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WASHINGTON -- A new Internal Revenue Service private letter ruling could further increase the appeal of cash balance pension plans.
Under the new ruling, employees annually could convert unused paid sick leave into a pay equivalent, have that amount credited to their cash balance plans and not be taxed on the paid sick leave at the time it is converted and contributed to the cash balance plan.
Such a conversion feature in a cash balance plan does not subject the converted unused sick leave to taxes because the employees do not have the option to receive cash rather than the credits.
"Thus the employee's receipt of the pay equivalent of the unused sick leave is not constructively received because the employee cannot elect to receive the unused sick leave in cash in lieu of receiving a contribution to the plan," the ruling says.
IRS private letter rulings do not carry the weight of law, but they do give insight into the IRS' thinking on an issue.
Benefit experts say such a conversion feature would be appealing to employers and employees.
For employers with overfunded pension plans, for example, converting unused paid sick leave into a cash balance credit would give employees a higher retirement benefit without increasing their cash costs.
"There would not be a cash outlay. Unused sick pay can be converted to retirement benefits on a very cost-effective basis for employers," said Dennis Coleman, a principal at PwC Kwasha in Fort Lee, N.J.
For employees, the conversion of paid sick leave into cash balance plan credits would mean an immediate increase in retirement benefits.
"This will grab attention. People will really be interested in this. And it is good public policy because it means more funds will be available at retirement," Mr. Coleman added.
The ruling, PLR 9840006, involves an organization that allows employees to accrue 12 paid sick leave days a year. At the end of each calendar year, employees' accrued but unused sick days are credited to the employees' sick leave bank.
The organization's proposed policy would involve non-highly compensated employees who have accumulated or expect to accumulate by Dec. 31 at least 30 days in the sick leave bank.
Employees could elect to have converted annually any or all days in excess of 30 days and have that amount contributed to a pay equivalent and contributed to the cash balance plan. Unused days would remain the sick pay bank.
In addition, for terminating employees, all unused sick leave would be converted automatically to a pay equivalent, and that amount would be added to his or her cash balance account.
Employees would not have the option of receiving a payment of cash from the organization in lieu of receiving a pay equivalent contributed to the cash balance plan.