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Ret plans - cash balance, hybrid

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When Amending a Plan, Tell the Truth or Pay the Consequences
"The district court found that the communications to employees [about a 1996 modification of its pension plan to become a cash balance plan, causing a suspension of benefit accruals for four to five years for several thousand participants] were intentionally false and misleading ... You have to ask why this case did not settle. Well before trial, Foot Locker surely knew the facts were not favorable, and the plaintiffs also must have been concerned about serious legal issues.... There were legitimate limitations period issues. Compromise on technical actuarial factors (interest rates and mortality tables) might have been reasonable. The plaintiffs might have yielded on the windfall issue.... It might be difficult to find employment records back to 1996 ... But perhaps 'principle' took over.... This loss will cost Foot Locker [$180 million]." [Osberg v. Foot Locker, Inc., No. 15-3602 (2d Cir. July 6, 2017; cert. pet. filed Nov. 8, 2017)] (Bob Blum Mediation)
2017 National Cash Balance Research Report (PDF)
16 pages. "The number of new Cash Balance plans increased 17% compared with just 3% growth in new 401(k) plans ... 92% of Cash Balance Plans are in place at firms with fewer than 100 employees.... Cash Balance plans now make up over 34% of all defined benefit plans, up from 2.9% in 2001." (Kravitz, an Ascensus Company)
[Guidance Overview] IRS Guidance on Cash Balance Benefit Formulas: Avoiding Employer Discretion
"IRS confirmed that a cash balance formula based on only a portion of a participant's annual compensation can nevertheless meet the 'definitely determinable' requirement so long as the formula is not subject to employer discretion under the plan terms. The EP staff is directed to apply this analysis when (i) reviewing a cash balance plan's determination letter request, or (ii) auditing a cash balance plan." (Drinker Biddle)
[Official Guidance] Text of IRS Memo for EP Employees: Definitely Determinable Cash Balance Plan Benefit Formulas (PDF)
"A Determinations specialist reviewing a determination letter request, or an Exam agent auditing a plan in which the benefit formula is not the subject of a determination letter, should follow the analysis (including examples) in the attached Issue Snapshot for determining whether a benefit formula based on only a portion of annual compensation, a special bonus, or other measure not based on annual compensation, is 'definitely determinable.' " [TE/GE-04-0417-0014, Apr. 7, 2017] (Internal Revenue Service [IRS])
Retirement Assets Total $24.5 Trillion in Second Quarter 2016
"Retirement assets accounted for 34 percent of all household financial assets in the United States at the end of the second quarter of 2016.... Assets in individual retirement accounts (IRAs) totaled $7.5 trillion at the end of the second quarter of 2016, an increase of 1.7 percent from the end of the first quarter. Defined contribution (DC) plan assets rose 2.1 percent in the second quarter of 2016 to $7.0 trillion." (Investment Company Institute [ICI])
Inside the Cash Balance Plan Black Box
"Here a few considerations in deciding whether to adopt a Cash Balance plan. First and foremost, an employer should consider a Cash Balance plan if it is profitable and has predictable revenue. It is a retirement plan with recurring contributions. Second, the owners or partners are generally 40 year old and earn at least $100,000 per year. Third, they want to accelerate their retirement savings by contributing more than the annual maximum of $53,000 ($59,000 if age 50 or older) to a 401(k) and profit sharing plan." (The Retirement Plan Blog)
2016 Report on the Use of Cash Balance Plans (PDF)
17 pages. "Continuing almost a decade of double-digit annual growth, the Cash Balance plan market was up 19% in 2014, the most recent year for which complete DOL data is available. In contrast, the number of new 401(k) plans rose only 2% ... . Between 2008 and 2014, there was a 189% increase in new plans nationwide.... Total Cash Balance plan assets reached $1T for the first time in 2014 ... Plan sponsors added $25B in contributions in 2014.... Cash Balance plans make up 29% of all defined benefit plans, compared with 2.9% in 2001[.]" (Kravitz)
The Cash Balance Moment
"In an industry that has been dominated for years with headlines for plan freezes and buyouts (signs for a declining DB market), these 'hybrid' plans are on the rise. Their ease of understanding, portability, and potential for reduced risk appeal to sponsors and participants alike. Their share of the DB market (based on number of plans) has grown from being only 3% in 2000 to around 30% in 2015[.]" (Russell Investments)
[Guidance Overview] IRS Provides Helpful Guidance for Cash Balance Plans and 401(k) Plan Testing (PDF)
"[Chief Counsel Memorandum 201617006 provides that], although a cash balance plan with a 'whipsaw' feature would not satisfy the age discrimination safe harbor for lump-sum-based plans, the plan can meet the age discrimination safe harbor rule for plans with indexed benefits.... [In Chief Counsel Memorandum 201615013, the IRS] concluded that it would be permissible to interpret the Code and relevant regulations to treat the population of otherwise excludable employees for purposes of Code Sec. 410(b) coverage testing and ADP testing as including employees participating in the plan who have not satisfied the Code Sec. 410(a)(4) entry date period applicable to them[.]" (Groom Law Group)
[Official Guidance] Text of Chief Counsel Advice 201617006: Eligibility of Certain Cash Balance Plans for the Section 411(b)(1)(H) Safe Harbor Rules Regarding Lump Sum-Based Benefit Formulas and Indexed Benefits (PDF)
"As of the effective date of the 2014 revisions to Section 1.411(b)(5)-1 (which generally apply for plan years beginning on or after January 1, 2017), cash balance plans with a single-sum distribution that is determined as the present value of the participant's accrued benefit using the actuarial assumptions specified in Section 417(e)(3) are not eligible for the safe harbor rule for plans with lump sum-based benefit formulas under Section 411(b)(5)(A) and Section 1.411(b)(5)-1(b)(1) (which applies to many cash balance plans using the safe harbor formula measure described in Section 1.411(b)(5)-1(b)(1)(i)(B)). However, these plans are generally eligible for the safe harbor rule for plans with indexed benefits under Section 411(b)(5)(E) and Section 1.411(b)(5)-1(b)(2)." (Internal Revenue Service [IRS])
[Guidance Overview] Hybrid Plans Should Be Reviewed for Compliance With Final Rules
"The IRS ... delayed by one year (to the 2017 plan year) the effective date of the various provisions in the 2014 final regulations that plan sponsors have been concerned about, including: [1] The requirement to use one of the IRS-approved interest crediting rates under the market rate of return rules; [2] The need to eliminate whipsaw in order to remain a 'lump sum based formula'; [3] The requirement that conversions from accounts to annuities be based on reasonable actuarial equivalence either at normal retirement date or at the annuity starting date in order to be a 'lump sum based formula'; [4] Addressing limitations on early retirement subsidies that may be disregarded under the age discrimination safe harbor rules." (Willis Towers Watson)
[Opinion] The Truth About Cash Balance Pension Plans for Public Employees
"Cash balance plans offer the false promise of a more 'fair' retirement plan for public employees. Traditional defined benefit pensions are better than cash balance plans at pooling and managing risk since cash balance plans shift more of the risk to the employee, just like 401(k)-style plans. In a cash balance plan, it is harder for a worker to know how much retirement income she is earning." (National Public Pension Coalition)
Are You Ready for a Cash Balance Plan? (PDF)
"What is a cash balance plan? ... How much can I contribute for myself each year? ... Those contributions are really high -- is this legal? ... Where is the money invested? ... How is the plan funded? ... What happens if I can't afford to fund the plan for a particular year? ... Can I give key employees a higher allocation than the rest of my staff? ... Should I terminate my 401(k) plan and just have a cash balance plan?" (Retirement Management Services)
My Cash Balance Plan Had a Return in 2015 Less Than the Interest Crediting Rate. Now What?
"The funding requirements of a Cash Balance Plan allow for funding of an unfunded liability over 7 years. If your Cash Balance Plan had an asset balance of $100,000 and the interest crediting rate was 6%, what happens if the Plan had no return in 2015? This means that the Plan had a $6,000 loss which can be funded over the next 7 years ... If the cash is available for this contribution, making the contribution can provide tax benefits and reduce the unfunded liability of the Plan to allow for flexibility in contributions in future years." (Markley Actuarial)
[Opinion] The Fallacy of the Participant Outcomes Mantra
"Auto-enrollment and auto-escalation work for those who can afford it. It doesn't work for those who are living day to day, and sadly today, that seems to be the majority of American families. In the Pension Protection Act of 2006, Congress claims to have intended to protected pensions. They did take some very positive steps while they were at it though by statutorily legalizing what are known as hybrid plans (cash balance, pension equity, variable annuity, etc.) and while they were at it, statutorily legalizing market return hybrid plans. If you really want to help to prepare your employees for retirement, these are better vehicles." (Benefits and Compensation with John Lowell)
Text of Reply Brief of Petitioner PricewaterhouseCoopers Urging Supreme Court Review of Cash Balance Plan's 'Normal Retirement Age' Based Solely on Years of Service (PDF)
23 pages. "Seeking to shield the decision below from the scrutiny it deserves, respondents deploy a tapestry of obfuscation to contend that the circuits' explicit disagreement is insufficiently direct to merit review, and that the question presented does not matter. Both contentions are baseless.... This Court should not delay restoring clarity and certainty to this important area of federal law that affects long-term decisions by employers and workers nationwide. The petition should be granted." [Laurent v. PricewaterhouseCoopers LLP, No. 14-1179 (2d Cir. July 23, 2015; cert. pet. filed Nov. 13, 2015)] (SCOTUSblog)
Text of Amicus Brief Urging Supreme Court Review of Cash Balance Plan's 'Normal Retirement Age' Based Solely on Years of Service
"The Second Circuit's standard handcuffs plans. A 'normal retirement age' for purposes of ERISA determines not 'when employees must retire, but only when certain rights vest and how benefits are adjusted.' ... The Second Circuit's approach limits the alternatives available to plans in arranging their benefits offerings to meet companies' needs, thus burdening employers and, by making retirement plans less attractive, undermining ERISA' s goal of providing benefits to employees.... As matters currently stand, the same plan will be subject to competing interpretations depending on the district in which a claim is raised. Worse yet, in the Second Circuit, a plan will be subject to a vague, general standard that could lead to divergent results by different factfinders." [Laurent v. PricewaterhouseCoopers LLP, No. 14-1179 (2d Cir. July 23, 2015; cert. pet. filed Nov. 13, 2015)] (American Benefits Council)
Class Action Lawsuit Prevails in Cash Balance Conversion
"[T]he court noted that, while participants received notice of the changes in a series of communications, none addressed the possibility of a wear-away period.... The court's remedy was to reform the terms of the plan in accordance with the participants' expectations.... [The court found that] participants reasonably but mistakenly believed that the pay and interest credits under the post-conversion formula would increase their pension benefit.... [and] held that Foot Locker committed equitable fraud by making changes to its plan to reduce costs without disclosing the full extent or impact of those changes to plan participants" [Osberg v. Foot Locker, Inc., No. 07-cv-1358 (S.D.N.Y. Sept. 29, 2015)] (Towers Watson)
Cash Balance Plans Overview
"Advantages of a Cash Balance Plan: Higher Deductions ... Flexibility in design ... Flexibility in contribution ... Investment gains ... Pooled investments ... Reduction in other taxes ... Creditor protection ... Disdvantages of a Cash Balance Plan: Special rules ... Duplications ... PBGC premiums ... Unfunded Liabilities." (Retirement Management Services)
Market-Return Cash Balance Plan Might Be the Right Design to Improve Sponsor and Participant Outcomes (PDF)
"It's a lot like a DC plan, even more so than a typical cash balance (CB) plan. Participants have an account balance, but like all cash balance plans it's a notional account balance. Benefits are expressed as account balances, pay credits, which are analogous to employer contributions in DC plan, are deposited periodically into accounts, and interest credits, which are analogous to investment returns, are credited. What distinguishes it from a traditionally-designed cash balance plan is that the interest credits are based on real market rates of return rather than bond yields." (October Three Consulting)
Hybrid Plan Rules Leave Those Using Whipsaw in Tight Spot
"While the IRS and Treasury had given plans time to eliminate whipsaw calculations in the past, it was never made explicitly clear that they were required to do so, [said] Richard Shea [of Covington & Burling LLP] ... 'Sponsors in this situation are really, really angry. Their view is for a period of almost 20 years they were told, if your interest crediting rate isn't one of the rates in Notice 96-8, you must do whipsaw and if you don't, your plan is bad,' Shea said. But now, they're being told that if they use whipsaw, they have a problem. To say that and 'then not to provide transition relief when it's actually needed adds insult to injury.' " (Bloomberg BNA)
[Guidance Overview] IRS Publishes Final Hybrid Plan Regs
"The new regulations do not change or expand permissible interest crediting rates. The prescribed transitional corrections are specifically tailored to a particular compliance failure of a plan's current interest crediting rate. Generally two or more alternatives are offered for each category of compliance failure, and the new regulations expressly allow rounding of annual and less frequently determined interest rates, within prescribed parameters." (Morgan Lewis)
[Guidance Overview] IRS Issues Final Regs Providing Anti-Cutback Relief and Guidance for Hybrid Retirement Plans
"[T]he final regulations provide anti-cutback relief by permitting a plan with a noncompliant interest crediting rate to be amended: [1] For benefits that have already accrued so that its interest crediting rate complies with the market rate of return rules. [2] Only for interest credits credited for periods that begin on or after the later of the effective date of the amendment or the date the amendment is adopted." (Practical Law Company)
[Official Guidance] Text of IRS Final Regs: Transitional Amendments to Satisfy the Market Rate of Return Rules for Hybrid Retirement Plans
31 pages. "These final regulations relate to previously issued final regulations that specify permitted interest crediting rates for purposes of the requirement that an applicable defined benefit plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return. These final regulations permit a plan sponsor of an applicable defined benefit plan that does not comply with the market rate of return requirement to amend the plan in order to change to an interest crediting rate that is permitted under the previously issued final hybrid plan regulations without violating the anti-cutback rules of section 411(d)(6)." (Internal Revenue Service [IRS])
Comparison of Colorado's Hybrid DB Plan to Alternative Plan Designs (PDF)
102 pages. "This study found that the current [Colorado Public Employees' Retirement Association (PERA) Hybrid Defined Benefit Plan] is more efficient and uses dollars more effectively than the other types of plans in use today. Thus, costs may not be the greatest consideration either for or against a change in the Plan. The decision to change from the PERA Hybrid Plan to another type of plan would be due to a change in the State's compensation policy, not because the same benefits could be achieved at a lower cost." (Gabriel Roeder Smith & Company)
Retirement Plan Communications Failed to Adequately Disclose Implications of Wear-Away Period to Retirement Plan Participants
"The court found that ... [the] human resources employees who helped draft these communications deliberately concealed the negative impact that wear-away would have on participants' benefits. Although Foot Locker asserted that it relied on the advice of counsel when drafting the communications, the court found that inside and outside counsel did not have all of the facts necessary to provide a clear understanding of the number of participants affected by wear-away." [Osberg v. Foot Locker, Inc., No. 07-cv-1358 (S.D.N.Y. Sept. 29, 2015)] (Practical Law Company)
Participants Get Larger Benefits Due to Disclosure Defects in Cash Balance Conversion
"[As] a remedy for Foot Locker's violation of the [ERISA] disclosure requirements, [the court] ordered Foot Locker to 'reform' the plan and pay the participants the benefits they would have received if the plan hadn't been amended. This equitable remedy of 'reformation' was adopted by the U.S. Supreme Court in Cigna Corp. v. Amara but there have been few cases where a court has had the opportunity to use reformation as a remedy for an ERISA violation." (Bloomberg BNA)
Text of District Court Opinion: Effect of DB Wear-Away Provision Was Not Adequately Disclosed; Cash Balance Plan Must Be Reformed to Provide Increased Benefits (PDF)
83 pages. "Both parties have compared this case to Amara v. CIGNA Corp.... This case presents a more egregious set of circumstances than Amara. In Amara, wear-away resulted, in large part, from fluctuations in interest rates; here, by contrast, the structure of plan conversion guaranteed that most Participants would experience severe wear-away and that this was the expected source of cost savings to Foot Locker.... Even employees directly involved in pension benefits calculations did not understand the concept of wear-away or that their accruals were effectively frozen for a period of time after the Plan conversion.... To remedy Foot Locker's misrepresentations, the Plan must be reformed to actually provide the A plus B benefit that the misrepresentations inequitably caused Class members to reasonably expect. " [Osberg v. Foot Locker, Inc., No. 07-cv-01358 (S.D.N.Y. Sept. 29, 2015)] (U.S. District Court for the Southern District of New York)
NASRA Issue Brief: State Hybrid Retirement Plans (PDF)
"Although a hybrid retirement plan may take one of many forms, this brief examines two broad types in use in the public sector. The first is a cash balance plan, which marries elements of traditional pensions with individual accounts into a single plan ... The second type combines a traditional DB plan, usually with a lower level of benefit accrual, with an individual [DC] retirement savings account.... Despite variability among these plans, most contain the core features known to promote retirement security: mandatory participation, shared financing between employers and employees, pooled assets invested by professionals, targeted income replacement with survivor and disability protection, and a benefit that cannot be outlived." [Updated Sept. 2015] (National Association of State Retirement Administrators [NASRA])
Cash Balance Plans 2015 Update
"If the issue is no longer surplus but risk, why establish (or convert to) a cash balance plan at all? Why not simply freeze the DB plan and establish a DC plan? ... DC plans do not present the preservation of capital, accounting and funding issues that market-return cash balance plans do. And in some respects they are more flexible -- unlike a 401(k) plan, participants in a cash balance plan cannot choose their contribution level or asset allocation. There are, however, still some reasons why some sponsors may prefer a cash balance plan solution." (October Three Consulting)
Text of Second Circuit Opinion: Cash Balance Plan Definition of 'Normal Retirement Age' at Five Years of Service Violates ERISA (PDF)
47 pages. "[T]he Plan defines 'normal retirement age' as '[t]he earlier of the date a Participant attains age 65 or completes five 'Years of Service' at PwC.... The repetition of the phrase, 'normal retirement age,' in Section 3(24)(A) [of ERISA] is no mere tautology. Rather, it suggests that 'the time' that a plan establishes as its normal retirement age must have some reasonable relationship to the age at which participants would normally retire.... If any age will do, why can't PwC set 35 as its normal retirement age? Or 25? Or 12? Setting a normal retirement age at any of these calendar ages is no more consistent with the statute than defining normal retirement age as five years of service. PwC cannot reasonably expect its employees to retire at 35 any more than the National Basketball Association can reasonably expect its players to retire at 65." [Laurent v. PricewaterhouseCoopers LLP, No. 14-1179 (2d Cir. July 23, 2015)] (U.S. Court of Appeals for the Second Circuit)
Designing a Retirement Program for Professional Firms: The Fundamentals (PDF)
"A stand-alone 401(k) plan may not achieve all of a professional firm employer's retirement plan goals; however, [IRS] regulations permit groups of highly paid professionals to convert or establish a next-generation cash balance plan to use in conjunction with a 401(k) plan. This approach may allow for significantly more tax-deductible contributions than can be made through a 401(k) plan alone." (Bryan, Pendleton, Swats & McAllister, LLC)
Cash Balance Contributions as a Business Expense: How to Allocate Costs Among Multiple Owners (PDF)
"How is the plan expense (contributions and administrative costs) handled from a business standpoint? ... [H]ow is the additional funding amount or the waiver to be applied among the business owners? The plan documents rarely address this. Neither do typical partnership or shareholder agreements. Some alternatives: [1] pro rata based on ownership; [2] pro rata based on the present value of each owner's accrued benefit; or [3] pro rata based on cumulative contributions on behalf of each owner. There is no right or wrong answer to this question." (John Frisvold and Jeff Cairns, Esq., in Plan Consultant)
Risk Management Solutions for Cash Balance Plans
"At a theoretical level, cash balance plans might seem impervious to movements in interest rates: Although rising rates would require a plan to pay larger benefits in the future, they would also reduce the time value of money, which might be expected to offset the increased benefit payout. However, this perspective misses the complex interest rate sensitivities inherent in cash balance plans' liabilities. Selecting plan assets with the goal of hedging against shifts in interest rates is just as important for cash balance plans as it is for defined-benefit pension plans." (Treasury & Risk)
Amara Again: Second Circuit Upholds Judicial 'Reformation' of Pension Plan (PDF)
"The latest opinion is notable for its holding that contract, as well as trust, principles could inform the availability of reformation, and for its conclusion that the elements of contract reformation had been established based on generalized circumstantial evidence of a unilateral mistake by the entire plaintiff class." [Amara v. CIGNA, Nos. 13-447-cv and 13-526 (2d Cir. Dec. 23, 2014)] (Steptoe & Johnson LLP)
IRS Hybrid Plan Transition Rules Criticized
"The IRS is now asking for comments on transitional rules to help plan sponsors that need to reduce their market rate of return without running afoul of anti-cutback rules. Those proposed rules are 'unnecessarily restrictive' and fail to account for a variety of interest crediting rates among plans, said Kathryn Ricard, ERISA Industry Committee senior vice president for retirement policy ... [E]mployer groups are also asking the IRS to revisit a provision in the final rules that could hurt sponsors calculating lump sums under a 'whipsaw' method when it comes to new age-discrimination safe harbors." (Pensions & Investments)
Hybrid Plan Transition Rules Would Not Mandate That Prior Plan Designs Be Treated as Improper
"Treasury Benefits Tax Counsel George Bostick ... said that the Treasury and the IRS do not expect people to read the government's mind. The setting of permitted interest rates in the final regulations does not imply that certain rates used in the past would fail, he added. The new rules should have no influence on whether a past rate is acceptable." (Wolters Kluwer Law & Business)
[Opinion] American Academy of Actuaries Comment Letter to IRS on Proposed Hybrid Retirement Plan Regs (PDF)
"[A]dditional clarification [of the following areas] could result in easier or more consistent plan administration and, in some cases, afford sponsors the opportunity to design plans that would be desirable both to the employees who benefit from them and the companies that sponsor them.... Lack of availability of indices for use in interest crediting.... Specification of some combination of investment-based rate of return with annual floor satisfying the market rate of return rules.... Requests to introduce 'self-directed investment' into statutory hybrid plans.... Clarity on plan termination rules for plans with interest crediting rates in excess of market rate of return.... Usefulness / complication of the subset of assets method.... Approval process for 'comparable' RICs.... Lack of clarity on fixed conversion factors." (American Academy of Actuaries)
[Opinion] ERIC Comment Letter to IRS on Transitional Amendments for Hybrid Retirement Plans (PDF)
12 pages. "[1] The 'silo' approach to transition in the proposed regulations is unnecessarily restrictive and fails to take account of the many variations in interest crediting rates among existing plans, resulting in arbitrary distinctions among plans. [2] The final regulations for the first time penalize plans that calculate lump sums using the 'whipsaw' method (even though the [IRS] previously required plans to use that method).... [3] The final regulations for the first time, and without statutory authority, establish a new definition of early retirement subsidy that differs markedly from the established definition embodied in the statute and regulations since the passage of [ERISA]." (The ERISA Industry Committee [ERIC])
[Guidance Overview] IRS Final and Proposed Regulations Address Cash Balance Plans
"The final regulations make some changes to the 2010 proposal and clarify some issues. The newly proposed rules set out transition guidance for sponsors who need to change their current market rate of return to comply with the final rules. The guidance offers hybrid plans (especially cash balance plans) a more stable future as well as new opportunities for plan sponsors." (Towers Watson)
[Guidance Overview] Long-Awaited Cash Balance Plan Guidance Presents Compliance Challenges and Opportunities (PDF)
"Sponsors of defined benefit plans that contain cash balance or hybrid pension formulas need to consider if plan changes will be required before 2016. The most critical compliance issue for most plans will be to determine if the plan's existing interest crediting features meet the final rules, and, if they do not, how to transition to a new, compliant regime.... Traditional defined benefit plan sponsors may conclude that the more complete regulatory framework in this area now presents a good opportunity to take advantage of a hybrid pension benefit formula." (Groom Law Group)
[Guidance Overview] IRS Issues Final and Proposed Rules for Hybrid Pension Plans (PDF)
"The final rule provides greater flexibility than the 2010 regulations on the market rate of return, the statutory metric used to credit interest ... on participants' hypothetical account balances. Commenters on the 2010 rule pointed out that the proscribed permissible rates of return and some of the permissible indices were neither broad enough nor representative of true market rates of return. The IRS now specifies that the hybrid plan's interest-crediting rate cannot be greater than the set of rates or indices established in the new final rule[.]" (Milliman)
Cash Balance Plans Are Redefining Retirement Benefits
"For employees at small businesses, the advent of a new cash balance plan in addition to their existing 401(k) plan, another vehicle that draws from pretax income, is reason to celebrate. For registered investment advisers who want to expand their practice and offerings, new cash balance programs that are coming online are a potential way to gain new business." (Institutional Investor)
[Guidance Overview] Recent Guidance on Hybrid Plans Gives Sponsors Interest Rate Options (PDF)
"The final regulations permit the use of a rate of return based on a subset of plan assets subject to certain conditions. The new preamble explains that some plan sponsors may want to credit interest differently for different groups of participants, such using a less-volatile rate for long-service employees.... A plan can change a benefit formula prospectively but is prohibited under federal tax Code Section 411(d)(6) from cutting back on accrued benefits." (ERISAdiagnostics, Inc. via Thompson Pension Plan Fix-It Handbook)
[Guidance Overview] IRS Releases Highly Anticipated Cash Balance Plan Regs
"The Final Regulations ... retain an exclusive list of permissible interest rates (including fixed rates, variable rates and combinations of rates) that meet the market rate of return requirement.... The Proposed Regulations set forth specific correction procedures for each noncompliant feature of a noncompliant interest crediting rate. If the noncompliant interest crediting rate has more than one noncompliant feature, then each noncompliant feature must be separately addressed ... The Proposed Regulations only permit modification of the noncompliant features of the interest crediting rates, while requiring maintenance of any compliant features." (McDermott Will & Emery)
[Guidance Overview] IRS Issues Final and Proposed Hybrid Plan Regs
"The new regulations confirm that a cash balance plan may credit interest based on the actual rate of return on the aggregate assets of the plan, provided that plan assets are diversified to minimize volatility.... The regulations clarify that a participant's right to future interest credits under a hybrid plan as determined under the plan terms, to the extent not tied to future service with the employer, is a protected benefit under Code Section 411(d)(6).... The IRS had previously requested comments regarding whether hybrid plans should permit participants to 'direct' the 'investment' of their accounts to track certain pre-selected investment options ... [E]ven though this issue is not settled, hybrid plans should not introduce a self-directed interest crediting method that was not in place on September 19, 2014." (Proskauer Rose LLP)
[Guidance Overview] IRS Issues Final and Proposed Regs on Hybrid Pension Plans
"Treasury and the IRS are continuing to study whether a hybrid plan design that bases the interest crediting rate on participant self-direction of investments should be permitted. If they decide that such design is not permissible, only plans that have this feature on September 18, 2014 will be granted relief from the anti-cutback rules of Code Section 411(d)(6)." (Littler)
[Guidance Overview] Final and Proposed Regulations on Hybrid Pension Plans
"The original proposed regulations provided, and the final regulations continue to provide, that the actuarial equivalent ... of the then-current balance of the hypothetical account or other accumulated benefit can be used to determine annuity forms of distribution as of a distribution date prior to normal retirement. The final regulations also clarify that this rule applies to a subsidized optional form of benefit, including any early retirement subsidy or a subsidized survivor portion of a qualified joint and survivor annuity, but not to an optional form of benefit that is less than the actuarial equivalent of the cash balance account or PEP accumulation." (Morgan Lewis)
[Guidance Overview] IRS Issues Final Rules For Cash Balance and Pension Equity Plans
"With respect to the requirement that interest crediting rates not exceed a market rate of return, the list of permissible interests rates has been expanded to include rates of return based on a subset of plan assets, an increase in the permitted maximum fixed rate from 5% to 6%, an increase in the maximum floor from 4% to 5% for government bond-based rates and the use of segmented rates." (Winston & Strawn LLP)
[Guidance Overview] Hybrid Plan Regulations Relax Market Rate of Return (PDF)
"Plan sponsors will need to be mindful of the funding based restrictions on amending plans when evaluating the regulatory options offered by the hybrid regulations. Amendments to meet mandatory vesting requirements -- which would include the market rate of return requirement -- are excused from this funding-based restriction, but only to the extent the increase is necessary to continue to satisfy plan qualification requirements." (Buck Consultants at Xerox)
[Guidance Overview] IRS Final Regs Address Market Rates of Return for Hybrid Plans
"The final regulations adopt an exclusive list of permitted cash balance plan interest crediting rates.... The preamble to the final regulations confirms that it is acceptable to determine an investment-crediting rate based on a specified blend of multiple rates.... [T]he list of permitted interest crediting rates in the final regulations is exclusive.... The final regulations do not permit a cash balance plan to allow participants to choose among different interest crediting rates." (October Three Consulting)
Hybrid Plan Rules Now Offer Certainty, Open Up Options for Employers
"The final rules open up a new world for employers wanting to offer retirement plans to their employees and could eventually slow the migration from defined benefit plans to defined contribution plans ... The market rate of return in the final rules doesn't solve the problem for every plan, but 'at least moved in a direction that both gave clarity to all plan sponsors and put a lot more plan sponsors in the category of we're OK, versus we're not OK,' [said Alan Glickstein, senior retirement consultant at Towers Watson]." (Bloomberg BNA)
Final Cash Balance Regs Expand Rate Options
"The final regulations allow plan sponsors who choose the actual rate of return as the [interest crediting rate (ICR)] to create different investment strategies for different groups of participants.... The option to allow participant choice of investments for the ICR is 'under further study' by the IRS." (Society for Human Resource Management [SHRM])
[Guidance Overview] IRS Issues Regs on Hybrid Defined Benefit Plan Rules
"One change is to permit the 133% rule of Sec. 411(b)(1)(B) for defined benefit plans that adjust benefits using a variable rate that could be negative to be applied at an earlier date than originally proposed, either for plan years that begin on or after Jan. 1, 2012, or an earlier date elected by the taxpayer.... Related proposed regulations issued simultaneously concern the rules under which a hybrid plan is treated as failing to satisfy Sec. 411(b)(1)(H) (which prohibits the rate of an employee' s benefit accrual from being reduced because of the attainment of any age) if the terms of the plan provide any interest credit (or an equivalent amount) for any plan year at a rate that is in excess of a market rate of return." (Journal of Accountancy)
[Guidance Overview] New IRS Regs Address Cash Balance Plan Requirements
"[T]he final regulations modestly expand what is considered to be a permissible interest crediting rate, but retain the closed-group approach under which rates other than those specifically described will be viewed as exceeding a market rate.... The proposed regulations address the transition from a noncompliant interest crediting rate to one that is permitted under the final regulations.... Although the rules provide anti-cutback relief, this relief is not as broad as some plan sponsors had hoped." (Towers Watson)
[Official Guidance] Text of IRS Proposed Regs: Removal of Allocation Rule for Disbursements from Designated Roth Accounts to Multiple Destinations
"This document contains proposed amendments to the regulations that address the tax treatment of distributions from designated Roth accounts under tax-favored retirement plans. The proposed regulations would limit the applicability of the rule regarding the allocation of after-tax amounts when disbursements are made to multiple destinations so the allocation rule applies only to distributions made before the earlier of January 1, 2015 or a date chosen by the taxpayer that is on or after [September 18, 2014]. These regulations would affect administrators of, employers maintaining, participants in, and beneficiaries of designated Roth accounts under tax-favored retirement plans." [Agency/Docket No. REG-105739-11] (Internal Revenue Service [IRS])
[Official Guidance] Text of IRS Proposed Regs and Request for Comments: Transitional Amendments to Satisfy the Market Rate of Return Rules for Hybrid Retirement Plan
"These proposed regulations would permit an applicable defined benefit plan that does not comply with the requirement that the plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return to comply with that requirement by changing to an interest crediting rate that is permitted under the final hybrid plan regulations, without violating the anti-cutback rules of section 411(d)(6)." (Internal Revenue Service [IRS])
Notes from Actuaries' 'Intersector Group' Meeting with Treasury and IRS, March 12, 2014 (PDF)
7 pages. Excerpt: "Twice a year the Intersector Group meets with representatives of [Treasury] and the [IRS] to dialogue with them on regulatory and other issues affecting pension practice.... The IRS and Treasury ... have legal concerns in addition to policy concerns in cases where a lump sum is offered to a participant who has already started receiving lifetime annuity payments.... IRS is working on a project to bring cash balance plans into the pre-approved determination letter program.... What can IRS and the Treasury Department do to quell plan sponsor, contributing employer, and practitioner fears that a potential 2015 sunset will be unworkable for red -- and yellow -- zone plans due to loss of ability to make changes to remedial plans, loss of enforcement mechanisms, and possible deficiency excise taxes?" (American Academy of Actuaries)
Market Based Cash Balance Plans and the Capital Preservation Rule
"We begin a series of three articles on the 'capital preservation rule' applicable to cash balance plans that use a 'market-based' interest crediting rate -- most commonly, a rate based on the performance of trust assets. (We refer to this sort of plan as a ReDefined Benefit (ReDB) plan.)" (October Three Consulting)
[Guidance Overview] There's No Failing in Cross-Tested Plans
"Unlike plans which are designed to automatically satisfy nondiscrimination (e.g., nonintegrated, integrated), a small change in the employer's demographics in a cross-tested plan (e.g., replacing a younger nonhighly compensated employee [NHCE] with an older NHCE or hiring a young highly compensated employee [HCE]) can cause an allocation formula that passed the previous year to fail in the current day.... Fortunately, the regulations provide several options for 'rescuing' the plan from failure." (SunGard Relius)

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