The IRS has released long-awaited final regulations that clarify market rate of return issues for cash balance and other hybrid plans. The new rules, effective for the first plan year that begins on or after Jan. 1 2016, give hybrid plan sponsors a clearer path forward, says Jim McHale, a principal with PricewaterhouseCoopers in New York.
The final regulations are based on proposed regulations from 2010, which were issued in connection to the Pension Protection Act of 2006.
The PPA tried to clarify issues around hybrid plans but, there was always controversy around hybrid plans since they have some aspects of defined benefit and some aspects of defined contribution, says McHale. Some of the rules werent terribly clear because they were written more for traditional defined benefit plans.
Issues addressed by the new regulations include rules on the use of the actual rate of return on plan assets in cash balance plans and plan termination rules. The 2014 final regulations, like the 2010 proposed rules, continue to specify an exclusive list of rates that qualify as market rates of return. The IRS also issued proposed regulations providing transition rules for plans that currently provide interest credits that are greater than a market rate of return under the final rules.
These new regulations have largely outlined the hoops you need to jump through to have a hybrid pension plan, says McHale.
Sponsors of hybrid plans, or employers considering sponsoring one, should review the new rules, advises McHale, and amend their plan documents as necessary.
The IRS and Treasury were very responsive to some of the comments that were submitted, and responsive to plan sponsors needs, says McHale. This is a positive for cash balance plan sponsors or folks who are interested in these shared risk arrangements. It opens a path for these plans really to become what Congress intended in the PPA.
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