United States: New Hybrid Pension Plan Guidance

The IRS recently issued new final and proposed regulations that provide welcome guidance to sponsors of hybrid pension plans. Hybrid pension plans, such as cash balance plans and pension equity plans, are defined benefit plans that have some of the characteristics of defined contribution plans. The popularity of hybrid pension plans has risen in large part because of their decreased cost volatility for employers and increased employee understanding (because the benefit is expressed as a lump sum), as compared with traditional defined benefit pension plans.

Under a cash balance plan, pay credits are made to a participant's hypothetical account. This hypothetical account receives interest credits based on a rate (or rates) specified in the plan document. Under a pension equity plan, a participant accrues percentage credits. At retirement, the sum of the percentage credits is multiplied by a permitted measure of the participant's average compensation. While a participant's accrued benefit under a hybrid pension plan is expressed in terms of a lump sum, the benefits must be paid in the form of an annuity unless the participant (with spousal consent, if applicable) elects a lump sum.

When hybrid pension plans first became more prevalent, there was great concern that they did not comply with IRS rules for defined benefit plans, particularly with regard to vesting, benefit accrual, and age discrimination. The IRS began to address many of these concerns in the Pension Protection Act of 2006, and provided additional guidance in proposed regulations issued in 2007, in the Worker, Retiree, and Employer Recovery Act of 2008, and in proposed and final regulations issued in 2010.

New Final Regulations Responding to the many comments it received, the IRS has now issued final hybrid pension plan regulations. These final regulations are generally effective as of the first day of the plan year beginning on or after January 1, 2016, although in some cases the plan sponsor may elect an earlier effective date. The regulations finalize many of the provisions of the 2010 proposed regulations, but also make significant changes. Among the many changes to previous proposed and final regulations are the following:

Interest Crediting Rate Rules – Expansion and Clarification

  • The maximum fixed interest crediting rate is increased from 5 percent to 6 percent.
  • New variable interest rates are permitted, such as a segment of plan assets or the rate of return on a regulated investment company, if certain criteria are met.
  • For plans that use certain government bond rates or the Consumer Price Index (CPI) as the interest crediting rate with a fixed interest rate floor, the permitted annual floor is raised from 4 percent to 5 percent.
  • A plan with a variable interest crediting rate may use a cumulative floor of 3 percent instead of an annual floor.
  • There are new rules for amending the interest crediting rate, which include the benefits and subsidies that must be protected from cutback.
  • New guidance was provided regarding benefit calculations on plan termination, including annuity conversion rates, factors, mortality tables, and permissible interest crediting rates to be used for period after a plan's termination date for plans that use an investment-based rate of return.

Special Provisions for Pension Equity Plans

  • A pension equity plan may be based on a participant's highest average compensation, with no limitation on the averaging period; previously it had to be based on a participant's final average compensation.
  • A reduction in accumulations under a pension equity plan is permissible to the extent it is attributable to a decrease in the participant's final average compensation or, for a plan whose benefit formula is integrated with Social Security, results from an increase in the Social Security integration level.

Other Provisions

  • A benefit may be determined as the lesser of benefits under two formulas.
  • A participant's accrued benefit under a hybrid pension plan formula is permitted to be actuarially equivalent (using reasonable actuarial assumptions), to the benefit payable at the participant's annuity starting date, instead of the benefit payable at the participant's normal retirement age.
  • The amount of a single lump sum payment under a hybrid pension plan formula must equal the accumulated benefit under that formula (except to the extent that the lump sum payment is greater to meet anti-cutback requirements).
  • As with traditional defined benefit plans, if payments do not commence by a participant's normal retirement age, the plan must either actuarially increase the benefit or provide a suspension of benefit notice.
  • The rules cover early retirement and form of payment subsidies, multiple annuity starting dates, reemployment after a total distribution, and conversions from a traditional defined benefit formula to a hybrid plan formula.
  • The IRS will continue to study whether it would be acceptable to permit plan participants to choose an interest crediting rate from various permissible options.

New Proposed Regulations The IRS also issued proposed hybrid pension plan regulations, which allow for the adoption of an amendment by the first day of the plan year that begins on or after January 1, 2016, to prospectively amend an unacceptable interest crediting rate to one that meets the requirements of the final regulations without the amendment constituting an impermissible cutback.

The IRS asked for comments by December 18, 2014, on all aspects of the proposed regulations.

The new regulations contain many traps for the unwary. If you have any questions regarding the new hybrid pension plan regulations, or any other employee benefits-related questions, please contact one of the authors or your Reed Smith attorney.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions