According to the letter sent to the Treasury Department, the IRS is challenging some plan conversions on the grounds that their “greater of” design conflicts with the agency’s backloading rules, which prohibit pensions from concentrating a plan’s benefits in the later years of a worker’s employment.

The letter was signed by seven organizations, including AARP, the American Benefits Council, the Business Roundtable, the ERISA Industry Committee and the Service Employees International Union.

Lynn Dudley, vice president of retirement policy for the American Benefits Council, pointed out that companies began using “greater of” designs after cash-balance plan conversions were challenged in the 1990s as discriminating against older workers.

“They started looking for protections they could implement to ensure they wouldn’t have a problem,” Dudley says. “They would grandfather people and give them the ‘greater of’ for some period of time.”

She noted that the backloading regulations, which were written long before cash-balance plans existed, only have a problem with “greater of” designs when they’re applied to a combination of the benefit formulas, rather than each benefit formula separately.

“We’d like Treasury and IRS to come up with a way to solve this problem,” Dudley says. “What we want them to do is take a look at each formula. If both formulas satisfy the rule, then there ought not be a problem.”

The IRS is currently evaluating a sizable backlog of cash-balance plan conversions. It stopped issuing letters of determination for defined-benefit pension plans converting to a hybrid design, such as cash balance, back in 1999. The IRS announced in December 2006 that it would resume issuing such letters and hoped to work its way through the backlog by the end of 2007.

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.