in
1991, included a last- minute addition. 1 A sentence was inserted indicating
that IRS would not regard cash balance plans, a type of pension plan, as age
discriminatory. 2 Some believe that the sentence may have contributed to an
increase in the number of cash balance plans adopted by employers.

You asked us to examine the circumstances surrounding the inclusion of the
sentence in the preamble to the regulations. Following discussions with your
staff, it was agreed that we would determine whether, by including the
sentence, Treasury: (1) acted in accordance with its normal operating
procedures, and (2) violated either the Administrative Procedure Act (APA)
or a requirement of the Omnibus Budget and Reconciliation Act of 1986 (OBRA
'86) that it consult with the Department of Labor (DOL) and the Equal
Employment Opportunity Commission (EEOC). To complete this work, we
interviewed current and former IRS, Treasury, DOL, and EEOC officials and
reviewed documents of those agencies. We researched and analyzed statutory
and regulatory requirements and examined pertinent case law. We conducted
our analysis between January and December 2000.

1 Nondiscrimination Requirements for Qualified Plans, 56 Fed. Reg. 47,524,
47,528 (1991). 2 Cash balance plans are pension plans that determine
benefits by reference to an

employee's hypothetical “cash balance” account based on salary
and hypothetical interest credits through normal retirement age.

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 2

Summary

We found nothing improper about the inclusion of the preamble sentence.
Treasury followed its normal procedures and the sentence reflected the
agency's views at the time. We also found that Treasury's addition of the
sentence did not violate APA or OBRA '86 requirements. Nevertheless, while
the coordination requirement technically was inapplicable, the underlying
expectation was for consistency among the three agencies having roles in
administering statutes generally prohibiting pension plans from
discriminating based on age. Under the circumstances, Treasury should not
have opined on whether cash balance plans were age discriminatory in a
public manner without having coordinated that position with DOL and EEOC.
The preamble sentence may have misled the public and practitioners into
believing that the sentence reflected the coordinated views of all three of
the responsible agencies. Moreover, the statement may have limited the other
agencies' policy options on this issue.

Background

The Tax Reform Act of 1986 made comprehensive changes to the tax code. Among
its provisions was an amendment to Internal Revenue Code (I. R. C.) section
401( a)( 4) which, in essence, provides that to be eligible for favorable
tax treatment, pension plans may not discriminate in favor of highly
compensated employees. Final regulations implementing section 401( a)( 4)
were promulgated in 1991. The preamble to the final regulations discussed a
number of comments that had been received on the proposed regulations,
including questions seeking clarification on whether cash balance plans
could qualify for favorable tax treatment.

Tax statutes classify pension plans as either defined benefit or defined
contribution plans and establish separate requirements for the two types of
plans. 3 Cash balance plans are often referred to as “hybrid”
plans because they combine features of both defined benefit plans and
defined contribution plans. 4 Compared with a traditional defined benefit
plan that is based on final average pay, cash balance plans provide a larger
share of a participant's accumulated benefit earlier in a career. While

3 In a defined benefit plan, the retirement benefit is expressed as an
annual payment that would begin at the normal retirement age specified in
the plan. In a defined contribution plan, the retirement benefit is
expressed as the account balance of an individual participant, which results
from contributions that the employer, the worker, or both make and from
subsequent investment returns on the assets in the account. 4 Cash balance
plans are not identified in the law, but Internal Revenue Service (IRS)

guidance describes a cash balance plan as “a defined benefit plan that
defines benefits for each employee by reference to the amount of the
employee's hypothetical account balance.” 26 C. F. R. sect. 1.401( a)( 4)-
8( c)( 3)( I).

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 3
conversions from traditional defined benefit plans to cash balance plans can
increase

the value of some workers' benefits, especially younger workers or those who
switch jobs frequently, cash balance plans can result in a declining rate of
normal retirement benefit accrual over time. This declining accrual rate can
result in older workers' receiving lower benefits at retirement from a cash
balance plan than they would have received from a traditional final average
pay plan. 5

Section 411( b)( 1)( H) of the I. R. C. generally prohibits pension plans
from discriminating on the basis of age. Addressing cash balance plans, a
sentence in the preamble to the section 401( a) regulations stated:
“The fact that interest adjustments through normal retirement age are
accrued in the year of the related hypothetical allocation will not cause a
cash balance plan to fail to satisfy the requirements of section 411( b)(
1)( H), relating to age- based reductions in the rate at which benefits
accrue under a plan.” In essence, the sentence said that cash balance
plans are not age discriminatory. In recent years, cash balance plans have
become increasingly common among large corporations for a number of reasons,
including reducing total pension costs and increasing portability of
retirement benefits to enhance recruitment.

Agency Followed Normal Procedures: Sentence Reflected Views at the Time

The proposed regulation implementing section 401( a) was issued on May 14,
1990, and did not mention cash balance plans. On September 26- 28, 1990, the
IRS held public hearings on the proposed regulations. Seven commentators
urged the IRS to consider developing a “safe harbor” which could
be used to test cash balance plans' compliance with the regulations. The IRS
did so, in part, by folding a pre- existing working group considering
discrimination issues 6 under cash balance plans into the 401( a) regulation
project working group. The working group, consisting of Treasury and IRS
employees, after much discussion, ultimately reached a consensus view that
cash balance plans are not age discriminatory as prohibited by I. R. C. 411(
b)( 1)( H). While compliance with this section was not the subject of the
401( a) project, the agency officials recognized that compliance with I. R.
C. 411( b)( 1)( H) was an issue for some practitioners. In light of concerns
both within the IRS and Treasury and outside the government, as well as the
complexity of the issue, the working group decided

5 See Private Pensions: Implications of Conversions to Cash Balance Plans
(GAO/ HEHS- 00- 185, Sept. 29, 2000); Cash Balance Plans: Implications for
Retirement Income (GAO/ HEHS- 00- 207, Sept. 29, 2000).

6 Within that project, for almost a year before the preamble was published,
a working group, made up of people from Treasury and IRS, considered whether
cash balance plans could meet I. R. C. nondiscrimination requirements,
including section 411( b)( 1)( H).

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 4 that a
concise statement addressing I. R. C. 411( b)( 1)( H), without elaboration,
should

be included in the 401( a) regulation or its preamble. Although it could not
be determined exactly who wrote the sentence in question or when it was
done, we can say that it was inserted sometime between August 23 and August
26. IRS advises us that preambles to regulations generally are written late
in the promulgation process, as was the case here. IRS sent the regulation
draft and preamble to DOL and the Pension Benefit Guaranty Corporation for
their review and comment on August 19. This version did not contain the
sentence or anything substantively similar. On August 23, a preview copy of
the draft of the regulations and preamble was circulated within the IRS.
This version of the preamble did not contain the sentence or anything
similar. On August 26, the signature draft of the regulations with preamble
was completed; the preamble to this draft contains the sentence on section
411( b)( 1)( H). The final regulations were published in the Federal
Register on September 19, 1991. While the precise circumstances surrounding
the insertion of the sentence remain unclear, given the collaborative
process employed to develop the regulation, we believe that the sentence in
the preamble reflected the views of IRS and Treasury at that time. 7

APA Notice and Comment Requirement Not Applicable

Generally, under the APA, agencies must give the public notice of any
proposed rulemaking in the Federal Register and then give interested persons
the opportunity to comment on the proposed rule. 8 However, the APA provides
an exception to this requirement for interpretive rules and general
statements of policy. 9 We believe that the preamble sentence falls within
this exception as an interpretive rule.

The courts have defined an interpretive rule as one that “simply
states what the administrative agency thinks the statute means, and only
‘reminds' affected parties of existing duties.” 10 Generally, an
agency can declare its understanding of what a statute requires without
providing notice and comment. 11 A rule will be considered interpretive if
it represents an agency's explanation of a statutory provision. To

7 It has been reported that a Treasury official who had worked on the
regulation left the agency shortly after its publication to accept
employment with a law firm that advised employers on pension issues,
suggesting that he was responsible for the sentence's inclusion. We found
nothing improper in the actions of this official. 8 5 U. S. C. sect. 553( b).

9 5 U. S. C. sect. 553( b)( 3)( A). 10 Citizens to Save Spencer County v. EPA,
600 F. 2d 844, 876 & n. 153 (D. C. Cir. 1979) (cited with approval in
Fertilizer Institute v. EPA, 935 F. 2d 1303, 1307 (D. C. Cir. 1991). 11
Fertilizer Institute, 935 F. 2d at 1308.

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 5
determine whether a preamble is interpretive, the true emphasis must be on
the legal

base upon which the rule rests. If a rule is based on a specific statutory
provision, it is generally an interpretive rule. This is distinguishable
from a so- called “legislative

rule” requiring notice and comment, which is based on an agency's
power to exercise its judgment as to how best to implement a general
legislative mandate. Where a preamble represents an agency's attempt to
interpret the meaning of a statutory provision it is proper to conclude that
the rule is interpretive. 12

Applying the principles stated above, we believe that the preamble sentence
is an interpretive rule and, therefore, not subject to the APA's notice and
comment requirement. In essence, the preamble sentence applies a specific
tax code provision, section 411( b)( 1)( H), to a specific circumstance
“interest adjustments through normal retirement age are accrued in the
year of the related hypothetical allocation”

and expresses Treasury's interpretation that the statute's requirements are
not violated by the stated adjustments. Accordingly, the preamble sentence
would be considered an interpretive rule under the APA exception.

Other Agencies Unaware of Sentence: Applicability of OBRA '86 Coordination
Requirements

Our review indicated that other agencies were not aware of the addition of
the preamble sentence. Neither the IRS nor the EEOC has any record of a
draft of the regulation or the preamble being sent to the EEOC. EEOC
officials had no recollection of receiving a draft of either document. To
the best of their recollection, IRS officials believe that EEOC was not made
aware of the regulation or preamble.

As indicated, DOL was provided a draft of the final regulation, but the
version of the preamble sent along with it did not contain the sentence in
question. None of the officials we talked to at DOL had any recollection of
a policy consideration in 1990 or 1991 of the issue of whether cash balance
plans were age discriminatory.

OBRA '86 Coordination Requirement Not Applicable Treasury's failure to make
EEOC and DOL aware of the preamble sentence did not violate OBRA '86 because
the sentence was not covered by the Act's coordination requirements. Those
requirements are found in section 9204( d) of the Act, 13 which provides:

Interagency Coordination. The regulations and rulings issued by the
Secretary of Labor, the regulations and rulings issued by the Secretary

12 Id. at 1308- 09. 13 Pub. L. No. 99- 509 (1986).

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 6 of the
Treasury, and the regulations and rulings issued by the Equal

Employment Opportunity Commission pursuant to the amendments made by this
subtitle shall each be consistent with the others. The Secretary of Labor,
the Secretary of the Treasury and the Equal Employment Opportunity
Commission shall each consult with the others to the extent necessary to
meet the requirements of the preceding sentence. (Emphasis added;
“this subtitle” refers to subtitle C of OBRA '86.)

The Act's coordination requirement, therefore, was limited to regulations
and rulings issued pursuant to subtitle C of OBRA '86. Subtitle C added
section 411( b)( 1)( H) to the I. R. C. and added generally parallel
provisions to the Employee Retirement Income Security Act of 1974 and the
Age Discrimination in Employment Act. Because the September 1991 regulations
interpreted section 401( a)( 4), and not section 411( b)( 1)( H), the
interagency coordination requirement did not apply to these regulations.
While the preamble sentence discusses section 411( b)( 1)( H), the sentence
alone is not a “regulation or ruling” subject to the interagency
coordination requirement.

Treasury Should Have Coordinated the Preamble Sentence with DOL and EEOC

While the coordination requirement technically was inapplicable, the
underlying expectation was for consistency among the three agencies having
roles in administering section 411( b)( 1)( H). Under the circumstances,
Treasury should not have opined on whether cash balance plans were age
discriminatory in a public manner without having coordinated that position
with DOL and EEOC. The preamble sentence may have misled the public and
practitioners into believing that the sentence reflected the coordinated
views of all three of the responsible agencies. Moreover, the statement may
have limited the other agencies' policy options on this issue. The agencies
are continuing to analyze whether cash balance plans are age discriminatory.
The continuing regulatory uncertainty surrounding cash balance plans,
resulting in part from the preamble sentence, continues to be problematic
for employers and plan participants.

Agency Comments

We provided a draft of this letter to IRS, Treasury, DOL, and EEOC for
review and comment. IRS, Treasury, and DOL each advised us that they did not
have any comments.

EEOC submitted written comments and substantially agreed with much of our
draft (see enclosure). However, it disagreed with our conclusion that
Treasury did not violate applicable law by not coordinating with EEOC when
it issued the final regulation. Specifically, EEOC argues that ORBA
‘86 required Treasury to coordinate with EEOC before issuing
regulations or rulings pursuant to amendments made to

GAO- 01- 511R Preamble to Final Regulations on Pension Plans Page 7 I. R. C.
section 411( b)( 1)( H), and since the preamble sentence interpreted that
section,

coordination was required. EEOC also believes that Executive Order 12067
required Treasury to coordinate with it. That order requires agencies to
advise and offer to consult with EEOC during the development of any proposed
rules, regulations, policies, procedures, or orders concerning equal
opportunity.

We continue to believe that our conclusion that Treasury did not violate the
OBRA '86

requirement for coordination is correct. We do not read the statute as
requiring coordination of a sentence in a preamble to regulations that were
not subject to the coordination requirement. The requirement, by its own
terms, applies only to regulations or rulings issued pursuant amendments
made to I. R. C. section 411( b)( 1)( H). Other than the fact that the
preamble sentence interprets that section, EEOC has not explained why that
one sentence in the preamble, in isolation, should be construed as a
“regulation or ruling” subject to the statutory requirement. We
have no basis to conclude that the preamble sentence, standing alone, is
tantamount to a regulation or ruling as those terms are used in the statute.

With respect to the executive order, compliance with the order was beyond
the scope of our review and is essentially a matter of executive branch
policy. We point out, in this regard, that IRS does not view the executive
order as being applicable to the preamble sentence, and we do not have a
basis for disagreeing with them on this point. To the extent that the
agencies disagree about matters covered by the order, the order contemplates
that such disputes be resolved through the good faith efforts of the
affected agencies to reach mutual agreement. Moreover, the order contains a
dispute resolution mechanism, which authorizes an agency to refer the matter
to the Executive Office of the President.

Copies of this correspondence are being provided to the Honorable Paul H.
O'Neill, Secretary of the Treasury; the Honorable Elaine L. Chao, Secretary
of Labor; the Honorable Charles O. Rossotti, Commissioner of the Internal
Revenue Service; the Honorable Ida L. Castro, Chairwoman, Equal Employment
Opportunity Commission; appropriate congressional committees; and others
upon request.

If you have any questions regarding this letter, please contact Dayna K.
Shah, Acting Associate General Counsel, at (202) 512- 8208. Jonathan Barker
and Richard Burkard made major contributions to this work.

Sincerely yours, Anthony H. Gamboa General Counsel

Enclosure
*** End of document ***