IRS modifies procedures for issuing opinion/advisory letters for pre-approved DB plans with cash balance formula

The IRS has modified procedures for issuing opinion and advisory letters for pre-approved defined benefit (DB) plans containing a cash balance formula. Specifically, the IRS has modified sections 6.03(7)(c) and 16.03(7)(c) of Rev. Proc. 2015-36 to allow pre-approved DB plans containing a cash balance formula to provide for the actual rate of return on plan assets as the rate used to determine interest credits. The IRS has also modified section 6.03(7)(c) of Rev. Proc. 2017-41 relating to the rates that are permitted to be used to determine interest credits in pre-approved DB plans containing a cash balance formula. In addition, references to “hypothetical interest” and “hypothetical interest credits” in Rev. Proc. 2015-36 have been changed to “interest credits”, consistent with terminology in Rev. Proc. 2017-41. The modifications are effective March 16, 2018.

Background

Rev. Proc. 2015-36 provides the procedures for requesting opinion and advisory letter for master & prototype and volume submitter plans for the second six-year remedial amendment cycle. In Rev. Proc. 2015-36, the IRS adds procedures for DB plans with cash balance features and sets forth definitions relating to hybrid plans. A cash balance formula is defined as a statutory hybrid benefit formula used to determine all or any part of a participant’s accumulated benefit, under which the accumulated benefit is expressed as the current balance of a hypothetical account maintained for the participant. The hypothetical account balance is described as generally consisting of principal credits and hypothetical interest credits. Sections 6.03(7)(c) and 16.03(7)(c) of Rev. Proc. 2015-36 provide that opinion and advisory letters will not be issued for statutory hybrid plans that include provisions that allow a rate used to determine hypothetical interest to be based on the actual return on plan assets or a subset of plan assets or the rate of return on certain regulated investment companies (RICs).
Rev. Proc. 2017-41 modifies and supersedes Rev. Proc. 2015-36 for applications for opinion letters for pre-approved plans submitted for the third (and later) six-year remedial amendment cycles. Rev. Proc. 2017-41 modifies the IRS pre-approved plan letter program by combining the master and prototype and volume submitter plan programs into a new opinion letter program. However, the provisions of Rev. Proc. 2015-36 continue to apply to applications for opinion and advisory letters submitted during the second six-year remedial amendment cycle. Among other things, Rev. Proc. 2017-41 clarifies that for purposes of the definition of “cash balance formula” the “hypothetical account balance generally consists of Principal Credits and Interest Credits.” In addition, Rev. Proc. 2017-41 also deletes the restriction on using a rate that is based on the actual return on plan assets in determining interest credits. This modification allows nonstandardized pre-approved DB plans with a cash balance formula that are submitted for an opinion letter during the third (and subsequent) six-year remedial amendment cycles to provide for a rate that is based on the actual return on plan assets as the rate used to determine interest credits, including a rate that is equal to the actual rate of return on aggregate plan assets.

Actual rate of return on plan assets used to determine interest credits

The IRS explains that, after the release of Rev. Proc. 2017-41, the IRS received comments requesting that plans submitted under Rev. Proc. 2015-36 be permitted to provide for a rate equal to the actual rate of return on aggregate plan assets as the rate used to determine interest credits. The IRS states that it has determined that it is appropriate to allow master and prototype nonstandardized DB plans and volume submitter DB plans that contain a cash balance formula, submitted under Rev. Proc. 2015-36 for the second six-year remedial amendment cycle, to provide for a rate equal to (but not merely based on) the actual rate of return on aggregate plan assets as the rate used to determine interest credits. The IRS also has decided to clarify that, although these plans generally may not provide that the rate used to determine interest credits is based on the rate of return on RICs, the rate used to determine interest credits may be equal to the actual rate of return on aggregate plan assets even if that return includes returns on RICs.
In addition, the IRS has determined that Rev. Proc. 2017-41 should be revised, consistent with these changes to Rev. Proc. 2015-36, to allow pre-approved defined benefit plans that contain a cash balance formula, submitted for the third (and subsequent) six-year remedial amendment cycles, to provide for a rate equal to the actual rate of return on aggregate plan assets as the rate used to determine interest credits (rather than a rate that is merely based on the actual return on plan assets) and to clarify that the rate used to determine interest credits may be equal to the actual rate of return on aggregate plan assets even if that return includes returns on RICs.
Finally, the IRS has decided to modify Rev. Proc. 2015-36 to make clarifying changes to the definition of hypothetical account balance and related clarifications throughout the revenue procedure, where applicable, consistent with Rev. Proc. 2017-41.
The IRS has provided the revised language for sections 6.03(7)(c) and 16.03(7)(c) of Rev. Proc. 2015-36 and for section 6.03(7)(c) of Rev. Proc. 2017-41 as well as clarifications to terminology relating to statutory hybrid plans throughout Rev. Proc. 2015-36.

Source: Rev. Proc. 2018-21.
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