ERIC News Release
Washington, DC – The ERISA Industry Committee (ERIC) on December 18 submitted to the Treasury Department and Internal Revenue Service (IRS) recommendations to improve the most recent package of proposed and final regulations implementing the cash balance and pension equity plan provisions of the Pension Protection Act of 2006 (PPA).
The proposed and final regulations, released on September 19, 2014, address the transitional amendments to satisfy the market rate of return rules and the rates of return that may be provided in cash balance and pension equity plans.
“Congress recognized the value of cash balance and pension equity plans, and in the Pension Protection Act … adopted comprehensive legislation to encourage employers to adopt and maintain them. To safeguard the retirement income of the numerous Americans covered by these plans, it is critical that Treasury adopt regulations that reflect Congress’ intent,” wrote Kathryn Ricard, ERIC’s Senior Vice President for Retirement Policy.
ERIC commends the Treasury Department and IRS for making great progress toward achieving this goal and appreciates the consideration Treasury gave to our previous comments, but contends that several critical issues still need to be addressed.
ERIC argues, among other things, that the “silo” approach in the proposed regulations that provides a way for a hybrid plan that credits a non-compliant interest crediting rate to become compliant is unnecessarily restrictive and fails to take account of the many variations in interest crediting rates among existing plans.
“Not only might the silo approach get it wrong – by mandating a change that significantly alters the characteristics of the plan – but it also unnecessarily confines plan sponsors,” Ricard stated.
The letter explains that the PPA included broad anti-cutback relief, permitting sponsors of private plans to make amendments until the end of 2009 — three years after the PPA was enacted. However, the rules telling plan sponsors how to transition their pension plans to the PPA are only now expected to be finalized in 2015. ERIC argues that this delay has essentially prevented plan sponsors from taking full advantage of the transition relief provided in the PPA. Moreover, the letter points out that Congress did not mandate a narrow set of transition rules depending on a plan’s design but instead granted plan sponsors broad discretion to amend their plans.
“Given the intent that the rules would be clear before plans were required to make changes, and that broad anti-cutback relief would be available to make changes to comply with these rules, the final transition regulations should ensure that plan sponsors have as much flexibility as possible to make changes now required as they would have if the rules had been finalized before the end of the PPA’s original deadline,” Ricard stated.
“One purpose of the PPA is to encourage new designs that more effectively provide benefits to workers. Employers should be encouraged to provide these benefits, rather than leaving the defined benefit system altogether, and broad transition relief is a key element of this process,” Ricard adds.
ERIC’s letter further urges Treasury and IRS to amend the final regulations to clarify that plans that provide the so-called “whipsaw” calculation should receive the same treatment under the age discrimination rules as plans that do not provide whipsaw. The letter explains that the final regulations for the first time penalize plans that calculate lump sums using the “whipsaw” method, and contends that there is no basis in the statute for denying these plans the protections Congress afforded hybrid plans in the PPA.
“One of the most surprising provisions in the PPA regulations imposes adverse consequences on plans that apply the so-called ‘whipsaw’ calculation,” Ricard said, adding that this is particularly astounding because many plans include the whipsaw calculation only because the IRS previously required them to do so. “Now, years later, the Treasury states—for the first time in final regulations and several years after the deadline passed for plans to voluntarily eliminate it—that whipsaw undermines the plan’s ability to obtain the relief provided by the PPA,” Ricard said.
ERIC’s letter further notes that the final regulations for the first time, and without statutory authority, would impose age discrimination rules on early retirement subsidies. The letter contends that, because early retirement subsidies are exempt from the age discrimination rules, the new definition will have unpredictable impacts on many existing hybrid plans previously approved by the IRS.
The letter argues that, while it is not clear whether the current approach is consistent with the statute, there is certainly no reason in the statute to have different definitions of early retirement subsidy, depending on whether the plan is a hybrid plan. ERIC recommends that if Treasury wishes to create a new definition of early retirement subsidy, it should be adopted only pursuant to full notice-and-comment rulemaking.
Finally, ERIC notes that, because critical regulations governing hybrid plans remain to be issued, plan sponsors will be required to make important plan design changes under the final regulations—potentially involving significant reductions in participants’ already accrued benefits—on the basis of incomplete guidance. This problem is particularly acute for pension equity plans (PEP), participant-directed cash balance plans, and plans that credit an investment rate of return.
“While sponsors can speculate on the shape of future guidance, they and their participants face the real prospect that changes required by the current round of final regulations will conflict with requirements imposed by subsequent rounds,” Ricard explains. “It is incumbent upon Treasury to minimize these disruptions by proactively anticipating and avoiding inconsistent and repetitive plan design changes in its current and future hybrid plan guidance,” Ricard further states.
ERIC’s letter can be accessed by clicking on the link below.