Hybrid Pension Plan Interest Credit Rule Amendment Deadline Nears

As of January 1, 2017 (January 1, 2019 for collectively bargained plans), hybrid pension sponsors will be required to be in compliance with the key provisions of final IRS hybrid plan regulations by adopting plan amendments to bring them up to speed and compliance.  Specifically, transitional amendments which satisfy the regulations’ market rate-of-return rule will need to be implemented to be in compliance.

What Plans Are Affected?

The final regulations apply to those defined benefit (“DB”) plans that incorporate a lump-sum based benefit formula, as opposed to a formula which is annuity based on earnings and length of service of the participant.  In addition, this applies to cash balance, pension equity, and other plans which have comparable formulas and methodologies to a lump-sum based formula.

Furthermore, these new regulations also affect those sponsors of traditional DB plans who are contemplating a conversion to a hybrid plan.

What Do the Regulations Require?

Taking the new regulations into consideration means that the hybrid plans will be required to maintain interest credit rates that do not exceed a market rate of return.  The objective is to avoid the possibility of hybrid plan sponsors estimating the value of notional participant “accounts” benefits too optimistically.  This will help bridge the gap and lessen the risk of participants basing their retirement planning using those estimates, in those instances in which the plan’s underlying investments do not perform to expectation and the plan sponsor cannot make up the difference.

There are various conditions that are defined within the regulations of which the hybrid plan sponsors can amend their noncompliant plan without triggering “anticutback rules” under the tax code.  (Anticutback rules prevent plan sponsors from reducing previously promised benefits.) Plan sponsors ought to refer to the regulations’ methods for addressing particular compliance failures.

What Should You Do?

Review and examine the final rules and regulations so you know if your plan is affected and action must be taken.  Particularly, review whether your plan meets the statutory requirements of the interest credit rates.  Finally, contact your benefits advisor, if you haven’t done so already, and discuss if any plan amendments will be necessary to be compliant.

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