On Monday, the IRS released final and proposed regulations providing guidance on so-called hybrid defined benefit pension plans (TD 9505 and REG-132554-08). The regulations deal with changes made by the Pension Protection Act of 2006 and the Worker, Retiree, and Employer Recovery Act of 2008. They generally apply to plan years that begin on or after Jan. 1, 2011.
A hybrid defined benefit pension plan is generally a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation (or is a plan that uses a formula that has an effect similar to this).
The Pension Protection Act added IRC §§ 411(a)(13) and 411(b)(5) to the Code. These sections modified the minimum vesting standards of section 411(a) and the accrual requirements of section 411(b). In 2007, the IRS issued proposed regulations (REG-104946-07), and the final regulations generally adopt the provisions of the 2007 proposed regulations (with certain modifications) as well as the transition guidance provided in Notice 2007-6.
Final Regulations
The final regulations adopt the terminology used in the proposed regulations (such as “statutory hybrid benefit formula” and “lump sum-based benefit formula”) to take into account situations where plans provide more than one benefit formula. The regulations define “accumulated benefit,” “statutory hybrid plan,” and “lump sum-based benefit formula.”
They define a lump sum-based benefit formula as a benefit formula used to determine all or any part of a participant’s accumulated benefit under which the accumulated benefit provided under the formula is expressed as the current balance of a hypothetical account maintained for the participant or as the current value of an accumulated percentage of the participant’s final average compensation.
The final regulations provide that the relief under section 411(a)(13)(A) applies to benefits determined under a lump sum-based benefit formula. They also provide special vesting rules for applicable defined benefit plans and safe harbors for age discrimination, conversion protection, and market rate of return limitations.
The final regulations clarify that a formula is expressed as the balance of a hypothetical account maintained for the participant if it is expressed as a current single-sum dollar amount.
The final regulations provide that a participant whose benefits are affected by a conversion amendment generally must be provided with a benefit after the conversion that is at least equal to the sum of benefits accrued through the date of conversion and benefits earned after the conversion, with no permitted interaction between the two portions. They provide an alternative method of satisfying the conversion protection requirements where an opening hypothetical account balance or opening accumulated percentage of the participant’s final average compensation is established at the time of the conversion and the plan meets certain requirements.
Under the final regulations, a plan that credits interest must specify how the plan determines interest credits and must specify how and when interest credits are credited. They contain specific rules regarding the method and timing of interest credits, including a requirement that interest be credited at least annually.
Proposed Regulations
The proposed regulations issued on Monday provide guidance with respect to other issues under sections 411(a)(13) and 411(b)(5) that are not addressed in the final regulations. The proposed regulations would provide that the relief of section 411(a)(13)(A) does not apply with respect to the benefits determined under a lump sum-based benefit formula unless certain requirements are satisfied.
The proposed regulations would also provide that the relief under section 411(a)(13)(A) extends to certain other forms of benefit under a lump sum-based benefit formula, in addition to a single-sum payment of the entire benefit.
The proposed regulations would clarify that the relief provided under section 411(a)(13)(A) does not apply to any portion of the participant’s benefit that is determined under a formula that is not a lump sum-based benefit formula.
The proposed regulations would provide an alternative method of satisfying the conversion protection requirements set forth in the final regulations.
The proposed regulations would provide guidance with respect to the application of the rules of section 411(b)(5)(B)(vi), which require special plan provisions relating to interest crediting rates and annuity conversion rates that apply when the plan is terminated.
The specific rules that would be implemented under the proposed regulations generally would apply to plan years that begin on or after Jan. 1, 2012. However, plans can rely on the provisions of the proposed regulations, as well as the 2010 final regulations, the 2007 proposed regulations, and Notice 2007-6, for purposes of satisfying the requirements of sections 411(a)(13) and 411(b)(5) for periods before the regulatory effective date.
The IRS has asked for comments on the proposed regulations, and a public hearing will be held on Jan. 26, 2011, in the IRS building in Washington. Written or electronic comments must be received by Jan. 12, 2011, and can be submitted via the Federal eRulemaking Portal at regulations.gov.
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