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Employee Plans News - October 12, 2011 - Hybrid Plan Interest Crediting Rules – Certain Effective Dates Postponed

Notice 2011-85, issued October 12, 2011, announces the postponement of effective dates for certain hybrid defined benefit plan interest crediting rules:

  • IRC section 411(b)(5) proposed hybrid plan regulations, when finalized, will be effective for plan years beginning on or after a date to be specified in the regulations that is not earlier than January 1, 2013, and related provisions of final hybrid plan regulations that are effective January 1, 2012 will be postponed.

  • The deadline for plans to adopt amendments to comply with IRC section 411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5)) is extended to the last day of the first plan year before the plan year for which the proposed regulations, once finalized, apply to the plan.

  • Relief from IRC section 411(d)(6) is expected to apply to an amendment that eliminates or reduces a section 411(d)(6) protected benefit, provided that the amendment is adopted by the last day of the first plan year before the plan year for which the proposed regulations, once finalized, apply to the plan and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of section 411(b)(5).

Notice 2011-85 also formalizes the special timing rule announced in Announcement 2009-82 for providing section 204(h) notice of certain amendments adopted to change the interest crediting rate under a hybrid plan. The special timing rule only applies to amendments adopted after November 10, 2009, and on or before the last day of the first plan year that begins on or after January 1, 2009.

Regulation Effective Dates Postponed
IRC section 411(b)(5) requires that the rate of any interest credit (or an equivalent amount) for any plan year provided under the terms of a hybrid plan not exceed a market rate of return.

The 2010 proposed and final hybrid plan regulations provide guidance on the interest crediting and market rate of return requirements. The final regulations are generally effective for plan years beginning on or after January 1, 2011. However, sections 1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i) of the final regulations, which provide that the regulations set forth the exclusive list of interest crediting rates and combinations of rates that satisfy section 411(b)(5), are effective for plan years beginning on or after January 1, 2012, which is also when the proposed regulations are proposed to be effective. The proposed regulations would, in part, describe additional interest crediting rates that satisfy section 411(b)(5).

The proposed regulations, when finalized, will apply to plan years beginning on or after a date to be specified in the regulations, which will not be earlier than January 1, 2013. The IRS will also postpone the effective date of final regulation sections 1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i) to match the effective date of the proposed regulations when they are finalized.

Extended Amendment Adoption Deadlines
Notice 2011-85 extends the deadline for adopting an interim or discretionary amendment to comply with IRC section 411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5) until the last day of the first plan year before the plan year for which the proposed hybrid plan regulations, once finalized, apply to the plan. Determination letter applications submitted between February 1, 2011, and January 31, 2012, won’t consider the final regulations other than the requirements of IRC section 411(a)(13)(A), unless the plan has been amended for the final regulations. In this case, the IRS will only consider those parts of the final regulations that are effective in plan years beginning on or after January 1, 2011.

Section 411(d)(6) Relief
When the proposed regulations become final, the IRS is expected to grant relief for a plan amendment that eliminates or reduces a protected benefit, if:

  • the amendment is adopted by the last day of the first plan year before the plan year for which the proposed plan regulations, once finalized, apply to the plan; and

  • the amendment eliminates or reduces the protected benefit only to the extent necessary to enable the plan to meet the requirements of IRC section 411(b)(5).

Section 204(h) Notice Deadline
An ERISA section 204(h) amendment significantly reduces the rate of future benefit accruals and generally requires that a section 204(h) notice be sent to all affected parties at least 45 days before the amendment’s effective date. Otherwise, the IRS assesses an excise tax against the plan administrator (see IRC section 4980F).

Announcement 2009-82 announced that the IRS would give relief to hybrid plans from the notice timing requirements for certain plan amendments adopted to change the interest crediting rate under a hybrid plan. Without relief, plans wouldn’t have had enough time to comply with the notice timing requirements for their amendments effective as of the first day of their 2010 plan year. These amendments were for interest crediting rate changes adopted beginning when the announcement was issued through the deadline for amending plans for the Pension Protection Act of 2006.

Notice 2011-85 permits a hybrid plan to provide a section 204(h) notice up to 30 days after an amendment is effective, for an amendment that:

  • changes an interest crediting rate under a statutory hybrid plan;
  • is adopted after November 10, 2009, and on or before the last day of the first plan year beginning on or after January 1, 2009; and
  • is effective no later than the first day of the first plan year beginning on or after January 1, 2010.
Page Last Reviewed or Updated: 15-Aug-2013