The contraction of defined benefit plans over the last 20 or so years has been dramatic and disappointing for those of us who believe that such plans are the best vehicle for providing retirement security. Some of the decline can be based on changes to the economy, the emergence of new companies and the decline of others, global competition, funding and financial reporting volatility, and other macro and micro economic factors. However, some of the reasons for decline can be based on misguided government policy. Labyrinthine rules regarding technical ERISA and tax code requirements, increased funding volatility caused by the Pension Protection Act's funding rules, and increased PBGC premiums on healthy plans are all examples of questionable policy having an adverse affect on DB plan maintenance.
Most recently, IRS and Treasury proposed and final guidance on PPA hybrid plan provisions may further contribute to the loss of interest by plan sponsors in continuing DB plans. Hybrid plans appear to be the last bastion of the DB system, and well-designed hybrid plans are responsive to both the retirement security needs of employees and the business and financial imperatives of sponsors.
Cash balance plans are the most common hybrid plans. They provide lifetime income guarantees, spousal death benefit protection, and PBGC guarantees. After years of litigation and, to some extent, regulatory uncertainty surrounding these plans, Congress stepped in and, in the PPA, unambiguously recognized hybrid plans and removed legal and regulatory impediments to allow them to flourish. It was hoped that the guidance that Treasury and IRS needed to issue would recognize the intent of PPA to foster hybrid plans by providing guidance that clarified and applied PPA provisions in a positive and flexible manner consistent with the Congressional intent. In some ways, the agencies have done that, but, for the most part, the guidance has been based on a principle that is fundamentally at odds with Congressional intent; While Congress sought to clear a place in the regulatory jungle for hybrid plans to grow, the regulators appear to view the PPA as imposing new limits on hybrid plans to rein them in -- and a complicated web of regulations imposing significant and unanticipated new restrictions and requirements has ensued.
Several objectionable or questionable provisions of the regulations include:
The IRS and Treasury received many comments on their proposed and final regulations and recently held hearings on them. I understand that the regulators have a difficult job, presumably want to protect participants, and provide guidance consistent with the intent and terms of the PPA. It is hoped that revised rules are more aligned with the PPA provisions and statutory intent and further the maintenance and possible growth of the db system rather than foster its likely further contraction.
-- Scott J. Macey
Covington & Burling LLP
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