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Report on Treasury/IRS Hearing for Hybrid Regulations

February 2, 2011

On Wednesday, January 26th, the Treasury Department and Internal Revenue Service (IRS) held a hearing on the proposed hybrid plan regulations that were released last October. Nine witnesses appeared, the bulk of them representing hybrid plan sponsors and service providers. Attached are documents listing the witnesses and the Treasury and IRS officials who presided at the hearing. Several other Treasury and IRS officials, including George Bostick, the Benefits Tax Counsel at the Treasury Department, attended the hearing.

Kent Mason of Davis & Harman LLP testified on behalf of the Coalition. Given the limited time for each testimony and the many issues raised by the proposed regulations, the Coalition coordinated with other organizations and witnesses to ensure that all key flaws in the regulations would be adequately addressed. The Coalition testimony focused on three specific issues raised in the joint Coalition/American Benefits Council comment letter on the proposed regulations:

  • the closed and restrictive list of interest crediting rates that constitute market rates under the proposed regulations,
  • the low levels at which the proposed regulations set permitted minimum (4%) and fixed (5%) interest crediting rates, and
  • the proposed regulations’ application of the market rate interest crediting requirement to plan accruals that pre-dated the effective date of the market rate provision of the Pension Protection Act (PPA).

Kent articulated how each of these elements seemed to flout the statutory language of PPA, were harmful to participants, and might not withstand the legal challenges that could occur as a result of participant upset with the plan changes needed to comply with the proposed regulations.

Mike Pollack of Towers Watson also testified, focusing on the regulations’ unduly aggressive effective date, the need to expand the permitted range of interest crediting rates (particularly with respect to minimum and fixed rates), the problematic new whipsaw requirements (which would impair the ability to provide subsidized annuity forms of benefit), the types of plan designs that should not be regarded as hybrid plans under the regulations, and appropriate transition approaches for plans that will have to adjust their interest crediting rates.

Conclusion: Witness concerns about the regulations’ unduly restrictive approach to permitted interest crediting rates under the market rate standard dominated the testimony and the questions from the government officials. Treasury and IRS officials did not signal much flexibility on these market rate issues and did not give a clear sense of how quickly they would move to finalize the regulations (or re-propose them if that is deemed necessary). The Coalition will likely be taking part in a follow-up meeting on the proposed regulations with more senior political officials at the Treasury to continue to make our case for needed revisions to the rules. We will continue to update the Coalition on what we learn about the likely next steps for the regulations, both in terms of substance and timing.

If you have any questions, please contact Jamey Delaplane at Davis & Harman LLP (202-662-2294;