Market rate of return rules, hybrid retirement plans | KPMG | QA

Final regulations: Market rate of return rules, hybrid retirement plans

Market rate of return rules, hybrid retirement plans

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9743) providing guidance relating to “applicable defined benefit plans”—that is, plans that use a lump sum-based benefit formula including cash balance plans and pension equity plans, as well as other hybrid retirement plans that have a similar effect.


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Today’s final regulations [PDF 233 KB] relate to “hybrid plan” regulations issued in 2014.  The 2014 final regulations permit interest crediting rates for purposes of the requirement that an applicable defined benefit plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return. 

Employers that used rates that did not quite fit within the regulations needed permission to make corrective changes to comply with the 2014 hybrid plan regulations. As a general rule, section 411(d)(6) prevents an employer from amending a plan in a way that could reduce an employee’s current benefit.  However, the IRS has authority to permit a plan amendment that could reduce an employee’s current benefit. 

Under today’s regulations, the IRS has exercised its authority to allow a plan sponsor to amend a plan in order to use in interest crediting rate that is permitted under the hybrid plan regulations.  

Changes included in final regulations

Today’s release finalizes regulations that were proposed in 2014. Those regulations were proposed to permit an applicable defined benefit plan that does not comply with the requirement that the plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return to comply with that requirement by changing to an interest crediting rate that is permitted under the final hybrid plan regulations, without violating the anti-cutback rules of section 411(d)(6). 

The preamble to today’s final regulations notes that after comments to the proposed regulations were considered, the proposed regulations have been adopted as final regulations “subject to a number of changes.” For example:

  • The final regulations give additional time for plan sponsors to implement changes to a plan’s interest crediting rate to bring the plan into compliance. The changes must be made effective for plan years that begin on or after January 1, 2017.
  • New examples are included illustrating application of rules in the final regulations.
  • The final regulations permit a plan sponsor to choose among certain alternative amendments to bring a plan into compliance.
  • An additional option has been added in each case involving bond-based rates so that any noncompliant variable rate that is not an investment-based rate (including the greater of two or more non-investment based variable rates) may be capped at the third segment rate.
  • The final regulations delay the applicability date of certain provisions in the 2014 final hybrid plan regulations.

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