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Trust Examination Manual IRS Revenue Ruling Notice 2007–6 Cash Balance and Other Hybrid Defined Benefit Pension Plans Notice 2007–6 I. PURPOSE This notice announces that the Service is beginning to process determination letter and examination cases in which an application for a determination letter or a plan under examination involves an amendment to change a traditional defined benefit plan into a cash balance plan and provides related guidance. This notice also provides transitional guidance on the requirements of §§ 411(a)(13) and 411(b)(5) of the Internal Revenue Code (Code), as added by section 701(b) of the Pension Protection Act of 2006, Public Law 109–280 (PPA ’06), which was enacted on August 17, 2006. This guidance generally relates to cash balance plans and other hybrid defined benefit pension plans and to amendments that convert defined benefit pension plans to hybrid defined benefit pension plans. This notice also requests comments on certain issues raised by §§ 411(a)(13) and 411(b)(5). II. BACKGROUND A
defined benefit pension plan generally must satisfy the minimum vesting
standards of § 411(a) and the accrual requirements of § 411(b) in order to be qualified under § 401(a). Both sections have been modified by section 701(b) of PPA ’06, which added §§ 411(a)(13) and 411(b)(5) to the Code. Section 411(a)(13)(A) provides that a
plan described in § 411(a)(13)(C) is not treated as failing to meet either (i) the requirements
of § 411(a)(2) (subject to a special vesting rule in § 411(a)(13)(B) with respect to benefits derived from employer contributions),
or (ii) the requirements of§ 411(c) or § 417(e) with respect to benefits derived from employer contributions, solely
because the present value of the accrued benefit (or any portion thereof)
of any participant is, under the terms of the plan, equal to the amount
expressed as the balance in a hypothetical account or as an accumulated
percentage of the participant’s final average compensation. A plan is described in§ 411(a)(13)(C)(i) if the plan is a defined benefit plan under which the accrued
benefit (or any portion thereof) of a participant is calculated as
the balance of a hypothetical account maintained for the participant
or as an accumulated percentage of the participant’s final average compensation. Under § 411(a)(13)(C)(ii), the Secretary is to issue regulations that treat any defined
benefit plan (or any portion of such a plan) that has an effect similar
to a plan described in§ 411(a)(13)(C)(i) as if it were described in § 411(a)(13)(C)(i). For purposes of this notice, a plan described either in § 411(a)(13)(C)(i) or in regulations or other guidance issued pursuant to§ 411(a)(13)(C)(ii) is referred to as a statutory hybrid plan. Section 411(b)(1)(H)(i)
provides that a defined benefit plan fails to comply with § 411(b) if, under the plan, an employee’s benefit accrual is ceased, or the employee’s rate of benefit accrual is reduced, because of the attainment of any age. Section
411(b)(5)(A), as added by section 701(b)(1) of PPA ’06, generally provides that a plan will not be treated as failing to meet the
requirements of§ 411(b)(1)(H)(i) if a participant’s benefit accrued to date, as determined as of any date under the terms of the
plan, would be equal to or greater than that of any similarly situated,
younger individual who is or could be a participant. For purposes
of this notice, a participant’s benefit accrued to date is referred to as the participant’s accumulated benefit. Under§ 411(b)(5)(A)(iv), for purposes of the safe harbor standard of § 411(b)(5)(A), a participant’s accumulated benefit may, under the terms of the plan, be expressed as an annuity
payable at normal retirement age, the balance of a hypothetical account,
or the current value of the accumulated percentage of the employee’s final average compensation. Section 411(b)(5)(B) imposes several requirements
on a statutory hybrid plan as a condition of satisfying § 411(b)(1)(H). First, § 411(b)(5)(B)(i) provides that a statutory hybrid plan is treated as failing
to meet the requirements of § 411(b)(1)(H) if the terms of the plan provide for an interest credit (or an
equivalent amount) for any plan year at a rate that is greater than
a market rate of return. Second,§ 411(b)(5)(B)(ii) and (iii) contain minimum benefit rules that apply if, after
June 29, 2005, an amendment is adopted that converts a defined benefit
plan to a statutory hybrid plan. For purposes of this notice, such
an amendment is referred to as a conversion amendment. Third,§ 411(b)(5)(B)(vi) provides a special rule for projecting variable interest crediting
rates in the case of a terminating statutory hybrid plan. In addition, § 411(a)(13)(B) requires a statutory hybrid plan to provide that an employee who
has completed at least 3 years of service has a nonforfeitable right
to 100 percent of the employee’s accrued benefit derived from employer contributions. Section 411(b)(5)(E) provides
that a plan is not treated as failing to meet the requirements of § 411(b)(1)(H) solely because the plan provides for indexing of accrued benefits
under the plan. Under§ 411(b)(5)(E)(iii), indexing means, in connection with an accrued benefit, the
periodic adjustment of the accrued benefit by means of the application
of a recognized investment index or methodology. Section 701(a) of
PPA ’06 added provisions to the Employee Retirement Income Security Act of 1974, Public
Law 93–406 (ERISA) that are parallel to the above described sections of the Code that
were added by section 701(b) of PPA ’06. The guidance provided in this notice with respect to the Code also applies
for purposes of the parallel amendments to ERISA made by PPA ’06.1 Section 701(c) of PPA ’06 added provisions to the Age Discrimination in Employment Act of 1967, Public
Law 90–202 (ADEA), that are parallel to § 411(b)(5) of the Code. Executive Order 12067 requires all Federal departments
and agencies to advise and offer to consult with the Equal Employment
Opportunity Commission (EEOC) during the development of any proposed
rules, regulations, policies, procedures or orders oncerning equal
employment opportunity. Treasury and the Service have consulted with
the EEOC prior to the issuance of this notice. The amendments made
by section 701 of PPA ’06 are generally effective for periods beginning on or after June 29, 2005. There
are a number of special effective date rules, some of which are described
in this notice. Section 701(d) of PPA ’06 provides that nothing in the amendments made by section 701 should be construed
to create an inference concerning the treatment of statutory hybrid
plans or conversions of plans into such plans under§ 411(b)(1)(H), or concerning the determination of whether a statutory hybrid
plan fails to meet the requirements of§ 411(a)(2), 411(c), or 417(e) as in effect before such amendments solely because
the present value of the accrued benefit (or any portion thereof)
of any participant is equal to the amount expressed as the balance
in a hypothetical account or as an accumulated percentage of the participant’s final average compensation. Section 702 of PPA ’06 requires the Secretary to prescribe regulations for the application of the
provisions of section 701 of PPA ’06 in cases where the conversion of a plan to a statutory hybrid plan is made
with respect to a group of employees who become employees by reason
of a merger, acquisition, or similar transaction. Proposed regulations
(EE–184–86, 1988–1 C.B. 881) under §§ 411(b)(1)(H) and 411(b)(2) were published by Treasury and the Service in the
Federal Register on April 11, 1988 (53 F.R. 11876), as part of a package
of regulations that also included proposed regulations under §§ 410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age for participation,
vesting, normal retirement age, and actuarial adjustments after normal
retirement age, respectively).2 Notice 96–8, 1996–1 C.B. 359, described the application of §§ 411 and 417(e), prior to the enactment of PPA ’06, to a single-sum distribution under a cash balance plan where interest credits
under the plan are frontloaded (i.e., where future interest credits
to an employee’s hypothetical account balance are not conditioned upon future service and thus
accrue at the same time that the benefits attributable to a hypothetical
allocation to the account accrue). Under the analysis set forth in
Notice 96–8, in order to comply with §§ 411(a) and 417(e) in calculating the amount of a single-sum distribution under
a cash balance plan, the balance of an employee’s hypothetical account must be projected to normal retirement age and converted
to an annuity under the terms of the plan, and then the employee must
be paid at least the present value of the projected annuity, determined
in accordance with § 417(e). Under that analysis, where a cash balance plan provides frontloaded
interest credits using an interest rate that is higher than the § 417(e) applicable interest rate, payment of a single-sum distribution equal
to the current hypothetical account balance as a complete distribution
of the employee’s accrued benefit may result in a violation of § 417(e) or a forfeiture in violation of § 411(a). In addition, Notice 96–8 proposed a safe harbor that provided that, if frontloaded interest credits
are provided under a plan at a rate no greater than the sum of identified
standard indices and associated margins, no violation of § 411(a) or 417(e) would result if the employee’s entire accrued benefit is distributed in the form of a single-sum distribution
equal to the employee’s hypothetical account balance, provided the plan uses appropriate annuity conversion
factors. On September 15, 1999, the Service’s Director, Employee Plans, issued a field directive requiring that open determination
letter applications and examination cases that involved the conversion
of a defined benefit plan formula into a benefit formula commonly
known as a cash balance formula be submitted for technical advice
with respect to the conversion’s effect on the qualified status of the plan (referred to in this notice as the
1999 Field Directive). The 1999 Field Directive identified as a cash
balance formula a benefit formula in a defined benefit plan by whatever
name (e.g., personal account plan, pension III. TRANSITIONAL GUIDANCE This part III provides transitional guidance with respect to rules in §§ 411(a)(13) and 411(b)(5) that relate to statutory hybrid plans and the conversion of a defined benefit plan into a statutory hybrid plan. The transitional guidance provided in this part III applies pending the issuance of further guidance. A. Section 411(a)(13)(C): Definition of statutory hybrid plan.
B. Section 411(a)(13): Special rules for the application of §§ 411(a)(2), 411(c), and 417(e).
C. Section 411(b)(5)(A)(iv): Scope of rule. In
applying the age discrimination test set forth in § 411(b)(5)(A)(i), a lump sum based plan may under§ 411(b)(5)(A)(iv) determine the accumulated benefit of a participant as the balance
of a hypothetical account or the current value of the accumulated
percentage of the employee’s final average compensation even if the plan defines the D. Section 411(b)(5)(B)(i): Market rate of return.
E. Section 411(b)(5)(B)(ii)—(iv): Special rules for conversion amendments.
F. Safe harbor for conversions related to mergers and acquisitions.
For
purposes of this paragraph F(2), the benefits under clause (A) and
the benefits under clause (B) of this paragraph F(2) must each be
determined in the same manner IV. DETERMINATION LETTERS In light of the enactment of section 701 of PPA ’06, the Service is no longer applying the 1999 Field Directive and Announcement 2003–1 and is beginning to process the determination letters and examination cases that were the subject of such field directive and announcement (referred to as moratorium plans in this notice). This part IV describes certain rules that will be applied for purposes of processing moratorium plans. Qualification requirements that are not described in this part IV (e.g., the backloading rules of§ 411(b)(1)(A), (B), and (C)) continue to apply. A. Age discrimination.
The Service expects to issue regulations interpreting the effective date of§ 411(a)(13)(A) (described in part IIIB(2) of this notice). Until this guidance is issued, the Service will not process a moratorium plan that does not satisfy the requirements of Notice 96–8 with respect to distributions made before August 18, 2006. C. Terminating plans. Under Title IV of ERISA, a standard termination may only occur if, when the final distribution of assets occurs, the plan is sufficient for benefit liabilities determined as of the termination date. See § 4041(b)(1)(D) of ERISA; 29 C.F.R. § 4041.8(a). The Pension Benefit Guaranty Corporation (PBGC) has informed the Service that, for purposes of Title IV of ERISA, a terminating plan with a termination date that is prior to August 18, 2006, cannot apply § 411(a)(13)(A) in determining its benefit liabilities with respect to any distributions made by the terminating plan. V. COMMENTS REQUESTED AND FUTURE REGULATIONS Treasury
and the Service expect to issue regulations with respect to the transitional
guidance provided in this notice and the issues described in part
IIIB(2) of this
Written comments should be submitted by April 16, 2007. Send submissions to CC:PA:LPD:DRU (Notice 2007–6), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered to CC:PA:LPD:DRU (Notice 2007–6), Room 5203, Internal Revenue Service, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007–6). All comments will be available for public inspection.
The
principal authors of this notice are Kathleen J. Herrmann of the Employee
Plans, Tax Exempt and Government Entities Division and Christopher
A. Crouch, Footnotes:
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