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.