ACTION ALERT

July 2, 2007
AA 07–01

Calls to Congress needed: Treasury Department must reconsider backloading rules for participants' sake

Action Requested: Contact your Congressional representatives and ask them to urge the committees of jurisdiction (the Senate Finance Committee, the Senate Health, Education, Labor and Pensions (HELP) Committee, the House of Representatives Ways and Means Committee and the House Education and Labor Committee) to request that the U.S. Treasury Department and Internal Revenue Service (IRS) reconsider their interpretation of the backloading rules. In the context of the recently opened determination letter process for hybrid pension plans, the Internal Revenue Service's interpretation of the backloading rules would preclude the use of the "greater-of" transition in which participants receive the greater of the benefits calculated under the traditional plan formula and benefits calculated under the hybrid formula. This interpretation of the backloading rules as applied to the generous pro-participant approach to conversions could also negatively affect "greater-of" formulas in other contexts (such as traditional plans with a minimum benefit, or plans that provide the greater of the buyer's plan formula or the seller's plan formula immediately following a corporate acquisition). Companies must tell Congress that elimination of "greater-of" formulas undermines retirement security and confidence in the retirement system and will hurt participants.

Background: During conversion to a hybrid pension plan, a company will sometimes calculate benefits under the new formula and the prior formula and provide the participant with the greater benefit automatically. However, the IRS has determined that this "greater-of" approach violates the backloading rules, which are generally intended to require benefits to accrue ratably without any material increases in later years. In the context of a conversion to a cash balance plan, the "greater-of" approach often frontloads benefits followed by ratable accruals, creating a frontloaded accrual pattern that the IRS has wrongly decided violates the backloading rules. Several Council members have been alerted that their hybrid plan could potentially receive adverse determination letters because of this issue and some plan sponsors have been scheduled for a conference with IRS officials to discuss the potential adverse determination letter. In many cases the plan sponsors have been waiting several years to receive a determination letter and this issue is only newly being raised. The IRS maintains that this position is consistent with their regulations and the statute despite the fact that huge numbers of favorable determination letters have been issued with respect to all types of defined benefit plans with greater-of formulas. The Treasury and IRS have repeatedly noted that nothing in the Pension Protection Act relating to hybrid plans changed the backloading rules and the delay in raising the issue is a result of the moratorium on determination letter, not a change in position. This does not, however, explain the huge number of plans with "greater-of" formulas that have received determination letters.

Council staff along with other business groups recently met with Treasury and IRS officials. Clearly some of the officials present are looking for a way to resolve this problem under the current statute and regulations. However, so far they have not found a satisfactory solution and a number of representatives from Treasury and IRS met this week with congressional committee staff to tell them that they have not found a solution to the problem, though they are still trying. There is no indication that scheduled conferences of right and the issuance of adverse determination letters have been put on hold.

The Council's new talking points on the effect of the backloading interpretation on hybrid and traditional pension plans address this issue, as does a recent letter signed by six House of Representatives and Senate Republicans. A joint business community letter to the chairmen and ranking members of the committees of jurisdiction has also been sent.

Please help: Members of the key Congressional committees with jurisdiction in this area are considering a formal request for Treasury to reconsider its interpretation of the backloading rules. We are urging companies to weigh in with their representatives and explain how the pro-participant "greater-of" conversion formulas are threatened by Treasury and IRS’ current view.

Click here to access the Council's Capitol Connection Center, where you can type in your zip code and obtain contact information for your Senators and representative.

For more information: Contact Lynn Dudley, Council vice president, retirement policy, or Diann Howland, Council senior director, income security & international benefits, at (202) 289-6700.