ERIC: Hybrid Plan Rules Should Encourage Plan Creation

The ERISA Industry Committee (ERIC) submitted to the Treasury Department and Internal Revenue Service (IRS) a series of letters on proposed and final regulations about cash balance and other hybrid plans.

In a news release accompanying the release of its comment letters, the industry group argued that “it is critical that Treasury and IRS draft regulations that reflect Congress’ intent to encourage the creation and maintenance of these plans.” 

ERIC President Mark Ugoretz said: “As traditional defined benefit plans have become increasingly less attractive, cash balance and pension equity plans have provided a welcome exception to this troubling trend.  Congress recognized these facts and, in the Pension Protection Act, adopted comprehensive legislation to encourage employers to adopt and maintain cash balance and pension equity plans.  Yet despite this clear Congressional intent, the proposed and final regulations provide either a narrow interpretation of the statute or inadequate guidance for plan sponsors.”

Among the areas of concern addressed in the ERIC letters were:

  • The final regulations should expand the rates of return that a plan is permitted to offer to include the full range of market rates of return.  Whether a rate constitutes a market rate should be determined without regard to either the reasonable minimum guaranteed rates allowed under the statute or the capital preservation requirement.  Market rates listed in the regulations should constitute a safe harbor and not an exclusive list of permissible market rates.  The list of permissible rates should be expanded.  The final regulations, according to ERIC, should reflect Congress’ intent to permit hybrid plans to offer a wide array of interest crediting rates.
  • The final regulations should clarify that the Internal Revenue Code rejected earlier guidance (Notice 96-8) and eliminated whipsaw for hybrid plan distributions after August 17, 2006.  ERIC notes that Congress was deeply troubled by the effects of whipsaw and sought to eliminate any requirement to apply whipsaw in the future through the adoption of the Pension Protection Act of 2006.  ERIC urges that revising the regulations to make clear that no whipsaw calculations will be required in the future.
  • ERIC recommends that the age discrimination safe harbor should be revised to permit plans to compare the benefits provided to similarly situated individuals covered by different benefit formulas by reducing each participant’s benefit to its present value.   
  • The final regulations should limit the three-year vesting rule to benefits accrued under a hybrid formula and clarify that the three-year vesting requirement does not apply to non-vested participants who are rehired after prior hybrid formula benefits have been lost under the plan’s break-in-service rules.

ERIC’s letter recommends that the final regulations clarify how the various qualification requirements apply to participant-directed cash balance plans, including the anti-cutback rule, the market rate of return requirements, the age discrimination tests, the anti-backloading rules, and the plan termination requirements.  Among these recommendations are that participants in a participant-directed cash balance plan should be permitted to choose among a wide array of hypothetical investments that individually qualify as market rates of return.


PEP Guidance  

According to ERIC, the proposed and final regulations offer only minimal guidance on Pension Equity Plans (PEPs), placing PEP sponsors in an awkward position, knowing they will have to comply with the rules in the near future with limited guidance on how to do so.  ERIC recommends that the Treasury and IRS develop a comprehensive, workable set of rules that provide PEPs with legal certainty and a clear path to compliance.

In a separate statement, Ugoretz said that, “ERIC’s comments reflect a deep concern that the proposed regulations would not reflect Congress’s intent to provide a predictable legal environment in which employers can safely offer retirement benefits to their employees through cash balance and pension equity plans.  The survival of cash balance and other hybrid plans is critical to the future of sound retirement policy.” 

The Treasury Department and IRS released these final and proposed regulations on October 18, 2010.   The ERIC letters are at