We’ve recently improved our determination letter application process for pension equity plans (PEPs) by:
- Training a special team in Employee Plans (EP) Determinations, and
- Issuing procedural guidance for IRS employees.
The new procedures and worksheets are shown below:
- PEP Determinations Worksheet (PDF)
- Explanation of PEP Plan Issues (PDF) (corresponds to the Worksheet)
What is a PEP?
A PEP is a type of hybrid pension plan. The benefit is expressed as a lump sum amount instead of an annuity payable at normal retirement age. The benefit under a PEP formula is usually defined as a percentage of a participant’s final average pay. The percentage usually increases annually over a participant’s career based on his or her age or years of service. A PEP also generally provides hypothetical interest on a participant’s accumulated benefit.
What issues do the Procedural Guidelines address?
The PEP Determinations Worksheet and the Explanation of PEP Plan Issues Memo are for IRS employees to use when reviewing determination letter applications. This guidance discusses the unique issues we consider when reviewing PEP plan documents. For example, does the hypothetical interest requirement affect the plan’s compliance with the accrual rules of Internal Revenue Code (IRC) Section 411(b)(1)?
The PEP Memorandum helps IRS employees ensure the plan document meets IRC Section 411(b)(1)(G), which generally states that a participant’s accrued benefit in a qualified defined benefit plan can’t be reduced due to an increase in his or her age or service.
EP Determinations employees should review the plan document to determine if it has any of the following provisions:
- Aside from any other plan requirements, a participant’s accrued benefit as of any determination date won’t be less than the benefit required to meet IRC Section 411(b)(1)(G);
- Aside from any other plan requirements, a participant’s accrued benefit won’t be reduced due to an increase in his or her age or service;
- A participant’s accrued benefit as of any determination date won’t be less than the accrued benefit to which he or she would have been entitled if accruals ended as of the end of any prior plan year;
- A participant’s accrued benefit will be the lesser of:
- the annuity benefit he or she has accrued to date (including interest calculated to normal retirement age), and
- the annuity benefit he or she would have accrued if he or she worked to normal retirement age.
- The accumulated benefit determined for the PEP formula as of any determination date can’t be less than the accumulated benefit at the end of any prior year with interest credited to the determination date and calculated as if accruals stopped at the end of the prior plan year.
If a PEP plan doesn’t have these provisions, we’ll usually ask the plan sponsor to amend the plan retroactively to add item 1. While a plan sponsor can choose to add one of the other requirements, item 4 generally can’t be added to a current plan without creating a cutback of benefits, which violates IRC Section 411(d)(6).