An IRS news release said the new rules are related to the PPA changes to tax code Sections 411(a)(13) and 411(b)(5) about certain hybrid defined benefit plans. The agency said a defined benefit pension plan generally must satisfy the minimum vesting standards of 411(a) and the accrual requirements of 411(b) to be qualified under 401(a).
While the new document includes transitional guidance released December 21, 2006 announcing the lifting of a moratorium and the start of processing for determination letter applications and examination cases for cash balance conversions (See IRS Opens Floodgates on Cash Balance Conversion Letter Requests ), it includes new terminology, such as a” statutory hybrid benefit formula” and a “lump sum-based benefit formula,” to take into account situations where plans provide more than one benefit formula.
A lump sum-based benefit is defined as a benefit formula used to determine all or any part of a participant’s accumulated benefit under which the benefit is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation. A statutory hybrid benefit formula is defined as a benefit formula that is either a lump sum-based benefit formula or a formula that has an effect similar to a lump sum-based benefit.
Under the latest IRS proposal, a plan is not treated as failing to meet the requirements for certain benefit formulas if a participant’s accumulated benefit expressed under one of those formulas would not be less than a similarly situated younger participant’s accumulated benefit expressed under the same formula, the tax agency said.
The new rule asserts that a defined benefit plan is not in violation with respect to a participant’s accrued benefit derived from employer contributions because the plan determines the present value of benefits under a lump sum-based benefit formula as the amount of the participant’s hypothetical account as the current value of the accumulated percentage of the participant’s final average compensation under that formula.
The proposed regulations address in detail special vesting rules, safe harbor age discrimination conversion protection, and market rate of return limitation. The PPA provided prospective safe harbor age discrimination protections in response to numerous lawsuits alleging historical age discrimination from cash balance conversions.
The IRS said that for a participant whose accrued benefit is determined under a statutory hybrid benefit formula, the plan is not treated as meeting the requirement unless the plan provides that the participant has a nonforfeitable right to 100% of the participant’s accrued benefit if the participant has three or more years of service. A plan that does not satisfy this test is required to satisfy the general nondiscrimination test, it added.
The safe harbor for satisfying the test only comes into play where a participant’s accumulated benefit under the terms of the plan is expressed as an annuity payable at normal retirement age (or current age, if later), the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation.
To guard against any wear-away problems, under the proposed regulations, a participant whose benefits are affected by a conversion amendment which occurred after June 29, 2005, must generally be provided with a benefit after the conversion that is at least equal to the sum of the benefits accrued through the date of the conversion and benefits earned after the conversion, with no permitted interaction between these two portions.
The regulations would provide an alternative mechanism under which the plan provides for the establishment of an opening hypothetical account balance as part of the conversion and keeps separate track of the opening hypothetical account balance and interest credits attributable to the account, and the post-conversion hypothetical contributions and interest credits attributable to the account.
Written comments on the proposed rule are due by March 27, 2008, to CC:PA:LPD:PR (REG-104946-07), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. The IRS specifically requested comments on how the proposed regulations "may be made easier to understand."
The IRS also asked for comments on conversion protection, market rate of return limitation, application of the three-year vesting requirement, whether a characteristic is indirectly on account of age, and the age discrimination safe harbor.
The proposed rule is here .