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<nobr>Jan 13, 2011</nobr>

ERIC Urges Treasury to Develop Workable Set of Rules in Implementing Hybrid Retirement Plan Regulations

For Immediate Release: January 13, 2011

Washington, D.C. -- The ERISA Industry Committee (ERIC) on January 12 submitted to the Treasury Department and Internal Revenue Service a series of six comment letters on proposed and final regulations implementing the cash balance and pension equity plan provisions of the Pension Protection Act of 2006 (PPA), as amended by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA).

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

ERIC's comment letters can be accessed by clicking on the link below:

Because cash balance and pension equity plans cover approximately one out of every four participants in a defined benefit plan in the United States, and account for roughly 40 percent of the assets held in defined benefit plans nationwide, ERIC argues that it is critical that Treasury and IRS draft regulations that reflect Congress' intent to encourage and facilitate the creation and maintenance of these plans.

ERIC President Mark Ugoretz said that, "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."

While recognizing that the 2010 proposed and final regulations revised and clarified the 2007 proposed regulations in helpful ways, ERIC recommends that the Treasury and IRS develop a comprehensive, workable set of rules that provide cash balance and pension equity plans with legal certainty and a clear path to compliance.

ERIC's six comment letters address many specific concerns with the regulations, among them:

1) Market Rates of Return: 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.

ERIC contends that the proposed and final regulations restrict the PPA's "market rate of return" principle to an artificially narrow, exclusive list of rates of return and base this limitation on the PPA's participant-protective capital preservation rule and permitted guaranteed minimum rates of return. As a result, the proposed and final regulations turn what Congress intended to be a boon to participants into a new form of restriction on hybrid plans. The final regulations, according to ERIC, should reflect Congress' intent to permit hybrid plans to offer a wide array of interest crediting rates.

2) PPA's Anti-Whipsaw Rules: 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 will accomplish one of the principal goals of Title VII of the PPA, and notes that this recommendation would also bring the regulations into accord with the plain language of section 411(a)(13)(A) of the Internal Revenue Code.

3) Age Discrimination Testing: 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 letter argues that revising the safe harbor in this manner would make the test design-neutral and would reflect the principle that the time value of money should not be considered age-discriminatory.

4) PPA Vesting, Plan Termination, Conversion Rules, and Non-Hybrid Indexed Plans:

The final regulations should:

  • Limit the 3-year vesting rule to benefits accrued under a hybrid formula and clarify that the 3-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.

  • Clarify the rule requiring a plan that uses variable interest rates to apply, upon plan termination, the 5-year average of the variable interest rates.

  • Clarify when and how the requirements regarding plan conversions apply.

  • Clarify that plans that provide an indexed benefit but do not express the benefit by reference to a current value do not share key similarities with hybrid plans and therefore should not be subject to the vesting, plan termination, and plan conversion rules that apply uniquely to hybrid plans.

5) Participant-Directed Cash Balance Plans: ERIC's letter notes that participant-directed cash balance plans are consistent with existing statutes, including the PPA, and 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. ERIC argues that this is essential to allowing participants to build sufficient retirement savings in these types of plans and adjust their risk exposure as they near retirement.

6) Pension Equity Plans (PEPs): According to ERIC, the proposed and final regulations offer only minimal guidance on 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' 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."

ERIC believes that many of the problems with the proposed and final regulations, taken together, would make it difficult for many sponsors to effectively operate a hybrid plan. "If the regulations are finalized without significant modification, they are likely to drown these plans in a regulatory morass and breed litigation and controversy for decades to come. That is simply unacceptable," Ugoretz concluded.


For more information:
Ted Godbout
Director, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400
Fax: (202) 789-1120

The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.


ERIC Comment Letter on Hybrid Plans

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