IRS Seeks Comments on PPA Provisions That Apply to Hybrid Plans

Section 701 of the Pension Protection Act of 2006 ("PPA") amends the Internal Revenue Code ("Code"), ERISA, and the Age Discrimination in Employment Act ("ADEA") in order to address benefit accrual standards for hybrid qualified plans and conversion of defined benefit ("DB") plans to cash balance plans.  Although the PPA provisions that amend the Code and ERISA do not pertain to governmental plans, the amendments to the ADEA would apply to governmental plans. 

In anticipation of future guidance, the IRS, in Notice 2007-6 , is requesting comments on certain issues by April 16, 2007.   Of particular importance to governmental plans and employers, the IRS is requesting comments on applying the special rules for hybrid plans to a plan in which only certain participants' accrued benefits, or only a portion of a participant's accrued benefit, is determined by lump sum based accrual methods.

Governmental plan sponsors and administrators with fixed interest structures such as DROPs, guaranteed refunds of employee contributions, annuity savings accounts, money purchase options, or cash balance plans will want to evaluate those structures carefully in light of the PPA and Notice 2007-6.  In addition, governmental plan sponsors and administrators may want to submit comments to the IRS on the issues outlined above and also propose that interest rates determined by state statute or administrative regulations should be either a safe harbor or be deemed to be a market rate of return.  At the very least, governmental plan sponsors and administrators may want to propose that the IRS give governmental employers additional time to comply with these rules to give state legislatures and/or administrative agencies adequate time to pass appropriate legislation or promulgate appropriate regulations.  It also appears to us that some plans may wish to raise state constitutional issues with regard to these changes.

For additional information regarding IRS Notice 2007-6 or the impact of the PPA's benefit accrual standards on governmental plans, please contact Mary Beth Braitman, Terry Mumford, or Cynthia Purvis.