IRS issues final and proposed regulations for hybrid plans

©2011, The Prudential Insurance Company of America, all rights reserved. Prudential, the Prudential logo, and the Rock symbol are service marks of The Prudential Insurance Company of America, Newark, NJ, and its related entities, registered in many jurisdictions worldwide. Important information Plan design February 2011 IRS issues final and proposed regulations for hybrid plans Who’s affected These developments affect sponsors of and participants in hybrid plans, such as cash balance plans and pension equity plans. They also affect plan sponsors that are considering converting a traditional defined benefit plan to a hybrid plan design. Background and summary Hybrid plans, such as cash balance and pension equity plans, are common plan designs. A hybrid plan is a retirement plan that combines

features of a defined contribution plan and a defined benefit plan. The enactment of the Pension Protection Act of 2006 (PPA) into law on August 17, 2006, clarified the legal status of cash balance and other hybrid plan designs created after June 29, 2005, if they satisfy certain requirements. To assist plan sponsors in designing and administering these plans, the IRS issued Notice 2007-6 and proposed regulations in 2007. Recently, the IRS issued final hybrid plan regulations to reflect the changes made by PPA. The final regulations incorporate the transitional guidance provided under Notice 2007-6 and generally adopt the provisions of the proposed rules. They offer guidance on a variety of issues regarding: Vesting; Age discrimination; Conversions; and Market rate of return. At the same time, the IRS issued additional proposed regulations. These rules provide guidance on certain issues that are not addressed in the final regulations such as: Interest crediting rates; Changes in interest crediting basis; and Additional conversion guidance. Action and next steps Sponsors of cash balance and pension equity plans should carefully read the information contained in this Pension Analyst. We encourage plan sponsors to discuss the contents of this publication with their legal counsel and their plan‟s enrolled actuary to determine how this most recent guidance impacts their plans. In some situations, plan amendments may be needed. The final regulations generally apply to plan years beginning on or after January 1, 2011. The proposed regulations apply to plan years beginning on or after January 1, 2012, but may be relied upon until then. In this issue Final regulations 2 ©2011, The Prudential Insurance Company of America, all rights reserved. Prudential, the Prudential logo, and the Rock symbol are service marks of The Prudential Insurance Company of America, Newark, NJ, and its related entities, registered in many jurisdictions worldwide. February 2011 Definitions Vesting Safe harbor for age discrimination Conversion protection Market rate of return Revisions to the interest crediting rate Proposed regulations Market rate of return Changes in interest crediting rates Additional conversion guidance Additional benefit calculation guidance Effective dates Next steps Related document Highlights of final and proposed rules for hybrid plans Hybrid plans, such as cash balance plans and pension equity plans (PEPs), are a special type of defined benefit pension plan that combines features of a defined benefit plan and a defined contribution plan. Most hybrid plans express benefits as the value of a...

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