left the buildingIt was just a brief note on the Form 8-K filed on August 17, 2015 by U.S. Steel Corporation with the U.S. Securities and Exchange Commission.

As described above, on August 17, 2015, the Corporation enacted a hard freeze of benefits accrued under its DB Plan effective December 31, 2015. Participants of the DB Plan will be transitioned to a defined contribution retirement plan at that time. The Corporation will perform a remeasurement of the DB Plan, and will report these results in its quarterly report on Form 10-Q for the quarter ended September 30, 2015.

The usual course of action in situations such as these is to subsequently terminate the plan by paying out benefits.

Pension plan freezes and ultimate terminations is not a new phenomenon, or course. It’s symbolic of the transformation of this country’s workplace retirement programs from defined benefit plans to defined contributions plans, i.e., 401(k) plans that began in the 1980s. In everyday terms, it represents the change from guaranteed retirement benefits by the employer to retirement savings by the employees.

The U.S. Steel Corporation Pension Plan began in 1911 even before favorable tax legislation was enacted as noted by the Employee Benefit Research Institute:

  • 1921. The Revenue Act of 1921 exempted interest income on trusts for stock bonus or profit-sharing plans from current taxation. Trust income was taxed as it was distributed to employees only to the extent that it exceeded employees’ own contributions. The act did not authorize deductions for past service contributions.
  • 1926. The Revenue Act of 1926 exempted income of pension trusts from current taxation.
  • 1928. The Revenue Act of 1928 allowed employers to take tax deductions for reasonable amounts paid into a qualified trust in excess of the amounts required to fund current liabilities. The act changed the taxation of trust distributions that are attributable to employer contributions and earnings.

But defined benefit pension plans haven’t totally left the building at least for small business. They have taken on a different persona in the form of Cash Balance Pension Plans. Coincidentally, the Kravitz 2014 Cash Balance Research Report was published at about the same time as the U.S. Steel announcement with quite a different tone:

  • The Cash Balance Plan market surged 22% versus a 1% increase in number of 401(k) plans.
  • Cash Balance Plans grew 22%, surpassing industry projections of a 15% annual increase.
  • Cash Balance Plans now make up 25% of all defined benefit plans, up from 2.9% in 2001.

A different era beginning with 87% of the approximate 16,700 Cash Balance Plans adopted by small employers (those with less than 100 employees) with the highest growth for employers with 25 or fewer employees.

The difference? Large employers shedding liabilities and compliance obligations and small employers maximizing tax deductions and increased allocations to owners.