Pension Protection Act Blog

Yesterday was a reminder about the 3-year vesting schedule for cash balance plans. Today is a look at the design requirements for cash balance plans contained in Section 701 of the Pension Protection Act.

Identifying the design requirements does not start with Section 701 of PPA, it actually starts with IRS Notice 2007-6, which enumerates them. Notice 2007-6 states that:

Section 411(b)(5)(B) imposes several requirements on a statutory hybrid plan as a condition of satisfying §411(b)(1)(H).

First, §411(b)(5)(B)(i) provides that a statutory hybrid plan is treated as failing to meet the requirements of §411(b)(1)(H) if the terms of the plan provide for an interest credit (or an equivalent amount) for any plan year at a rate that is greater than a market rate of return.

Second, §411(b)(5)(B)(ii) and (iii) contain minimum benefit rules that apply if, after June 29, 2005, an amendment is adopted that converts a defined benefit plan to a statutory hybrid plan. For purposes of this notice, such an amendment is referred to as a conversion amendment.

Third, §411(b)(5)(B)(vi) provides a special rule for projecting variable interest crediting rates in the case of a terminating statutory hybrid plan.

In addition, §411(a)(13)(B) requires a statutory hybrid plan to provide that an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions.

Section 411(b)(5)(E) provides that a plan is not treated as failing to meet the requirements of §411(b)(1)(H) solely because the plan provides for indexing of accrued benefits under the plan. Under §411(b)(5)(E)(iii), indexing means, in connection with an accrued benefit, the periodic adjustment of the accrued benefit by means of the application of a recognized investment index or methodology.

The vesting requirement is probably the easiest requirement to comply with - the plan document either provides that an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions, OR it doesn’t.

The other four requirements are each individually worth a very in-depth look. Section 701 of PPA is not easy reading. While Notice 2007-6 uses less-complex language, the concepts contained within it are extremely complex.

Technorati Tags: Pension Protection Act, defined benefit, cash balance, hybrid plan, plan design, vesting, pension, ppa