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November 11, 2009 at 07:00 PM
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.
