The Internal Revenue Service is coming out with a new batch of advice aimed at cash balance plans that have to cut their interest crediting rates to comply with a new law.
The IRS discusses the upcoming guidance in IRS Announcement 2009-82, which affects cash balance plans and other types of “statutory hybrid plans,” such as pension equity plans.
A cash balance plan is supposed to provide a pension benefit that is defined in advance, but it is funded using a formula that increases a participant’s benefits 1 year at a time, rather than using a formula that assumes a participant will spend many years with the same employer.
One section of the Internal Revenue Code, Section 411(d)(6), normally prohibits pension plan sponsors from cutting the benefits a participant already expects to collect.
But a new law, IRC Section 411(b)(5)(B)(i), will prohibit statutory hybrid plans from having a plan interest crediting rate above the market rate of return. The Section 411(b)(5)(B)(i) rate cap could take effect during the first plan year that begins on or after Jan. 1, 2011, officials write.
The IRS hopes to resolve the conflict between Section 411(d)(6) and the 411(b)(5)(B)(i) rate cap in the final rate cap regulations.
If a statutory hybrid plan sponsor cuts the plan crediting rate simply to comply with the rate cap regulations before the rate cap regulations actually come out, the IRS will not punish the plan for violating the Section 411(d)(6) ban on benefits cuts, officials write.
A plan can make a 411(b)(5)(B)(i)-inspired rate cut even if the amendment is adopted after the end of the first plan year that starts in 2009, officials write.
The IRS also expects to come out with a special notice timing rule. The timing rule will tell statutory hybrid plans how to let participants know about a crediting rate change that is adopted by the last day of the first plan year that begins on or after Jan. 1, 2009, officials write.
The plan can provide the notice “as late as 30 days after the effective date of the amendment,” officials write.
That relief probably will apply only if the amendment is effective by the first day of the first plan year that begins on or after Jan. 1, 2010, officials write.