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U.S. Pension plan Sponsors Form Coalition to Preserve the Defined Benefit System

Coalition to focus on modifications to proposed age discrimination regulations

The Coalition has been staying in close touch with Treasury and IRS officials, as well as key Congressional staff, with respect to the hybrid plan regulations. As you know, proposed regulations were issued in October of 2010 primarily with respect to (1) the requirement that hybrid plans not credit interest above a market rate, and (2) conditions for the whipsaw relief provided in the Pension Protection Act of 2006. These proposed regulations can have far-reaching effects on plans. For example, if a plan's rate of return must be reduced, that can adversely affect the ability of the plan to satisfy the backloading rules, thus triggering a need to re-design the entire benefit formula.

The Coalition has met several times with Treasury and the IRS on a host of issues raised by these proposed regulations, and has made numerous written submissions. The meetings have been very constructive, especially since the Coalition has been part of a very small group that has been representing plan sponsors on these issues. Because of this central role we have been playing, the meetings have been extensive, very well attended by the government, and quite detailed.

Recently, we have heard reports that Treasury and the IRS are moving quite close to being finished with their work on finalizing the regulations. The reports also indicate that the final regulations will retain most of what was in the proposed regulations, notably with respect to issues where we had raised concerns. Treasury and IRS officially are not formally commenting on these reports, which may or may not be accurate. But there are enough indications that the reports may be accurate that we are taking additional steps to ensure that our concerns are understood.

We are reaching out to senior Treasury and IRS officials to alert them to our ongoing concerns. We are also talking to the Congressional staff who share many of our concerns. We are brainstorming with Congressional staff about ways to raise the profile of these important issues with some urgency. We hope to be able to report back to you soon on the progress of these discussions.

There are many key issues under the proposed regulations. Among the ones being discussed most prominently are:

  1. Transition issues.
    1. Provide an effective date that is at least one year after issuance of the final regulations, so that plan sponsors have enough time to come into compliance.
    2. Provide guidance that precludes retroactive liability for reasonable actions taken prior to the effective date of final regulations.
    3. Provide clear safe harbor means of coming into compliance.
  2. Permit any rate of return available in the market to qualify as a market rate of return. Convert the proposed list of rates of return from an exclusive list to a list of safe harbors, and expand that list with other commonly used rates of return.
  3. The proposed regulations do not permit a minimum interest crediting rate in excess of 4%. This needs to be raised to at least 5%.
  4. The proposed regulations do not permit a fixed interest crediting rate in excess of 5%. This needs to be raised to at least 6%.
  5. The proposed regulations condition the exemption from whipsaw on complying with a variety of factors, including have no subsidies in the plan. Congress did not impose any such conditions on whipsaw relief; all such conditions should be removed. And the regulations should clearly allow for plans to reasonably subsidize annuity forms of payment.
  6. Guidance on pension equity plans ("PEPs") is very much needed. Any such guidance should be prospective only.
  7. Hybrid plans should be permitted to offer participants a choice among a menu of interest crediting rates, so that participants can choose the mix of equity and fixed income investments that are right for them.
  8. Hybrid plans should be able to structure the interest crediting rate to mimic what would be provided under a target date fund or managed account.
  9. For purposes of converting accounts into annuities for various compliance purposes (e.g., the backloading rules), plans should be able to use reasonable projections, rather than the actual interest credit for the prior plan year. This is critical to measuring benefits in a fair and accurate way.

As always, for more information or for any questions, you may contact Kent Mason (202-662-2288, at Davis & Harman or visit the Coalition's website at