Hybrid Pension Plan Interest Credit Rule Amendment Deadline Nears


The deadline for hybrid pension sponsors to adopt plan amendments bringing them into compliance with key provisions of final IRS hybrid plan regulations is fast approaching: January 1, 2017 (January 1, 2019 for collectively bargained plans). The deadline applies specifically to transitional amendments to satisfy the regulations’ market rate-of-return rule.

What plans are affected?

The final regulations apply to defined benefit (DB) plans that use a lump-sum-based benefit formula, instead of one expressed as an annuity based on participant earnings and length of service. These plans include cash balance, pension equity and others that have formulas similar to a lump-sum-based formula.

If you’re a sponsor of a traditional DB plan and are considering converting to a hybrid plan, the new regulations affect you as well.

What do the regulations require?

The new regulations generally require that interest credit rates used by hybrid plans not exceed a market rate of return. The goal is to prevent hybrid plan sponsors from estimating the value of notional participant “accounts” benefits too optimistically. Doing so could put plan participants at risk if they base their retirement planning using those estimates, the plan’s underlying investment performance ultimately falls short and the plan sponsor cannot make up the difference.

The regulations define the conditions under which hybrid plan sponsors can amend their noncompliant plans without triggering “anti-cutback rules” under the tax code. (Anti-cutback rules prevent plan sponsors from reducing previously promised benefits.) Plan sponsors should consult the regulations’ methods for addressing particular compliance failures.

What should you do?

Review the final rules to see if your plan is affected. In particular, check to make sure your plan’s interest credit rate meets the statutory requirements. If you haven’t done so already, contact your benefits advisor to complete any plan amendments if necessary.

BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Employee Benefits team consists of professionals with extensive knowledge of ERISA guidelines and deep expertise performing employee benefit plan audits. We can help you craft a smooth-running plan that serves your employees while mitigating associated risk. For more information or for a free expert consultation, Jenise Gaskin at (925) 296-1016 or Mike Spence at (408) 961-6303 or visit us at www.bpmcpa.com/ebp.