The IRS announced Dec. 21, 2006, that it will immediately begin processing determination letter applications for converted cash balance plans, on which it had previously placed a processing moratorium since 1999. The IRS said that by the end of 2007, it hopes to process and rule on a majority of the more than 1,200 cases currently pending.

In conjunction with this announcement, the IRS has offered transitional guidance on several issues under the Pension Protection Act (PPA) related to "statutory hybrid plans" (commonly known as cash balance plans) pending the issuance of further guidance, including the following:

  • A "statutory hybrid plan" is a defined benefit plan where a participant's accumulated benefit is expressed as the balance of a hypothetical account or as the current value of the accumulated percentage of the participant's final average compensation; the existence of a lump sum optional form of benefit is not determinative.
  • "Anti-cutback" relief is offered for statutory hybrid plans that are amended to eliminate the amount of any excess of a single sum distribution over the hypothetical account balance, in accordance with new PPA rules, as long as applicable advance notice is provided (i.e., 30 days prior to the time the amendment is given effect).
  • "Market rate of return," as related to the maximum rate permitted for an interest credit, includes the rate of return on long-term investment grade corporate bonds, the rate of interest on 30-year Treasury securities, or the sum of any of the standard indices (and the associated margins). 
  • Special rules for "conversion amendments (conversions occurring after June 29, 2005)."
  • A safe harbor for plan conversions related to mergers and acquisitions.
  • Special rules for termination of statutory hybrid plans.

The IRS notes that plans with conversion dates prior to June 30, 2005, will not be reviewed for compliance with age discrimination rules under Code Section 411(b)(1)(H) as in effect prior to the PPA. This leaves cash balance plans that were converted prior to June 30, 2005, open to potential age discrimination challenges.

Many plan sponsors of converted cash balance plans have IRS applications that have been pending since 1999, and since that date have amended their plans multiple times to comply with GUST, EGTRRA, and other law changes (and potentially to make some design changes, including possible plan freezes, etc.), without updating their pending IRS applications or submitting new applications for approval because of the IRS moratorium on all converted cash balance plans. Additionally, the new cyclical IRS filing year for many sponsors will be in 2007 and 2008. As a result, plan sponsors should begin to work very soon with their benefit counsel and actuaries to consider how to best file plans and amendments since 1999 in the applicable IRS application year, e.g., supplement existing/pending filings immediately or postpone cyclical filing if possible until the IRS issues a determination on pending conversion plan applications. Such plans must also be updated for many PPA-required changes in the next few years. We would be glad to work with clients and their actuaries to develop the most efficient strategy.