Long-Awaited Hybrid Plan Rules Issued, Along With Accompanying Transition Relief


The Treasury Department and the IRS issued long-awaited  final regulations (T.D. 9693, RIN 1545-BI16) on hybrid retirement plans, providing guidance regarding certain issues that weren't addressed in the 2010 final rules.

The new final rules, issued Sept. 18, answer lingering questions for hybrid plans, including the acceptable market rate of return. Treasury and the Internal Revenue Service proposed regulations in 2010 on hybrid plans (REG-132554-08, RIN 1545-BI16), such as cash balance plans under tax code Sections 411(a)(13) and 411(b)(5).

The rules “finalize proposed hybrid plan regulations issued in October 2010 and a new set of proposed regulations dealing with transition rules for implementing market rates of return included in the final regulations,” Carol Zimmerman, actuary, IRS Office of Employee Plans, said during a Sept. 18 webinar on defined benefit plans.

The agencies also issued  proposed regulations (REG-111839-13, RIN 1545-BL62) on hybrid plans stating that prior to the first day of the first plan year beginning on or after Jan. 1, 2016, a plan using an interest crediting rate that isn't permitted under the final rules issued Sept. 18 must amend the plan to a rate permitted under the final rules, the IRS said.

The IRS has scheduled a hearing for Jan. 9, 2015, on the proposed rules. Comment deadline is Dec. 18.        

‘Favorable' Developments       

Mark L. Lofgren, a principal with Groom Law Group Chartered in Washington told Bloomberg BNA on Sept. 18 that the changes made to the permitted annual and cumulative floors for bond-based interest crediting rates were “favorable.”

The final rules increase the fixed rate permitted in combination with government bond-based rates from 4 percent to 5 percent.

Lofgren said the change “will be significant for a number of plans that had something between 4 and 5 and were worried it wouldn't work and now should be fine. Of course there are some that had a floor that was above 5 and they're still going to have an issue.” However, plans using a rate higher than 5 percent will have to rely on the transition relief in the proposed rules.         

Kathryn L. Ricard of the ERISA Industry Committee told Bloomberg BNA on Sept. 18 that there were several positive developments in the proposed rules, including “this ability to have separate crediting rates for different groups of people.”

That provision “gives a lot of flexibility for these types of plans, especially for folks who are looking at starting a hybrid plan,” she said.

The final rules also “eliminated a bunch of conditions” for whipsaw pension calculations and allowed “subsidized forms of benefit,” she said.       

While there were a lot of positive aspects to the final rules, the IRS “really left open the projection rate issue,” Ricard said. There was “no mention of that, no guidance on that, and they didn't technically even hold it open. So it's more kind of radio silence on that issue.”           

However, she said she is hopeful that the IRS will address the issue down the line.

Excerpted from a story that ran in Pension & Benefits Daily (09/19/2014).