Feds Offer Cash Balance Conversion Relief

February 1, 2008 (PLANSPONSOR.COM) - New guidance issued by the Treasury Department and the Internal Revenue Service (IRS) provides that cash balance conversions that have filed for an IRS determination letter, and occur before next year, won't be disqualified solely for relying on traditional conversion rules.

The new guidance provides that cash balance conversions before January 1, 2009 that have asked for or received an IRS determination letter won’t be disqualified solely for using the traditional conversion rules.  Revenue Ruling 2008-7 analyzes a traditional plan that was converted into a cash balance arrangement before the effective date of the new conversion requirements under the Pension Protection Act (PPA). 

The relief applies to a plan only if either as of February 19, 2008, the plan provisions under which the applicable “greater-of” benefit is provided have been the subject of a favorable determination letter; as of February 19, 2008, a remedial amendment period under § 401(b) for the plan provisions under which the applicable “greater-of” benefit is provided has not expired; or the plan is otherwise a “moratorium plan” as defined in Notice 2007-6.

The ruling deals with the “backloading” rules under Section 411(b)(1) of the Internal Revenue Code. 

“Greater Of” Concerns

Concerned that the Internal Revenue Service (IRS) will take a dim view of the “greater-of-the-two” formulas, a number of industry organizations this summer asked Treasury Secretary Henry Paulson to “suspend temporarily any adverse actions relating to backloading of benefits resulting from grandfather provisions in hybrid pension plans.” (See Industry Groups Ask Treasury for Cash Balance Intervention ).

Under a scenario outlined in the new ruling, certain participants had their pension determined using the greater of the benefit provided under a continuation of the pre-conversion plan formula for a limited number of years after conversion – and the benefit under the new cash balance formula. 

The federal officials said they anticipate proposing amendments to the regulations that will allow separate backloading testing involving the scenario under the revenue ruling and other “greater of” formulas. 

It is expected that the regulations will be issued soon and will be proposed to be effective for plan years beginning on or after January 1, 2009, the officials said.

The new revenue ruling is  here .

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