The Internal Revenue Service has released a draft of regulations that would help employers use new federal laws that endorse adoption of cash balance plans and other “hybrid” pension plans.

The notice of proposed rulemaking, which incorporates guidance previously given in IRS Notice 2007-6, implements the hybrid plan provisions of the Pension Protection Act of 2006. The rules would take effect for non-union plans in plan years starting on or after Jan. 1, 2009.

The IRS describes the plans as hybrids because the plans are defined benefit pension plans with Pension Benefit Guaranty Corp. protection, but the funding formulas are different from the funding formulas used with typical defined benefit plans.

Traditional defined benefit plan sponsors use funding formulas based on the assumption that an employee will spend many years in the plan. Contributions are based on assumptions about what an employee will need to get a set amount of benefits at retirement.

A sponsor of a hybrid plan contributes a set amount per similarly situated employee per year, and the plan assets earn a certain amount of interest each year, regardless of the employee’s age.

The proposed regulations would define a “lump sum-based benefit formula” as one in which the formula 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,” IRS officials write in the preamble to the proposed regulations, which appeared recently in the Federal Register.

The regulations would define a “statutory hybrid benefit formula” as a “benefit formula that is either a lump sum-based benefit formula, or a formula that has an effect similar to a lump sum-based benefit formula,” officials write.

A formula would be similar to a lump sum-based formula if “the formula provides that a participant’s accrued benefit payable at normal retirement age…is expressed as a benefit includes periodic adjustment (including a formula that provides for indexed benefits…that are reasonably expected to result in a larger annual benefit at normal retirement age…for the participant, when compared to a similarly situated younger individual who is or could be a participant in the plan,” officials write.

To meet the rules for statutory hybrid benefit plans, a plan would have to give the participant with 3 or more years of service a nonforfeitable right to 100% of the participant’s accrued benefits.

The proposed regulations would create a “safe harbor for age discrimination” that would require plan sponsors to compare the accumulated benefits of each possible participant in the plan to the accumulated benefit of each other similarly situated individual.

Older employees would have to be getting benefits that were at least as high as the benefits going to younger, similarly situated employees who were subject to the same pension benefits calculation formula, officials write.

A section of the proposed regulations dealing with conversions would require employers converting plans after June 29, 2005, to ensure that participants get benefits equal at least to the sum of benefits accrued before the conversion and benefits earned after the conversion, which no interaction, or “wear-away,” between pre-conversion and post-conversion benefits, officials write.

Sponsors also could come up with a mechanism for giving a participant a choice between collecting benefits based on the pre-conversion formula, if those were higher, or the post-conversion formula, if those were higher.

The IRS is asking for comments about methods for satisfying the proposed conversion performance tracking requirements.

The IRS also emphasizes that a statutory hybrid plan would fail to meet plan requirements if it provided an interest crediting rate that exceeded the market rate of return.

Plans that adopt crediting rates other than those specifically permitted by the proposed regulations might have to reduce their rates, officials warn.

Comments on the hybrid plan proposed regulations are due March 27, 2008.

In related news, the IRS also has released a notice of proposed rulemaking dealing with technical aspects relating to the measurement of assets and liabilities for pension funding purposes.

Those proposed regulations would help employers implement the PPA pension plan funding sections now incorporated in Section 430 of the Internal Revenue Code.

One section of the proposed regulations would require the actuaries making the funding calculations to use a corporate bond yield curve figure published by the Treasury Department.

Special rules would apply to plans with funding problems.

The regulations would treat a plan as “at risk” if, starting in 2011, the “funding target attainment percentage” for the preceding plan year was less than 80% and the at-risk FTAP for the preceding plan year was less than 70%.

The at-risk FTAP level would be 65% in 2008, 70% in 2009 and 75% in 2010, officials write.

The IRS has proposed starting to apply the rules to plan years beginning on or after Jan. 1, 2009, or for the plan year beginning on or after the date Section 430 kicks in, officials write.

When plans sponsors are trying to comply with the regulations, “under the proposed regulations, any change in a plan’s funding method that is made for the first plan year Section 430 applies to the plan and that is not inconsistent with the requirements of Section 430 would be treated as having been approved by the [IRS] commissioner and would not require the commissioner’s specific approval,” officials write.

The commissioner’s approval also would not be required for actuarial assumptions adopted for the first plan year for which Section 430 applies to the plan and that are “not inconsistent with” the requirements of Section 430, officials write.

Comments on the proposed regulations are due March 31, 2008.