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The US Treasury Department and Internal Revenue Service (IRS) issued final hybrid plan regulations (or “new regulations”) on November 13, 2015 to address the conflict that plans face when transitioning impermissible interest crediting rates to those that are permitted by existing final hybrid plan regulations—a move that, on its face, would violate the anticutback restrictions of ERISA and the Internal Revenue Code (Code).

The Code and final regulations issued in 2014 prohibit an interest crediting rate greater than a market rate of return and provide an exclusive description of interest crediting rates that satisfy this requirement. Plans with interest crediting rates that may exceed these permissible rates must be amended to reduce their current rates, which would ordinarily violate anticutback restrictions. The final hybrid plan regulations provide relief from this conundrum.

The new regulations do not change or expand permissible interest crediting rates. The prescribed transitional corrections are specifically tailored to a particular compliance failure of a plan's current interest crediting rate. Generally two or more alternatives are offered for each category of compliance failure, and the new regulations expressly allow rounding of annual and less frequently determined interest rates, within prescribed parameters.

The preamble to the new regulations indicates that the IRS will continue to consider the permissibility of participant-directed rates from among a menu of interest crediting rates. Where a current menu includes one or more rates that are impermissible under the final regulations, however, the new regulations offer two alternative corrections.

Perhaps most significantly, the new regulations extend until January 1, 2017 the effective date and required amendment date requirements applicable to interest crediting rates and the plan provisions that implement them. An additional effective date extension—until the earlier of January 1, 2019 or the latest expiration of any currently effective collective bargaining agreement—is provided for collectively bargained hybrid plans. Included in the extension are all requirements to use a five-year average interest crediting rate for plan terminations, whether or not component interest crediting rates are permissible. The extension also applies to certain final regulatory requirements that do not apply directly to the permissibility of a specific interest crediting rate, such as the implications of the interest crediting rate on the requirement for post-normal retirement age adjustments absent suspension of benefits, and the conditions on lump sum based benefit formulas that appear to deny Pension Protection Act (PPA) hybrid plan relief to plans that use a whipsaw calculation. The extension does not apply, however, to other regulatory requirements that do not apply directly to the permissibility of interest crediting rates, such as the requirement that three-year vesting apply to a participant's entire accrued benefit where that accrued benefit is determined under both hybrid and non-hybrid formulas.