Sponsors of cash balance plans and other hybrid retirement plans welcomed final rules in September from the IRS but are now criticizing the agency’s proposed transition rules on market rates of return.
The final rules issued Sept. 19 address permissible market rates of return for cash balance plans and increase the maximum permitted fixed-interest credit to 6% from 5%. The rules, which also address vesting, age discrimination and conversions, apply to plan years beginning on or after Jan. 1, 2016.
The IRS is now asking for comments on transitional rules to help plan sponsors that need to reduce their market rate of return without running afoul of anti-cutback rules. Those proposed rules are “unnecessarily restrictive” and fail to account for a variety of interest crediting rates among plans, said Kathryn Ricard, ERISA Industry Committee senior vice president for retirement policy, in a Dec. 18 letter to the IRS.
Ms. Ricard and other employer groups are also asking the IRS to revisit a provision in the final rules that could hurt sponsors calculating lump sums under a “whipsaw” method when it comes to new age-discrimination safe harbors. Employers that specify an investment return greater than the 30-year Treasury rate determine benefit amounts using a complex whipsaw calculation. “There is no basis in the statute for denying these plans the protections,” Ms. Ricard wrote. A new definition of early retirement subsidy also “differs markedly” from statutory intent, and “will have unpredictable impacts on many existing hybrid plans previously approved by the IRS,” she said.
Sponsors of hybrid plans that are being terminated should immediately review the new regulations, while those with ongoing plans might need to reduce above-market interest credits or make other changes to comply, once the transition rules are finalized, officials of consultant Mercer said. “IRS needs to provide explicit guidance,” Mercer senior partner Shams Talib and partner Bruce Cadenhead wrote in a Dec. 18 letter to the IRS.
Cash balance and pension equity plans cover one in four defined benefit participants, and represent one-third of the assets, according to ERIC.