IRS Issues Memo on Hybrid Plans Using Whipsaw

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

April 22 — 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, the IRS said in a chief council advice memorandum.

While those plans aren't eligible to use the lump sum-based safe harbor, they are eligible to use the safe harbor for indexed benefits under tax code Section 411(b)(5)(E), the Internal Revenue Service said in the memo, issued April 22.

This ruling is an important one for plans that use what is referred to as the whipsaw calculation, Mark L. Lofgren, a principal at Groom Law Group Chartered in Washington, told Bloomberg BNA April 22 .

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.

After the IRS issued final rules on hybrid plans in 2014, it became clear that plans with whipsaw didn't qualify for the safe harbor, Lofgren said.

This ruling is an attempt to acknowledge that while plans' whipsaw can't qualify for the final rule safe harbor, “this isn't the end of the story,” he said.

Safe Harbor

For plan years beginning on or after Jan. 1, 2017, a benefit measure is considered a safe harbor formula under the regulations only if the balance of the hypothetical account is calculated using a lump sum-based formula, the IRS said.

A benefit formula isn't a lump sum-based formula “unless a distribution of the benefits under that formula in the form of a single-sum payment equals the accumulated benefit,” the IRS said.

Some plans with cash balance formulas provide that a single-sum distributions is determined as the present value of a participant's accrued benefit using actuarial assumptions under Section 417(e)(3), the IRS said.

These plans aren't plans with a lump sum-based formula because the amount of a single-sum distribution isn't equal to the hypothetical account balance, the IRS said. As such, they aren't eligible for the safe harbor rules for plans using lump sum-based formulas.

“Under a cash balance plan, a participant’s accrued benefit at any relevant time is equal to the single life annuity payable at normal retirement age (or the current age, if later) that is the actuarial equivalent of the participant’s current hypothetical account balance plus projected future interest credits to that date,” the IRS said.

If a plan's interest crediting rate doesn't exceed a market rate of return, then the plan's interest crediting rate is considered to be a recognized index or methodology for purposes of applying the rules for indexed benefits, the IRS said.

“If the interest crediting rate under a cash balance plan is the same for participants of all ages, then the periodic adjustments that are applied to the hypothetical account balance for an interest crediting period do not provide an aggregate adjustment to the accrued benefit for that period for any participant that would be less than the aggregate adjustment for that period for any similarly situated younger participant,” the IRS said.

Because of that, the plan can be tested for compliance with the requirements of Section 411(b)(1)(H) “disregarding future interest credits pursuant to the rules for indexed benefits,” the IRS said.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at

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

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