The Internal Revenue Service (the “IRS”) has issued final regulations (TD 9505) and proposed regulations ( Reg-132554-08) which provide guidance on certain provisions of the Internal Revenue Code (the “Code”) that apply to hybrid defined benefit pension plans, such as cash balance plans.
The Code provisions in question are sections 411(a)(13) and 411(b)(5), which were added to the Code by the Pension Protection Act of 2006, and then amended by the Worker, Retiree, and Employer Recovery Act of 2008. In general, sections 411(a)(13)(A) and (C)(i) establish the “applicable” defined benefit plan. An “applicable” defined benefit plan is a defined benefit plan under which a participant’s accrued benefit is expressed either as the balance of a hypothetical account (e.g., a cash balance plan), or as an accumulated percentage of the participant’s final average compensation. Under Section 411(a)(13)(C)(ii), the IRS is required to issue regulations which include in the definition of an applicable defined benefit plan any defined benefit plan which has an effect similar to a plan described in section 411(a)(13)(C)(i). Section 411(a)(13)(B) requires that, under an applicable defined benefit plan, a participant with at least 3 years of service must have a nonforfeitable right to 100 percent of his or her accrued benefit derived from employer contributions.
Section 411(b)(1)(H)(i) of the Code provides that a defined benefit plan fails to comply with section 411(b) of the Code if, under the plan, a participant’s benefit accrual is ceased, or the rate of the participant’s benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5) (A) elaborates on that provision by providing, generally, that a plan does not fail to meet section 411(b)(1)(H) if a participant’s accrued benefit is equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this “equal to or greater than test”, section 411(b)(5)(A)(iv) provides that a participant’s accrued benefit may be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the participant’s final average compensation. Section 411(b)(5)(B) imposes certain requirements on an applicable defined benefit plan-such as a minimum interest credit and rules pertaining to conversions of a traditional defined benefit plan to an applicable defined benefit plan- in order for the plan to satisfy section 411(b)(1)(H). Similarly Sections 411(b)(5)(C) through (E) allow the applicable defined benefit plan to have certain features-namely benefit offsets, social security integration and indexing of accrued benefits- without violating section 411(b)(1)(H).
The newly issued final and proposed regulations are intended to be used to implement the above Code sections.