Hybrid Plan Rules Offer Certainty, Open Up Options for Employers, Practitioners Say

Recently released and long-awaited final rules on hybrid defined benefit plans will free up the retirement community to embrace more innovative kinds of retirement plans, but this plan design may take a while to catch on, practitioners told Bloomberg BNA.         

The final rules open up a new world for employers wanting to offer retirement plans to their employees and could eventually slow the migration from defined benefit plans to defined contribution plans, Robert Newman and Richard C. Shea of Covington &  Burling LLP  said Sept. 19.      

“These regs are really, really important because they create a new opportunity that hasn't existed before,” Shea said.         

On Sept. 18, the Internal Revenue Service and Treasury Department came out with final rules (T.D. 9693, RIN 1545-BI16) on hybrid plans that answered lingering questions about the acceptable market rate of return, as well as proposed rules (REG-111839-13, RIN 1545-BL62) giving transition relief for employers that need to reduce their market rate of return to comply with the new final rules.        

The rules were very important for plan sponsors already offering hybrid plans, Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee in Washington, said Sept. 22. “We needed the rules for a road map. We were just kind of desperately hanging out there without the rules. Part of it is just getting the rules out there and having a road map, having a sense of where the lines are in terms of some of these technicalities,” she said.

This guidance also helps employers that may have been hesitant in the past to offer hybrid plans, she said.

“Ones who have the plans were desperately wanting to know what the rules were and ones who were actually looking to put one into place have actually been sitting on the sidelines, afraid to put their toe in that water because you don't know if you would be going the right way or wrong way,” Ricard said.

The prevalence of hybrid plans has declined significantly among the nation's biggest companies in recent years, falling 22 percent since 2003, according to a recent Towers Watson analysis of Fortune 500 companies.


Alan Glickstein, senior retirement consultant at Towers Watson, said Sept. 22 that the biggest issue the final rules resolved was the market rate of return, but some hybrid plans will still need to take advantage of the transition relief included in the proposed rules.

The market rate of return in the final rules doesn't solve the problem for every plan, but “at least moved in a direction that both gave clarity to all plan sponsors and put a lot more plan sponsors in the category of we're OK, versus we're not OK,” he said.

However, Glickstein said there are two big outstanding issues to deal with: how the transition relief offered in the proposed rules will be finalized and what happens to plans that were operating between 2008 and the applicability date of the final rules, which is Jan. 1, 2016.

“These regulations don't say much of anything about that period from 2008 until 2015, which is a pretty long period,” Glickstein said.

While the proposed rules offer transition relief going forward, the final rules don't explain where plans “stood with respect to the past,” he said.

“The concern would be all the concerns that existed to a much greater degree before we had any guidance about cash balance, which is when you don't know what the rules are, different parties will have different opinions, and when people have different opinions, disputes can arise, and when disputes arise, sometimes they're settled in courts or in other ways,” he said.

Ricard also expressed concern about the lack of guidance on this issue. She noted that the preamble to the final rules state that the “regulations should not be construed to create any inference concerning the applicable law prior to the effective dates of sections 411(a)(13) and 411(b)(5),” and that she takes that to mean that plans reasonably complying with the rule “should be fine.”

Excerpted from a story that ran in Pension & Benefits Daily (9/23/2014).