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Hybrid Pension Plan Guidance Issued

On October 18, the IRS released final and proposed regulations providing guidance on so-called hybrid defined benefit pension plans that apply to plan years that begin on or after January
1, 2011.

January 2011
by Alistair Nevius/The Tax Adviser

A hybrid defined benefit pension plan is generally a defined benefit plan under the terms of which a participant’s accumulated 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 (or is a plan that uses a formula that has an effect similar to this).

The Pension Protection Act added Secs. 411(a)(13) and 411(b)(5) to the Code. These sections modify the minimum vesting standards of Sec. 411(a) and the accrual requirements of Sec. 411(b). In 2007, the IRS issued proposed regulations (REG-104946-07), and the final regulations generally adopt the provisions of the 2007 proposed regulations (with certain modifications) as well as the transition guidance provided in Notice 2007-6.

Final Regs.

The regulations adopt the terminology used in the proposed regulations (such as “statutory hybrid benefit formula” and “lump sum-based benefit formula”) to take into account situations where plans provide more than one benefit formula. The regulations define “accumulated benefit,” “statutory hybrid plan,” and “lump sum-based benefit formula.”

They define a lump-sum-based benefit formula as a benefit formula used to determine all or any part of a participant’s accumulated benefit under which the accumulated benefit provided under the formula is expressed as the current balance of a hypothetical account maintained for the participant or as the current value of an accumulated percentage of the participant’s final average compensation.

The final regulations provide that the relief under Sec. 411(a)(13)(A) applies to benefits determined under a lump-sum-based benefit formula. They also provide special vesting rules for applicable defined benefit plans and safe harbors for age discrimination, conversion protection, and market rate of return limitations.

The final regulations clarify that a formula is expressed as the balance of a hypothetical account maintained for the participant if it is expressed as a current single-sum dollar amount.

The final regulations provide that a participant whose benefits are affected by a conversion amendment generally must be provided with a benefit after the conversion that is at least equal to the sum of benefits accrued through the date of conversion and benefits earned after the conversion, with no permitted interaction between the two portions. They provide an alternative method of satisfying the conversion protection requirements where an opening hypothetical account balance or opening accumulated percentage of the participant’s final average compensation is established at the time of the conversion and the plan meets certain requirements.

Under the final regulations, a plan that credits interest must specify how it determines interest credits and must specify how and when interest credits are credited. The regulations contain specific rules regarding the method and timing of interest credits, including a requirement that interest be credited at least annually.

This article has been excerpted from The Tax Adviser. View the full article here.