Late last year, the Internal Revenue Service (IRS) issued final regulations addressing transition rules for hybrid pension plans with noncompliant interest crediting rates, as well as some other issues. These regulations supplement regulations issued in 2010 and 2014, and key aspects of the 2015 final regulations follow.

Effective date

The final rules are generally effective for 2017 plan years, although plan sponsors may choose to apply them earlier. The IRS also delayed by one year (to the 2017 plan year) the effective date of the various provisions in the 2014 final regulations that plan sponsors have been concerned about, including:

  • The requirement to use one of the IRS-approved interest crediting rates under the market rate of return rules
  • The need to eliminate whipsaw in order to remain a “lump sum based formula”
  • The requirement that conversions from accounts to annuities be based on reasonable actuarial equivalence either at normal retirement date or at the annuity starting date in order to be a “lump sum based formula”
  • Addressing limitations on early retirement subsidies that may be disregarded under the age discrimination safe harbor rules

For collectively bargained plans, the effective date is the later of (1) the 2017 plan year, or (2) the earlier of the 2019 plan year and the first plan year beginning after the expiration of the last collective bargaining agreement that was ratified by November 13, 2015.

Added transition flexibility

The 2015 final regulations retain the pathway approach for transitioning to compliant interest crediting rates that was included in the proposed regulations, and introduce important and welcome additional flexibility. For example, any noncompliant bond-based rate may now be retained and capped at one of the acceptable third segment rates. Moreover, whenever it is permissible to address a noncompliant rate by capping the rate at a third segment rate, it would also be permissible to address the noncompliant rate simply by switching to a third segment rate (retaining any fixed minimum rate [up to 4%] that was part of the noncompliant rate).

What the guidance does not address

The 2015 final regulations do not address any of the outstanding pension equity plan issues or the numerous comments the IRS received on the 2014 final regulations relating to, among other things, early retirement subsidies and plans that continue to perform whipsaw calculations. Although the regulatory project may now be complete, the IRS may issue additional guidance in other forms to address the lingering issues.

Going forward

If plan amendments are necessary to comply with the interest crediting rate requirements of the final regulations, they should be made before the effective date (i.e., generally by the end of the 2016 plan year).

All hybrid plans — including those with a compliant interest crediting rate — should be reviewed for compliance with all aspects of the 2010, 2014 and 2015 final regulations.