Hybrid Plan Rules Leave Those Using Whipsaw in Tight Spot

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Kristen Ricaurte Knebel

Nov. 24 — Final regulations giving hybrid defined benefit retirement plans more time to bring their plans into compliance are helpful, but some plans are still in the dark, retirement insiders told Bloomberg BNA.

Recently released final regulations from the Internal Revenue Service and Treasury Department allow hybrid plans that have noncompliant interest crediting rates to be amended to bring rates into compliance with market rate-of-return rules by Jan. 1, 2017, an extension from 2016 in the proposed rules. 

However, the rules didn't include transition relief for plans using the whipsaw calculation, Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee in Washington, told Bloomberg BNA on Nov. 24.

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.

Whipsaw calculations have been controversial, and plan sponsors such as PricewaterhouseCoopers LLP, Hanover Insurance Group Inc., S.C. Johnson & Sons Inc., Alliant Energy Corp. and AK Steel Corp. have faced lawsuits over their use of them.

While the IRS and Treasury had given plans time to eliminate whipsaw calculations in the past, it was never made explicitly clear that they were required to do so, Richard Shea, a partner at Covington & Burling LLP in Washington, told Bloomberg BNA on Nov. 24.

“Sponsors in this situation are really, really angry. Their view is for a period of almost 20 years they were told, if your interest crediting rate isn’t one of the rates in Notice 96-8, you must do whipsaw and if you don’t, your plan is bad,” Shea said.

But now, they're being told that if they use whipsaw, they have a problem. To say that and “then not to provide transition relief when it’s actually needed adds insult to injury,” Shea said.

Ricard backed up Shea's assessment, saying that “the rub” lies in the fact that the IRS and Treasury hadn't made it clear “in previous iterations” that whipsaw needed to be eliminated.

Unclear Future

Though the IRS and Treasury know this is a loose end, it's unclear what they're going to do about it, Ricard said.

“We were hoping that they would put something in the preamble that would address it,” possibly providing a road map for amending plans with whipsaw, Ricard said.

Shea agreed that the future is unclear for plans with whipsaw.

One thing is for certain, the extended effective date of Jan. 1, 2017, will give more time for plans to digest the changes, and possibly for Treasury to consider giving transition relief to plans with whipsaw.

“This either gives people more time to adjust to bad news, although it’s unclear what they’re supposed to do, or it gives Treasury more time to assess its position and figure out how to address the concerns raised,” Shea said.

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


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