IRS Issues Transition Relief for Hybrid Plans

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By Sean Forbes

Nov. 13 — Hybrid pension retirement plans with noncompliant interest crediting rates can be amended with respect to benefits that have already accrued to bring rates into compliance with market rate-of-return rules, under newly issued final regulations.

The new rules give plan sponsors a period of time during which they can make such amendments without violating tax code regulations prohibiting benefit reductions, the Treasury Department and the Internal Revenue Service said in the rules, issued Nov. 13. Some plans will need to make such changes to come into compliance with final rules on hybrid plans issued in September 2014, the agencies said.

The transitional rules (T.D. 9743, RIN 1545-BL62) are generally applicable to plan amendments made on or after Sept. 18, 2014, until the first day of the first plan year that begins on or after Jan. 1, 2017—with up to a couple more years for collectively bargained plans.

Treasury and the IRS made several changes to the proposed version of the rules released in September 2014.

Delayed Deadline Welcomed

The 2017 deadline for plans not collectively bargained is an extension from 2016 in the proposed rules. Mark L. Lofgren, a principal at Groom Law Group Chartered in Washington, told Bloomberg BNA in an e-mail that “the delay will give affected plan sponsors much needed time to consider and implement any amendments needed to comply with the market rate of return rules.”

In addition, the one-year delay will help plan sponsors comply with requirements under the Employee Retirement Income Security Act that they provide notices of significant reductions in benefit accruals to participants, he said.

The rules are welcome, but more transitional guidance is needed, said Richard Shea, a partner at Covington & Burling LLP in Washington.

“The rules finalized today only address how to transition from a noncompliant market rate of return,” Shea told Bloomberg BNA in an e-mail.. “They do not address how to transition from plan provisions that do not comply with other aspects of the hybrid plan rules, including the failure to have a lump-sum-based formula. The lack of transition will pose special challenges for many plans.”

“Treasury and IRS had received comments, not only on the proposed transition rules (which they finalized with changes today), but also on numerous aspects of the permanent hybrid plan rules that were finalized last September,” Shea said. “Some of the comments on the permanent rules related to market rate of return issues, while others related to other aspects of the regulations, such as whether a plan has a lump-sum-based formula.”

More Guidance Ahead?

Shea said that based on Treasury and the IRS's extension of the applicability date, they may also revisit other public input, and that he looks forward to guidance on plans that include whipsawed lump sums, subsidized distribution forms and variable annuity plans.

The rules allow for flexibility, but also require sponsors to take a one-at-a-time approach to resolving problems regarding whether the noncompliant interest rate is a fixed rate, a bond-based rate, or an investment-based rate, said Robert Newman, also a partner at Covington & Burling LLP.

“The regulations issued today respond to requests for greater flexibility,” Newman said. “The regulations provide more ways in which a noncompliant plan may become compliant. However, the regulations maintain the so-called ‘silo approach,’ in which each type of interest crediting rate is categorized and subject to a different set of transition rules. The final rules add flexibility, but still within the silo framework.”

The rules are scheduled to be published Nov. 16 in the Federal Register, and are effective the same day.

To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Phil Kushin at

The regulations are at


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