An Internal Revenue Service official said March 29 that as officials are starting to process determination letter requests for defined benefit cash balance plans, which had been subject to a moratorium since 1999, they have noticed that more information may be needed from plan sponsors to specify certain facts that were involved with converting the prior traditional defined benefit plan to the new hybrid plan.

James Holland, technical manager, IRS Employee Plans Division, made the comment during a course and Webcast on pension plans and compensation plans sponsored by the American Law Institute and the American Bar Association. The moratorium on cash balance plans was lifted in December 2006 (244 PBD, 12/22/06; 33 BPR 5, 1/2/07).

Treasury Department and IRS officials were asked during the course how new funding provisions enacted in the Pension Protection Act should be handled by actuaries of plan sponsors.

William Bortz, associate benefits tax counsel for Treasury's Office of Tax Policy, was asked which actual years would be the starting point for the PPA's three-year vesting standard for cash balance plans, and whether the new investment requirement was prospective or would retroactively apply to individuals who had previously left the company prior to the effective date of 2008.

Bortz said the effective date provisions in the PPA relating to cash balance plans were not carefully worded. Calling the statutory effective date provisions very complex, he said, “We did not take those on in the notice we issued last December but we are hopeful about trying to take on those issues in our proposed regulation. We will try to address those kinds of questions 'fairly soon,' but not today,” he added.

Bortz called the benefit limitation rules in the PPA “a large, complex set of new rules that you have never heard of before PPA and you need to learn them.” Describing a possible option for meeting minimum funding requirements under the new law when paying lump-sum distributions, he advised that one option might to be pay half of the lump sum. Under the PPA, if a plan's funding percentage is between 60 percent and 80 percent of the adjusted funding target attainment percentage, which triggers lump-sum payment restrictions, the sponsor will need to pay an amount that complies with the Pension Benefit Guaranty Corporation's maximum dollar guarantee, he said.

Holland and Bortz warned practitioners, however, of the risk that a cliff effect in the new rules could be triggered, which would limit any lump sum from a plan whose funding percentage hovers around 70 percent. Just over 70 percent would still allow sponsors to make half of the lump-sum distribution that a participant is entitled to receive, Holland added, but just under 70 percent is “not going to be very helpful.” Bortz stressed the importance of the actuary's timing when trying to determine a plan's funding percentage because of the restriction.

Bortz said, for example, that if a calendar year plan's percentage fell below 70 percent in a prior year and the actuary has not done the calculation of the target for the next year, the plan will not be able to pay out any lump-sum amount. Asking the attendees to visualize the dynamics of that hypothetical situation for a calendar year plan, he pointed out that consequences could be significant for individuals who quit early in the year. People who quit in February or March would be able to receive half of their lump sums, but by contrast, they would receive none if they quit in April, he said. “This gets extremely complex,” he warned, adding that inattention to the timing could mean, “you're going to get involved in labor relations with your people.”

By Sheila R. Cherry