IRS to Use New Process for PEP Determination Letters

The Internal Revenue Service (IRS) has issued procedural guidelines for its employees to use when processing determination letter requests for pension equity plans (PEP), a type of hybrid pension plan.

The guideline documents from the IRS explain the issues unique to PEPs that it will take into account when reviewing plan documents, such as how the provision of hypothetical interest impacts the plan’s compliance with the accrual rules of Internal Revenue Code Section 411(b)(1). One issue is the plan document’s compliance with IRC Section 411(b)(1)(G), which generally provides that a participant’s accrued benefit under a qualified defined benefit plan cannot be reduced on account of any increase in the participant’s age or service.

In order to resolve the pending requests for determination letters for PEPs, an Employee Plans Determinations employee of the IRS will review the plan documents to determine if any of the following provisions are included:

• Notwithstanding any other provision in the plan, a participant’s accrued benefit as of any determination date will never be less than the benefit required to comply with IRC Section 411(b)(1)(G);
• Notwithstanding any other provision in the plan, a participant’s accrued benefit may not be reduced on account of an increase in a participant’s age or service;
• A participant’s accrued benefit as of any determination date shall not be less than the accrued benefit to which the participant would have been entitled if he had ceased accruals at the end of any prior plan year;
• A participant’s accrued benefit shall be the lesser of the annuity benefit that the participant has accumulated to date (including interest projected to normal retirement age) and the annuity benefit the participant would accumulate if he or she worked to normal retirement age; or
• The accumulated benefit determined under the PEP formula as of any determination date cannot be less than the accumulated benefit as of the end of any prior year with interest credited to the determination date, determined as if the participant had ceased accruals as of the end of that prior plan year.

If a PEP does not have any of the of these provisions, the IRS will generally ask the plan sponsor to amend the PEP retroactively to add provision 1 (“Notwithstanding any other provision in the plan, a participant’s accrued benefit as of any determination date will never be less than the benefit required to comply with section 411(b)(1)(G) of the Code”). While a plan sponsor may choose to add one of the other provisions, the IRS notes that provision 4 generally cannot be implemented in an ongoing plan without creating a cutback of benefits in violation of IRC Section 411(d)(6).

More information is here. 

The IRS issued final regulations for hybrid plans in September.