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Dialogue with Treasury/IRS on Hybrid Plan Regulations

April 18, 2011

In late July, Alan Glickstein of Towers Watson and Derek Dorn and Barbara Pate of Davis & Harman visited with key Congressional staff regarding IRS/Treasury’s proposed hybrid plan regulations. They met with the relevant committees in both chambers (the House Ways & Means and Education & Workforce Committees, and the Senate Finance and Health, Education, Labor & Pensions [HELP] Committees).

We wanted to update you on recent conversations with officials at the Treasury Department and the Internal Revenue Service about the pending proposed regulations interpreting the hybrid plan provisions of the Pension Protection Act of 2006 (PPA).

As you know, the Coalition has expressed numerous concerns about these regulations (which were proposed in October 2010) through our comment letter and our testimony at the January 2011 regulatory hearing on the proposed rules. On April 7th, the Coalition participated in a meeting with Treasury and IRS officials to highlight these concerns. A key objective of the meeting was to relay our concerns directly to the more senior policy officials at the Treasury Department who did not take part in the January hearing on the proposed regulations. We were joined at the meeting by a broad coalition of business trade associations, including the U.S. Chamber of Commerce, the Business Roundtable, the American Benefits Council and the ERISA Industry Committee.

  • The bulk of the meeting involved discussion of the restrictive market rate of return requirements for interest crediting rates, which are contained in the proposed regulations.
  • We expressed the view that the permitted minimum and fixed interest crediting rates under the proposed regulations (4% and 5, respectively) were too low, would require many hybrid plans to reduce interest crediting rates (to participants’ detriment), would require restructuring of pay credit levels in many plans in order to prevent backloading problems (again to the detriment of many participants), and that these actions would result in yet another deterrent to maintenance of defined benefit plans.
  • We also expressed our concern about the agencies’ interpretation of PPA, under which only their rather narrow list of specified interest crediting rates would constitute permissible market rates.
  • We felt we made some progress with the key policy officials on each of these interest crediting rate issues and are hopeful that the 4% and 5% rates may be adjusted upward in the final regulations.
  • The Treasury and IRS officials asked for some further data on plans’ use of minimum and fixed interest crediting rates, and Towers Watson will be following up shortly to provide this additional data (on a generic basis, of course).

While the meeting lasted for 2.5 hours, we did not have time to discuss our remaining concerns with the proposed regulations (beyond interest crediting rate issues). We also did not get a sense of the government’s likely timetable for finalizing the regulations, but will seek to gather this information in subsequent conversations. We will be scheduling an additional meeting with Treasury and IRS officials in the near future to discuss the issues not addressed in the April 7th meeting. Treasury officials have also agreed to schedule a separate meeting to have further discussions related to pension equity plans (PEPs) and the actions and guidance being considered by the regulators with respect to PEPs.

We will stay in touch as we continue these important conversations with government officials. In the meantime, please feel free to reach out with any questions to Jamey Delaplane at Davis & Harman LLP (jmdelaplane@davis-harman.com; 202-662-2294).