Hybrid Pension Plan Guidance Issued

By Alistair M. Nevius, J.D.

Regulations

On October 18, the IRS released final and proposed regulations providing guidance on so-called hybrid defined benefit pension plans (T.D. 9505 and REG-132554-08). The regulations deal with changes made by the Pension Protection Act of 2006, P.L. 109-280, and the Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110-458. They generally apply to plan years that begin on or after January 1, 2011.

A hybrid defined benefit pension plan is generally a defined benefit plan under the terms of which a participant’s accumulated benefit 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 Secs. 411(a)(13) and 411(b)(5) to the Code. These sections modify the minimum vesting standards of Sec. 411(a) and the accrual requirements of Sec. 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 Regs.

The 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 “lumpsum-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 Sec. 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 it determines interest credits and must specify how and when interest credits are credited. The regulations contain specific rules regarding the method and timing of interest credits, including a requirement that interest be credited at least annually.

Prop. Regs.

The proposed regulations issued simultaneously with the final regulations provide guidance on other issues under Secs. 411(a)(13) and 411(b)(5) that are not addressed in the final regulations. The proposed regulations would provide that the relief of Sec. 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 Sec. 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 Sec. 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 on the application of the rules of Sec. 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 January 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, to satisfy the requirements of Secs. 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 will hold a public hearing on January 26, 2011, in the IRS building in Washington, DC. Written or electronic comments must be received by Wednesday, January 12, 2011, and can be submitted via the Federal eRulemaking Portal.

Newsletter Articles

SPONSORED REPORT

Year-End Tax Planning and What’s New for 2016

A look at year-end tax planning strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

PRACTICE MANAGEMENT

CPAs Contend With Tax ID Theft

Tax-related identity theft fraud remains a widespread problem that is often difficult for victims and their tax preparers to correct.