IRS Postpones Effective Dates of Final and Proposed Regulations Relating to Interest Crediting Under Cash Balance and Other Hybrid Plans
On October 12, 2011, the IRS issued Notice 2011-85 which announced a delay in the effective dates of the 2010 final and proposed regulations regarding interest crediting and market rate of return under "hybrid" (such as cash balance) defined benefit plans. The final and proposed regulations were issued on October 19, 2010, and were intended to implement new provisions of The Pension Protection Act of 2006 requiring interest credits under hybrid pension plans to be no greater than a market rate of return. The final and proposed regulations provide the exclusive manner in which hybrid plans must measure the "market rate of return." Originally, the final and proposed regulations were to be effective for the first plan year on or after January 1, 2012. However, Notice 2011-85 postpones that effective date.
In general, Notice 2011-85 provides that:
The effective date of the 2010 proposed regulations, when finalized, will apply to plan years beginning no earlier than January 1, 2013.
The effective date of the 2010 final regulations will be postponed and will be the same effective date that will apply to the 2010 proposed regulations (no earlier than the first plan year on or after January 1, 2013).
The remedial amendment period for making plan amendments to comply with these rules is extended until the last day of the plan year before the first plan year for which the regulations are effective. For example, if the effective date of the proposed regulations is January 1, 2013, then a calendar year plan would have to be amended by no later than December 31, 2012. Operational compliance with the applicable provisions of The Pension Protection Act of 2006 is still required in the interim.
The IRS expects to grant 411(d)(6) relief for plans that must be amended to comply with the new regulations, when the amendment results in the elimination or reduction of an otherwise protected benefit (such as when the revised rate of return is lower than the rate that previously applied to the plan). Any such amendment will have to be timely adopted (see previous bullet point). Any such amendment will only be allowed to the extent necessary to enable the plan to meet the new rules.
In limited circumstances, there is a special timing rule for ERISA Section 204(h) notices that must be provided to participants if an amendment results in the elimination or reduction of a protected benefit.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.