The Treasury Department yesterday abruptly withdrew a key section of proposed pension rules after company and worker groups complained it would penalize efforts to help older workers.

The rules cover companies' conversion of traditional pensions to "cash-balance" plans, which have been criticized as penalizing older workers.

The department rescinded nondiscrimination requirements of the pending regulation following protests that the provisions would prevent employers from aiding veteran employees, such as giving them "grandfather" rights to remain in the old plan.

Cash-balance plans allow workers to earn benefits in more or less even increments over their time on the job rather than concentrating benefit accumulations in the final years of employment. In many cases, long-serving workers have found that their pensions would be smaller under a cash-balance plan than they expected under the traditional plan.

About 300 large companies, including International Business Machines Corp., have converted their pension plans in recent years, arguing that cash-balance plans distribute benefits more equitably and better fit today's more mobile workforce.

Workers who lost pension benefits with such conversions have argued, in court and elsewhere, that cash-balance plans illegally discriminate against older employees. The proposed regulations that Treasury issued in December specifically say that cash-balance plans do not violate age-discriminationlaws. They also included the contentious nondiscrimination provisions.

A sign of the controversy came in January when Treasury Secretary John W. Snow's Senate confirmation vote was held up while he met with Sens. Tom Harkin (D-Iowa) and Richard J. Durbin (D-Ill.) and promised to take a "fresh look" at the proposed regulations.

"The proposed nondiscrimination regulations would have had the unintended effect of making it more difficult for employers to provide workers with transition relief in cash balance conversions," Pamela Olson, Treasury's assistant secretary for tax policy, said in a statement. "When the effect was identified, Treasury and IRS decided to withdraw the proposed nondiscrimination regulations immediately so they do not prevent employers from reducing the impact of cash balance conversions on their employees."

The agencies will propose the rules again after obtaining additional comments. The IRS has scheduled hearings for tomorrow and Thursday to listen to comments on the proposed regulations.

Both sides of the cash-balance issue applauded yesterday's withdrawal.Rep. Bernard Sanders (I-Vt.), who has many unhappy IBM employees among his constituents, said in a statement yesterday that the withdrawal was a wise move, but he charged that the agencies did not go far enough.

Though removing the nondiscrimination rules would allow companies to give workers a choice between the old plan and the new one, it would not require them to do so, Sanders said. He plans to introduce legislation to kill the regulations permanently and to compel employers that convert to cash-balance plans to provide such a choice.

Mark Ugoretz of the ERISA Industry Committee, a large-employer group, said withdrawing the proposed rules "made eminent sense." Basically, the agencies "are admitting that they erred."

"In a conversion to a cash-balance plan employers were providing something extra to protect older workers, and [because] older workers tended to be more highly compensated . . . it was more likely they would flunk the nondiscrimination test," Ugoretz said, adding that the pay level involved is $90,000 -- "we are not talking millions [of dollars] here."

The American Benefits Council, an employer group, said that as originally proposed the rules would have made "several changes to the nondiscrimination rules . . . effectively prohibiting the vast majority of transition techniques employers use to help older workers when pension plans convert to cash balance designs."