On October 28, 2011, the Pension Benefits Guaranty Corporation (PBGC) proposed a new proposed regulation that would implement provisions of the Pension Protection Act of 2006 (PPA). These rules would conform the PBGC's regulations for determining the appropriate allocation of assets and amount of benefits due under ERISA and the IRC when a hybrid plan, such as a cash balance plan, terminates. The PBGC aims to create greater certainty for hybrid plan participants about benefit amounts on termination.

Under the proposed rule, new sections of the IRC and ERISA would require an applicable defined benefit plan to include provisions that apply when the plan terminates, including:

For a distress termination under ERISA section 4041(c), the proposed termination date would be used to determine benefits under the plan. If the proposed termination date is moved to a later date, benefits accrued between the proposed termination date and the final termination date would be recalculated using the interest rate that would have applied under the plan before the final termination date. For more information, review Practice Note, Defined Benefit Plans: Distress and Involuntary Terminations: Date of Plan Termination.

Generally, these PPA provisions also state that a defined benefit plan will fail to meet accrual requirements related to age if the plan terms provide for an interest credit for any plan year that is greater than a market rate of return. However, the present value requirements of a plan are considered to be met if the present value accrued benefit of any participant equals either:

By adding new sections 411(a)(13)(C) of the IRC and 203(f)(3) of ERISA, the proposed rule would define an "applicable defined benefit plan" as any plan for which the accrued benefit for a participant is calculated using these new present value requirements.

These changes, except for the present value requirements, are effective for years beginning after December 31, 2007 unless the plan sponsor chooses earlier application of the requirements for any period after June 29, 2005. The present value requirements are effective for distributions made after August 17, 2006.

The IRS recently postponed the effective date for interest crediting rules relating to hybrid plans. For more information, see Legal Update, IRS Postpones Effective Date of Interest Crediting Rules for Cash Balance and Hybrid Plans.

Under the proposed rule, certain benefits will be calculated differently for valuation purposes than for payment purposes. Specifically, under new Section 4022.122 of ERISA, the PBGC will determine whether a benefit is payable as a de minimis lump sum and the amount of the lump sum payment based on the present value requirements of hypothetical account balance or accumulated percentage of the final average compensation. If, however, after August 17, 2006, a plan made lump sum payments based on participants' hypothetical account balances without regard to the present value rules or stated in writing its intention to do so, the PBGC would make de minimis lump sum determination using the same method as the plan.

The proposed rule would also amend 29 CFR 4044 to provide that priority category 3 benefits of a participant who is eligible to, but does not, retire three years before a plan's termination date (or bankruptcy filing date) would be determined based on the participant's account balance and the interested rates under the plan as if the participant had retired there before the applicable date. Where termination occurs while the sponsor is in bankruptcy (a PPA 2006 bankruptcy termination), the bankruptcy filing date would substitute for the termination date when determining whether a participant or beneficiary is eligible for a priority category 3 benefit and the amount of those benefits.

For PPA 2006 bankruptcy terminations generally, the PBGC would determine the amount of a participant's hypothetical account balance as of the bankruptcy filing date using the following interest rates:

Comments on the proposed rule must be submitted before December 30, 2011.