What’s Important for Plan Sponsors in IRS Hybrid Plan Notice 2011-85

IRS Notice 2011-85 announces the relief and postponed effective date for several items related to hybrid pension plans IRS logo(e.g., cash balance and PEP plans). The notice is pretty technical (of course), but the IRS also published a nice summary of what’s affected by the relief.

Here’s what it means for plan sponsors:

  • The scope of the announcement is relatively narrow and only applies to certain hybrid plan rules and regulations. These rules were spelled out in a combination of proposed and final regulations issued in October 2010.
  • Important take-away from the notice: By extending the proposed 2010 hybrid plan regulation effective date, the IRS is hinting that they are still reviewing the definition of “market rate of return” for interest crediting rates. They’ve clearly received lots of comments from plan sponsors and practitioners about what a “fair” market rate of return should be. At this point, it looks like we won’t be getting final regulations about this issue until sometime in 2012.
  • Here’s an abbreviated summary of the notice’s relief items:
    • Extension of the effective date of the proposed 2010 hybrid plan regulations (which include the definition of market rate of return for interest crediting purposes) to a date no sooner than January 1, 2013 (they were expected to be finalized and effective January 1, 2012). The notice also extends the effective date of the final 2010 hybrid plan regulations from January 1, 2012 to the same date that the 2010 proposed regulations are effective.
    • Extension of the deadline for adopting amendments under § 411(a)(13) (other than § 411(a)(13)(A)) and § 411(b)(5)). This includes the 3-year vesting requirement for statutory hybrid plans. Plan sponsors now have until the last day of the year preceding the year that the 2010 proposed hybrid plans become effective to adopt the necessary amendments.
    • Additional 411(d)(6) relief for reducing accrued benefits as long as the amendment to reduce/eliminate benefits is done solely to comply with 411(b)(5) [i.e., age discrimination and interest credit rules for hybrid plans]. These amendments also need to be adopted before the last day of the year prior to when the proposed 2010 hybrid plans become effective.
    • Additional 204(h) notice timing relief in specific situations related to amendments that changed the interest crediting rate for a statutory hybrid plan.


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