Pension Protection Act Blog

The IRS issued a correction to the Proposed Regulations on Hybrid Retirement Plans, commonly known as the proposed cash balance plan regulations, which the Service issued on December 27, 2007. Besides correcting a few grammatical errors, the IRS has made a significant change in Proposed Treas. Reg. section 1.411(a)(13)-1. (hat tip to BenefitsLink.com)

The correction states:

1. On page 73683, column 3, in the preamble, first paragraph of the column, line 15, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.

§1.411(a)(13)-1 [Corrected]
4. On page 73691, column 1, §1.411(a)(13)-1(d)(3)(ii), line 18, the language “larger annual benefit at normal” is corrected to read “smaller annual benefit at normal”.

5. On page 73691, column 2, §1.411(a)(13)-1(d)(3)(iii)(B), line 9, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.

When these changes are incorporated into the text of the proposed cash balance regulations, the preamble now states:

The proposed regulations use the term statutory hybrid benefit formula to describe the portion of a defined benefit plan that is an applicable defined benefit plan described in section 411(a)(13)(C)(i) or the portion of the plan that has a similar effect. Specifically, the proposed regulations would define a statutory hybrid benefit formula as a benefit formula that is either a lump sum-based benefit formula or a formula that has an effect similar to a lump sum-based benefit formula. For this purpose, under the proposed regulations, a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accrued benefit payable at normal retirement age (or at benefit commencement, if later) is expressed as a benefit that includes periodic adjustments (including a formula that provides for indexed benefits described in section 411(b)(5)(E)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or at commencement of benefits, if later) for the participant, when compared to a similarly situated, younger individual who is or could be a participant in the plan. Thus, a benefit formula under a plan has an effect similar to a lump sum-based benefit formula if the right to future adjustments accrues at the same time as the benefit that is subject to the adjustments.

When incorporated into proposed Treas. Reg. §1.411(a)(13)-1(d)(3), it now states:

(d) Definitions–(1) In general. The definitions in this paragraph (d) apply for purposes of this section.

(2) Lump sum-based benefit formula. The term lump sum-based benefit formula means a lump sum-based benefit formula as defined in Sec. 1.411(b)(5)-1(e)(3).

(3) Statutory hybrid benefit formula–(i) In general. A statutory hybrid benefit formula means a benefit formula that is either a lump sum-based benefit formula or a formula that is not a lump sum-based benefit formula but that has an effect similar to a lump sum-based benefit formula.

(ii) Effect similar to a lump sum-based benefit formula. Except as provided in paragraph (d)(3)(iii) of this section, a benefit formula under a defined benefit plan that is not a lump sum-based benefit formula has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accumulated benefit (within the meaning of Sec. 1.411(b)(5)-1(e)(2)) payable at normal retirement age (or benefit commencement, if later) is expressed as a benefit that includes the right to periodic adjustments (including a formula that provides for indexed benefits under Sec. 1.411(b)(5)-1(b)(2)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan. A benefit formula that does not include periodic adjustments is treated as a formula with an effect similar to a lump sum-based benefit formula if the formula is otherwise described in the preceding sentence and the adjustments are provided pursuant to a pattern of repeated plan amendments. See Sec. 1.411(d)-4, A-1(c)(1).

(iii) Exceptions–(A) Post-retirement benefit adjustments. Post-annuity starting date adjustments of the amounts payable to a participant (such as cost-of-living increases) are disregarded in determining whether a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula.

(B) Certain variable annuity benefit formulas. If the assumed interest rate used for purposes of the adjustment of amounts payable to a participant under a variable annuity benefit formula is at least 5 percent, then the adjustments under the variable annuity benefit formula are not treated as being reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan, and thus such a variable annuity benefit formula does not have an effect similar to a lump sum-based benefit formula.

(C) Contributory plans. A benefit formula under a defined benefit plan that provides for a benefit equal to the benefit properly attributable to after-tax employee contributions does not have an effect similar to a lump sum-based benefit formula. See section 411(c)(2) for rules for determining benefits attributable to after-tax employee contributions.

The IRS was accepting comments on the Proposed Regulations on Hybrid Retirement Plans until March 27, 2008.

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