Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations providing guidance on the application of the accrual rules for defined benefit plans under Code Sec. 411(b)(1)( in cases where plan benefits are determined on the basis of the greatest of the benefits provided under two or more separate formulas. These regulations are proposed to be effective for plan years beginning on or after January 1, 2009. A public hearing is scheduled for October 15, 2008, beginning at 10:00 a.m. Comments must be received by the IRS by September 16, 2008.

Background

  Under Code Sec. 411(b) and Reg. §1.411(b)-1, the method provided by a defined benefit plan for determining accrued benefits must satisfy at least one of three alternative testing methods for accrued benefits with respect to all active participants under the plan. The three alternative methods are the three-percent method, the 133 1/3-percent rule, and the fractional rule. A defined benefit plan may provide that accrued benefits for participants are determined under more than one plan formula. In that case, the accrued benefits under all such formulas must be aggregated in order to determine whether the accrued benefits under the plan for participants satisfy one of these methods.

 
Rev. Rul. 2008-7 (I.R.B. 2008-7, 419; TAXDAY, 2008/02/04, I.4) applies these accrual rules to a defined benefit plan that was amended to change the plan's benefit formula from a traditional formula based on highest average compensation to a new lump-sum-based benefit formula. The ruling explains that, in the case of a plan amendment that replaces the benefit formula under the plan for all periods after the amendment, the rule that would otherwise require aggregation of the multiple formulas does not apply.

  Furthermore, any amendment to the plan that is in effect for the current plan year is treated as if it were in effect for all other plan years (including past and future plan years). Thus, the ruling provides relief from disqualification for a limited class of plans under which a group of employees specified under the plan receives a benefit equal to the greatest of the benefits provided under two or more formulas, provided that each such formula standing alone would satisfy accrual rules for the years involved. This relief applies for plan years beginning before January 1, 2009.

Proposed Regulations

  The proposed regulations would extend the relief provided in Rev. Rul. 2008-7 by providing a limited exception to the existing requirement to aggregate the accrued benefits under all formulas in order to determine whether or not the accrued benefits under the plan for participants satisfy one of the alternative methods. Under Prop. Reg. §1.411(b)-1(b)(2)(ii)(G), certain plans that determine a participant's benefits as the greatest of the benefits determined under two or more separate formulas would be permitted to demonstrate satisfaction of the 133 1/3-percent rule by demonstrating that each separate formula satisfies the 133 1/3-percent rule.

  A plan would be eligible for this exception only if each of the separate formulas use a different basis for determining benefits. The IRS points out that, under this proposed rule, a traditional defined benefit plan that determined benefits based on highest average compensation that is amended to add a cash balance formula would be eligible for this exception where, in order to provide a better transition for longer service active participants, the plan provides that a group of participants is entitled to the greater of the benefit provided by the hypothetical account balance and the benefit determined under the continuing traditional formula.

  The proposed regulations would also provide an extension of this exception in the case of a plan that provides benefits based on the greatest of three or more benefit formulas. In such a case, the plan would be eligible for a modified version of the formula-by-formula testing. Under this modification, the accrued benefits determined under all benefit formulas that have the same basis are first aggregated and those aggregated formulas are treated as a single formula for purposes of applying the separate testing rule under the proposed regulations.

  Eligibility for separate testing under the proposed regulations would be subject to an anti-abuse rule.

Proposed Regulations, NPRM REG-100464-08, 2008FED ¶49,809

Other References:

 
Code Sec. 411

  CCH Reference - 2008FED ¶19,065

  Tax Research Consultant

  CCH Reference - TRC RETIRE: 15,200