Regulators are trying to revive hybrid pension plans.

The Internal Revenue Service has issued IRS Notice 2007-6, “Cash Balance and Other Hybrid Defined Benefit Pension Plans,” a batch of guidance that could help employers and defined benefit plan administrators implement new sections of the Internal Revenue Code that could encourage employers to keep and adopt hybrid “pay as you go” defined benefit pension plans.

Comments on the guidance are due April 16, 2007.

The new cash balance plan IRC sections state that employers can set up cash balance plans, or hybrid plans, without automatically triggering age-discrimination concerns.

IRS officials say they will react to the new sections by lifting a moratorium imposed in 1999 on conversions of traditional defined benefit plans to a hybrid, cash balance plan structure.

In the past, some courts had suggested the cash balance plans discriminate against older workers because they involve employers contributing a specified amount to each employee each year rather than employers promising to pay each comparable vested worker a comparable amount of pension benefits when the worker reaches retirement age.

IRC Section 411(a)(13)(C) now defines “statutory hybrid plan” as a plan that is either a lump-sum-based plan or a plan that has a similar effect to a lump-sum-based plan.

“Lump sum based plan” means a defined benefit plan under the terms of which the accumulated benefit of a participant is “expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation, and includes a plan under which the accrued benefit under the terms of the plan is calculated as the actuarial equivalent of such a hypothetical account balance or accumulated percentage,” IRS officials write in the cash balance plan notice.

A plan will not qualify for special treatment, though, simply because it provides for post-retirement cost-of-living benefits adjustments, officials write.

Another type of plan, a variable annuity plan, “is not treated as having a similar effect to a lump-sum-based plan if it has an assumed interest rate used for purposes of adjustment of amounts payable to a participant that is at least 5%,” officials write.

The IRS hopes to issue future guidance about what will happen if an employer with a hybrid plan acquires a company with a conventional defined benefit plan and folds the employees at the acquired company into the hybrid plan.

The IRS also is developing guidance on how to handle a PPA provision that forbids hybrid plans from paying an interest rate higher than the general market rate of return.

The IRS is asking for public comments about how to identify when two or more amendments, or the coordination of two or more defined benefit plans, have the effect of a conversion into a statutory hybrid plan.

Other IRS questions deal with matters such as the definition of market rate of return and how to deal with pension plans that use a combination of the traditional defined benefit plan pension formula and the hybrid plan formula.

A copy of IRS Notice 2007-06 is on the Web at Document Link