News Briefings - Pension & Benefits
Follow us on
twitter.com/PensionBenefits.
The following article was taken from the 11/16/09 issue of Pension & Benefits Week.
11/16/09 -- Anticipated IRS guidance on statutory hybrid plans to include rules on permissible market rates of return
IRS has announced that it expects to issue guidance relating to statutory hybrid plans, including rules interpreting the requirement that statutory hybrid plans not have an interest crediting rate in excess of a market rate of return. The announcement may be relied on by plan sponsors pending publication of that guidance, which is not expected to go into effect before the first plan year that begins on or after January 1, 2011. (Ann. 2009-82, IRB 2009-48)
Background. Under Code Sec. 411(b)(5)(B)(i), a “statutory hybrid plan,” won't meet the Code Sec. 411(b)(1)(H)(i) age discrimination rules unless the plan provides that the “interest credit rate” (or an equivalent amount) for any plan year does not exceed a market rate of return. To satisfy this requirement, a plan must:
(a) satisfy the requirements for determining “interest credit rates;”
(b) meet a preservation of capital requirement; and
(c) provide that, upon termination, a participant's benefit meets specified requirements.
Proposed regs, which were issued under Code Sec. 411(b)(5) on December 28, 2007 (see Pension & Benefits Week, 1/7/2008), define a “statutory hybrid plan” as a defined benefit plan that has a statutory hybrid benefit formula, which is a benefit formula that's either:
(i) a lump sum-based benefit formula, or
(ii) a formula that is not a lump sum-based benefit formula, but that has an effect that's similar to a lump sum-based benefit formula.
Under the proposed regs, a “lump sum-based benefit formula” is a benefit formula that's used to determine all or part of a participant's accumulated benefit wherein the benefit provided under the formula is expressed as:
(1) the balance of a hypothetical account maintained for the participant (e.g., as under a cash balance plan); or
(2) the current value of the accumulated percentage of the participant's final average compensation (e.g., as under a pension equity plan).
Under the proposed regs, a statutory hybrid plan's “interest credit rate” (which must not exceed a market rate of return, if the plan is to satisfy the Code
Sec. 411(b)(1)(H)(i) age discrimination rules) is the rate by which a participant's benefit is increased under the plan's ongoing terms (to the extent not conditioned on current service) regardless of how the amount of the increase is determined.
The regs as proposed would be effective for plan years beginning after Dec. 31, 2008.
Anticipated additional guidance. Now, IRS has announced that it expects to issue in the near future final regs and proposed regs relating to statutory hybrid plans. The regs will include rules interpreting the Code Sec. 411(b)(5)(B)(i) requirement that statutory hybrid plans not have an interest crediting rate in excess of a market rate of return. The rules in the regs specifying permissible market rates of return are not expected to go into effect before the first plan year that begins on or after January 1, 2011.
Relief under the Code Sec. 411(d)(6) anti-cutback rules. In addition, IRS said that it anticipates exercising its authority under Reg. § 1.411(d)-4, Q&A 2(b)(2)(i) to provide that, once final regs regarding the market rate of return requirements are issued, an amendment to a statutory hybrid plan with an interest crediting rate that is in excess of a market rate of return under those final regs that is adopted before the final regs' effective date, will not violate the Code Sec. 411(d)(6) anti-cutback rules merely because the amendment reduces the future interest crediting rate on participants' account balances to the extent necessary to constitute a permissible rate under those final regs.
Under the anticipated guidance, Code Sec. 411(d)(6) will not operate to bar the amendment, even if the amendment is adopted after the last day of the first plan year that begins on or after January 1, 2009, and is thus not an amendment described in section 1107 of the Pension Protection Act of 2006 (PPA '06, P.L. 109-280, Sec. 1107). Section 1107 of PPA '06 provides, in general, that a plan will not fail to satisfy Code Sec. 411(d)(6) as a result of amendments that are adopted under PPA '06 or regs thereunder by the last day of the first plan year that begins on or after January 1, 2009.
Notice to plan participants. IRS said that it anticipates that future guidance will include a special timing rule for providing ERISA § 204(h) notice, as defined in Reg. § 54.4980F-1, Q&A 4, to participants and other applicable individuals with respect to an amendment that changes a statutory hybrid plan's interest crediting rate, if the amendment is adopted by (a) the last day of the first plan year that begins on or after January 1, 2009 (that is, by the end of the period described in section 1107 of PPA '06), and (b) after November 10, 2009. Under this special timing rule, any required section 204(h) notice relating to the amendment will be permitted to be provided as late as 30 days after the effective date of the amendment. According to IRS, it is expected that this relief will apply to an amendment only if the amendment is effective not later than the first day of the first plan year that begins on or after January 1, 2010.
Did you find this article helpful? Subscribe to Pension
& Benefits Week.
