Final Market Rate of Return Rules Adopted for Hybrid Plans

Final guidance published by the Internal Revenue Service (IRS) will impact the way certain hybrid defined benefit plans assess and report the value of pension portfolios and unfunded liabilities.

Defined benefit plans impacted by the regulation include those that use a lump sum-based benefit formula, including cash balance plans and pension equity plans, as well as other plans that have formulas with an effect similar to a lump sum-based benefit formula.

According to the IRS, 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.”

The 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). IRS says the regulations will directly impact sponsors, administrators, participants and beneficiaries of hybrid pension plans.

These regulations generally apply to plan amendments made on or after September 18, 2014 (or an earlier date as elected by the plan), and they cease to apply for amendments made on or after the first day of the first plan year that begins on or after January 1, 2017 (or, for collectively bargained plans, on or after a later date specified in the regulations).