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CCH® PENSION — 02/17/11

Proposed hybrid plan regs criticized at IRS hearing

Speakers at a January 26, 2011 IRS hearing delivered testimony critical of the recently proposed cash balance/hybrid plan regulations. Speakers accused the IRS and Treasury of failing to implement the relief provided by the Pension Protection Act of 2006 (PPA; P.L. 109-280) and for unduly restricting hybrid plan operations. The regulations were issued October 18, 2010, with final regulations proposed to apply to plan years beginning on or after January 1, 2012.

Many speakers opposed the rules relating to market rate of return. The law states that a cash balance plan fails to satisfy the applicable age discrimination rules unless the plan provides that any interest credit (or an equivalent amount) shall not exceed a market rate of return. According to Richard Shea, of Covington & Burling, LLP, representing the ERISA Industry Committee, the regulations improperly limit the rates of return that can be used. Accounts should be able to move up and down with the market, but the regulations prevent this, he said, adding that employers should be able to change rates and to offer higher rates.

It would be appropriate for the regulations to offer safe harbor interest rates, but they should accept rates available in the market, Lawrence Sher of the American Benefits Council testified. Similar criticisms were made by Michael Pollock, of Towers Watson, Kent Mason of Davis & Harman, LLP (representing the Coalition to Preserve the Defined Benefit System) and Thomas Finnegan of the American Society of Pension Professionals & Actuaries (ASPPA).

Speakers criticized the proposed 4% minimum and 5% fixed interest rates as artificially low. Sher said the rates should be at least 5 and 6 percent, respectively. According to Pollock, the government should choose rates that would cause less disruption; otherwise, half of the existing plans would have to change their interest rates. Mason claimed the rates would be a nullity in the marketplace and would trigger substantial plan violations.

Mason added that the market rate of return rules were not effective until 2008. These rules should not be applied retroactively to interest credited before the 2008 effective date, he said. Sher and David Certner of AARP echoed these remarks. The proposed 2012 effective date will not give plans enough time to comply with final regulations, speakers, including Robert Newman of Covington & Burling, Sher, and Pollock, commented. Plans will need at least 12 months to make the necessary changes, they indicated.

Some speakers criticized the rules for failing to take account of participant-directed plans and for not providing enough guidance on pension equity plans (PEPs). Julie Edmond of Covington & Burling, among others, expressed concern that the regulations would improperly limit subsidized benefits, which Congress intended to protect. Edmond and Pollock said that the rules appear to reinstitute the problem of "whipsaw," which Congress thought it had ended.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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