Compliance

IRS Clarifies Interest Crediting Rules for Pension Equity Plans

In particular, the IRS addresses applicability of final hybrid plan regulations to implicit interest PEPs.

By Rebecca Moore editors@plansponsor.com | November 07, 2016
Page 1 of 2 View Full Article

The Internal Revenue Service (IRS) has issued Notice 2016-67 describing the applicability of the market rate of return limitation rules to a defined benefit plan that expresses a participant's accumulated benefit as the current value of an accumulated percentage of the participant's final average compensation, highest average compensation, or highest average compensation during a limited period of years (a type of plan often referred to as a pension equity plan or PEP). 

In particular, this notice addresses the applicability of the market rate of return limitation rules to a type of PEP that applies a deferred annuity factor to the participant’s accumulated benefit in order to determine deferred benefits (a type of PEP often referred to as an implicit interest PEP). The IRS explains that such a PEP is often referred to as an implicit interest PEP because preretirement interest is implicitly reflected in the deferred annuity factor.

Under an explicit interest PEP, because the accumulated benefit is adjusted with interest credits to determine the benefit payable at annuity starting dates after principal credits cease, those interest credits are subject to the market rate of return limitation rules under hybrid plan regulations issued in 2015. Thus, any amendments necessary to bring the interest crediting rate into compliance with the market rate of return limitation rules under the hybrid plan regulations must be made by the applicable deadline of the transition regulations (generally before the beginning of the first plan year that begins on or after January 1, 2017) in order for the amendments to be eligible for the exception from rules against reducing benefit accruals provided by the transition regulations.

NEXT: Implicit interest PEPs not subject to interest crediting rules

SPONSORED MESSAGES