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CCH® PENSION — 6/19/08
ASPPA Calls For Clarifications In IRS’s Regs On Cash Balance, Other Hybrid Retirement Plans
From Spencer's Benefits Reports: Testifying at a June 6 hearing on the Internal Revenue Service’s proposed regulations governing cash balance plans and other hybrid retirement plans, the American Society of Pension Professionals & Actuaries (ASPPA) called for certain clarifications in the final regulations. The IRS issued the proposed regulations on Dec. 28, 2007.
IRC Sec. 411(b)(1)(H)(i) provides that a defined benefit plan (including a cash balance plan) fails to comply with the accrual requirements of Sec. 411(b) if, under the plan, an employee’s benefit accrual stops, or the employee’s rate of benefit accrual is reduced, because of the attainment of any age. That provision of the Tax Code had generated several court cases asserting that cash balance plans are inherently age-discriminatory. However, Sec. 411(b)(5)(A), as added by the Pension Protection Act of 2006, generally provides that a plan will not be treated as failing to meet the requirements of Sec. 411(b)(1)(H)(i) if a participant’s benefit accrued to date, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant.
Sec. 411(b)(5)(B) imposes certain requirements on a hybrid plan such as a cash balance plan as a condition of satisfying Sec. 411(b)(1)(H). In Notice 2007-6, I.R.B. 2007-3, 272, the IRS provided transitional guidance with respect to rules in Secs. 411(a)(13) and 411(b)(5) that relate to hybrid plans and the conversion of a defined benefit plan into a hybrid plan. The IRS’s 2007 proposed regulations would incorporate the transitional guidance contained in Notice 2007-6. The regulations also would provide additional guidance with respect to Secs. 411(a)(13) and 411(b)(5), taking into account comments received in response to Notice 2007-6.
ASPPA’s Testimony
ASPPA’s testimony included the following recommendations:
- Remove the participant-by-participant determination of conversion date. According to the ASPPA, “The statute prohibits wear-away of benefits accrued before the effective date of an ‘applicable plan amendment.’ The proposed regulations determine the effective date on a participant-by-participant basis—not with respect to when the amended terms of the plan apply, but when any transition relief provided by the amendment, usually in the form of a ‘greater of benefit, no longer applies.”
- Provide a clear definition of what is meant as a “pre-June 29, 2005” amendment.
“The PPA, and the proposed regulations, provide that a conversion amendment is covered under the new rules only if the amendment is both adopted and effective after June 29, 2005,” the ASPPA observes. “A common-sense interpretation of an adoption date would lead one to assume only a plan amendment adopted by the board (or other responsible party) after June 29, 2005, could trigger the new conversion requirements. However, that isn’t clear under the proposed regulations.”
- Establishment of opening account balances. According to the ASPPA, “The proposed regulations contemplate alternate means of satisfying the ‘A+B’ conversion requirements involving establishing an opening account balance, without requiring subsequent comparison to the preconversion plan benefit. Comments in the preamble would limit the circumstances to an arrangement where there was no early retirement subsidy, interest credits were expected to be no lower than the rates used to establish the opening balance, and there is no discount for death or 100% of the balance is to be paid on death.” The ASPPA recommends that the final regulations adopt the proposed exception outlined in the preamble, but without restricting applicability to participants that elect lump sum payment.
Interest Crediting Issues
- Transition relief for a change from any interest crediting rate in Notice 96-8 to any other PPA permissible rate. “The preamble to the proposed regulations states that until further guidance is provided, an amendment to change the interest crediting rate from one of the rates in Notice 96-8 to another will be afforded IRC section 411(d)(6) relief only if the difference between the maximum permissible margin and the actual margin for the new rate does not exceed the same differential as the old rate,” the ASPPA notes. “The preamble goes on to say IRS anticipates IRC section 411(d)(6) relief will be available when a plan is amended to change a plan’s interest crediting rate from an above-market rate of return to a market rate of return, provided the change is not applicable to periods before the time IRC section 411(b)(5)(b)(i) first applies to the plan.” The ASPPA recommends that any transition relief available in the final regulations for changing the interest crediting rate from an above-market rate to a market rate of return also be available for changing the interest crediting rate from one of the rates in Notice 96-8 to any other permissible rate.
- Any of the three segment rates, or the greatest of the three rates, should be a safe harbor rate. According to the ASPPA, “The proposed regulations provide that the third segment rate is a safe harbor rate. Most commonly, the first and second segment rates will be less than the third segment, and so will not be in excess of a market rate of return. However, occasionally the third segment rate will not be the highest rate, and a plan that uses an interest crediting rate of the first or second segments may exceed a safe harbor rate.”
- Determining the amount of annuity payments. According to the ASPPA, “There are multiple compliance issues that require determination of the annuity payable at retirement, including application of the 133-1/3% rule, 401(a)(4) testing, and disclosure in the relative value regulations, among others. Guidance should be provided on how to make this determination when the interest crediting rate is a variable rate.” The ASPPA recommends that the final regulations provide guidance on determining the amount of an annuity payable at retirement age, and the methodology for determining “greater of” benefits, when the interest crediting rate is a variable rate.
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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