What’s Important for Plan Sponsors in IRS Hybrid Plan Notice 2011-85

IRS Notice 2011-85 announces the relief and postponed effective date for several items related to hybrid pension plans IRS logo(e.g., cash balance and PEP plans). The notice is pretty technical (of course), but the IRS also published a nice summary of what’s affected by the relief.

Here’s what it means for plan sponsors:

  • The scope of the announcement is relatively narrow and only applies to certain hybrid plan rules and regulations. These rules were spelled out in a combination of proposed and final regulations issued in October 2010.
  • Important take-away from the notice: By extending the proposed 2010 hybrid plan regulation effective date, the IRS is hinting that they are still reviewing the definition of “market rate of return” for interest crediting rates. They’ve clearly received lots of comments from plan sponsors and practitioners about what a “fair” market rate of return should be. At this point, it looks like we won’t be getting final regulations about this issue until sometime in 2012.
  • Here’s an abbreviated summary of the notice’s relief items:
    • Extension of the effective date of the proposed 2010 hybrid plan regulations (which include the definition of market rate of return for interest crediting purposes) to a date no sooner than January 1, 2013 (they were expected to be finalized and effective January 1, 2012). The notice also extends the effective date of the final 2010 hybrid plan regulations from January 1, 2012 to the same date that the 2010 proposed regulations are effective.
    • Extension of the deadline for adopting amendments under § 411(a)(13) (other than § 411(a)(13)(A)) and § 411(b)(5)). This includes the 3-year vesting requirement for statutory hybrid plans. Plan sponsors now have until the last day of the year preceding the year that the 2010 proposed hybrid plans become effective to adopt the necessary amendments.
    • Additional 411(d)(6) relief for reducing accrued benefits as long as the amendment to reduce/eliminate benefits is done solely to comply with 411(b)(5) [i.e., age discrimination and interest credit rules for hybrid plans]. These amendments also need to be adopted before the last day of the year prior to when the proposed 2010 hybrid plans become effective.
    • Additional 204(h) notice timing relief in specific situations related to amendments that changed the interest crediting rate for a statutory hybrid plan.

Explanation of 436 and Hybrid Plan Amendment Extensions

As we speculated a few weeks ago, the IRS has extended the deadline for plan sponsors to amend their plan documents to comply with certain law changes under PPA and WRERA. Notice 2010-77 essentially just adds a year to the previously extended deadlines from Notice 2009-97. These extensions may be a moot point for many plan sponsors since the relief has come so late in the year and many have already made good-faith amendments.

So, what retirement plan amendment deadlines have been extended and what do they mean? They are:

1. Amendments to comply with the IRC 436 benefit restriction rules. These are the benefit restrictions that are activated when a pension plan’s funded status (AFTAP) falls below certain thresholds. The deadline for adopting 436 amendments has been extended from the end of the 2010 plan year to the end of the 2011 plan year.

2. Amendments for cash balance and other applicable defined benefit plans (e.g., PEP plans) to comply with IRC 411(a)(13), other than 411(a)(13(A) and 411(b)(5). These are the amendments necessary for a hybrid plan to be considered a Statutory Hybrid Plan (SHP) under PPA. An SHP defines a benefit as an accumulated balance (or accumulated percentage of pay). Read more…

Possible 436 Amendment Extension

Nothing’s official yet, but there are rumors circulating in the benefits community that the IRS may extend the deadline for amending defined benefit pension plan documents for the IRC 436 benefit restriction rules.

So, what’s the practical implication for pension plan sponsors? Perhaps not much. Many plan documents were already amended late in 2009 since deadline relief came so late last year. Presumably even more plan sponsors have drafted 436 amendments since then, so there may not be many who need the relief if the IRS ever delivers it. A more realistic scenario: The IRS will finally issue additional guidance in 2011 (or later) and plan sponsors will have to amend their current 436 amendments to recognize any clarifications. We’ll just have to wait and see.

Plan document restatements for terminating plans

Historically, the IRS has required that plan documents for terminating retirement plans be amended to reflect all legal requirements enacted up through the plan termination date. However, there was some uncertainty as to whether the “new” 5- and 6- year plan restatement rules actually required plan sponsors to:

  1. Entirely restate the plan document upon plan termination; or
  2. Just amend the plan document upon plan termination.

The actual text in Revenue Procedure 2007-44 on restatement rules is a bit fuzzy, but there is a great blog post from Suzanne Wynn that helps clarify some of the technical aspects. Essentially, Revenue Procedure 2010-6 confirms that terminating plans still don’t have to be restated as long as they are amended with law changes up through the termination date.