Hybrid Plan Guidance Critiqued

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By Kristen Ricaurte Knebel

April 27 — Recent informal guidance for hybrid defined benefit plans using a whipsaw calculation was helpful for those plans, but some are questioning whether it goes far enough.

The Internal Revenue Service's chief counsel advice memorandum is compelling, but because such guidance can't be relied on, it doesn't provide plans in this position with much practical help, Richard C. Shea, a partner at Covington & Burling LLP in Washington, told Bloomberg BNA April 26.

On April 22, the IRS issued CCA 201617006, which said that cash balance plans with a single-sum distribution, determined as the present value of a participant's benefit, aren't eligible for the safe harbor rule for plans with lump sum-based benefit formulas.

When the IRS and Treasury Department issued final transition rules for hybrid plans last November, there were a few issues that weren't addressed, including plans with whipsaw, Shea said.

In a typical whipsaw calculation, the value of a participant's cash balance account will be projected to normal retirement age using the plan's interest crediting rate, then discounted back to its present value using a variable interest rate set by the tax code.

While this CCA indicates the IRS heard the cries for some sort of guidance for plans using a whipsaw calculation, “it’s pretty disappointing in a sense because they’ve gone through a lot of trouble in other areas to issue proposed and final regulations,” Shea said.

Robert Newman, also a partner at Covington & Burling LLP in Washington, told Bloomberg BNA April 26 that the CCA is “one of these times when the IRS and Treasury think they’re being helpful, but it’s not as helpful as they could be.”

Ultimately, it would be beneficial if they issued guidance that plans could rely on, Newman said.

Heidi Rackley, a partner in Mercer LLC's Washington Resource Group in Seattle, agreed that the CCA was helpful, but wasn't sure the IRS needed to go further in the future.

The CCA “lays out how the Service views these plans and even though it can’t be relied on, it provides a pathway that plan sponsors can follow if there were ever a court challenge on this,” Rackley told Bloomberg BNA on April 27.

It would have been ideal for the IRS to tweak the final rule, but “we're happy with what they gave us,” Rackley said. She added that she doesn't think the IRS will issue more guidance on this in the future.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

For More Information

For more information, see Compensation and Benefits Library’s Cash Balance and Hybrid Pension Plans chapter.