IRSOne pension consultant is warning that new regulations by the Internal Revenue Service (IRS) regarding hybrid pension plans, also called cash balance plans, may prevent full pension distributions to retirees and other employees.

Under the new law, says Brett Goldstein, a Plainview, N.Y.-based pension administrator and president of The Pension Department, Inc., “employees may only get a partial pension, while the remaining pension money may have to stay in the plan.”

While the new IRS regulation is designed to minimize the number of underfunded plans, it also “allows companies to use the actual rate of return of the plan when calculating pension benefits,” Goldstein says. “If the cash balance plan makes money, the employees will make money. If the cash balance plan loses money, the employees may also lose money.”

Unfortunately, Goldstein continues, the new IRS rule conflicts with The Pension Protection Act (PPA) of 2006 rules, which limits how much money can be paid out from a pension plan.

“If a cash balance plan makes 10% in the stock market, retirees or those who have left their job may only get a partial pension check due to a conflict" between the new IRS regulations and the PPA, he says. “To add insult to injury, neither the new regulations nor the [PPA] are clear as to what happens to the remaining portion of your pension. The remaining portion may have to stay in the cash balance plan until further regulations are passed.”

Says Goldstein: the PPA stated that interest rates could not be in excess of the “’market rate.’” However, “the term market rate was never defined. Thus cash balance plans were forced to use conservative interest rates, ranging from 1.80%-5.19%, to determine pension payouts,” he says.

Although the new IRS regulation doesn’t take effect until 2012, “employers can utilize the new rules in 2011. The new IRS regulation clarifies that a cash balance plan can use the actual rate of return it makes in the stock market or an index like the S&P 500 to calculate pension benefits,” Goldstein explains. However, “if the stock market has a very good year with double digit returns, this would conflict with the Pension Protection Act of 2006 causing an employee to receive only a partial pension payment.”

Goldstein notes that the number of cash balance plans has increased 359% from 2001 to 2007, and that more than 25% of the Fortune 100 companies have a cash balance pension plan. “With the growth of these plans, Congress needs to change the new regulations to prevent employees from getting partial pensions,” he says.