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.
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.
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:
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