IRS delays deadline for “Market Rate of Return,” other rules

In Notice 2011-85, the IRS announced a delay of the effective or applicability dates for the interest crediting rules affecting cash balance and similar hybrid defined benefit (DB) plans. These final and proposed regulations, both published in October 2010, include rules to establish a regulatory “market rate of return” and have been roundly criticized by sponsors of cash balance plans and their advisors.

Notice 2011-85 states that, for these defined benefit plans:

  1. The interest crediting rate rules under the October 2010 proposed regulation (IRC section 411[b][5]) will be effective no earlier than January 1, 2013, for plan years beginning on or after the date the yet-to-be-issued final rule will specify.
  2. The current application date of the market rate of return rules under the October 2010 final regulation that are effective January 1, 2012, are similarly postponed.
  3. The deadline to adopt interim or discretionary amendments relating to vesting and other special rules (IRC sections 411[a][13] in general and 411[b][5]) is extended to the last day of the plan year for which the yet-to-be issued final rule will apply.
  4. The IRS expects to grant relief from the anti-cutback requirements (IRC section 411[d][6]) if an amendment reducing or eliminating protected benefits is timely adopted and the benefit reduction or elimination is only of an amount necessary for the plan to satisfy the age discrimination and market rate of return rules (IRC section 411[b][5]).

Special timing rule to provide ERISA Section 204(h) participant notices
Notice 2011-85 makes formal Announcement 2009-82’s special timing rule to provide ERISA section 204(h) participant notices for 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. Therefore, the plan sponsor has up to 30 days after an amendment is effective to send ERISA 204(h) notices to affected parties about a significant reduction in the rate of future benefit accruals. (ERISA 204[h] notices are typically due 45 days prior to a plan amendment effective date.) No definitive guidance is included in Notice 2011-85 as to what may constitute safe harbor language describing the significant reduction in the rate of future benefit accruals as a result of a decrease in the interest crediting rate.

The special timing rule does not apply in the case of a plan amendment described in #1 and/or #3 (above) that is adopted within the plan’s remedial amendment period. (Remedial amendment periods are five-year periods in which the plan sponsor must amend plan provisions for regulatory changes, and are based on the last digit of the Employer Identification Number [EIN].)

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