On October 12, 2011, the IRS issued Notice 2011-85 (Notice), announcing its intention to amend the final regulations under Section 411(d)(5) of the Internal Revenue Code (IRC) to postpone the effective date for changes relating to interest crediting rates under a cash balance or other statutory hybrid plan. Changes announced in the Notice include the:

The Notice announces a postponement of the effective date of planned changes to Treasury Regulation Section 1.411(b)(5)-1(d), which contains rules relating to interest crediting rates under cash balance plans and other statutory hybrid plans.

Section 411(B)(5)(B)(i) of the IRC, codified under the Pension Protection Act of 2006 (PPA), generally provides that a plan may not provide for any interest credit (or equivalent amount) for any plan year at a rate that is in excess of a market rate of return. Final and proposed regulations (2010 final and proposed regulations) under IRC Section 411(a)(13) and 411(b)(5) provide guidance on the market rate of return. The proposed regulations are also expected to describe additional interest crediting rates that satisfy the requirements of IRC Section 411(b)(5). Certain provisions of the 2010 final regulations apply to plan years beginning on or after January 1, 2012, which is also when the 2010 proposed regulations are proposed to be effective. The Notice postpones this effective date.

Under the Notice, the 2010 proposed regulations, when finalized, will apply for plan years that begin on or after a date specified in the regulations that is no earlier than January 1, 2013. Until the 2010 final regulations are formally amended, plan sponsors may rely on the Notice with respect to the postponement of the effective date.

The 2010 proposed hybrid plan regulations stated that the IRS anticipated providing IRC Section 411(d)(6) relief to eligible plan amendments adopted before the 2010 proposed regulations, once finalized, apply to a plan. The Notice extends the deadline for adopting an interim or discretionary plan amendment under Sections 411(a)(13) (other than Section 411(a)(13)(A)) and 411(b)(5) of the IRC to the last day of the first plan year before the plan year for which the 2010 proposed regulations, once finalized, apply to the plan. However, a plan must continue to satisfy the requirements of Section 1107 of the PPA, which provides rules for adopting amendments under the PPA, as a condition for relying on this extension.

As a result of this extension, the IRS will not consider the 2010 final hybrid plan regulations (other than with respect to Section 411(A)(13)(A)) during a review of an application for a determination letter that is submitted between February 1, 2011 and January 31, 2012, unless the plan has been amended to satisfy those regulations.

The Notice also provides that relief from the requirements of IRC Section 411(d)(6) is expected to apply to plan amendments eliminating or reducing protected plan benefits in connection with these changes to the interest crediting rules, provided those amendments are:

The Notice announces a special timing rule for providing notice of an ERISA Section 204(h) plan amendment that:

A 204(h) notice for an amendment that satisfies these requirements was permitted to be provided as late as 30 days after the date the amendment was effective. Under this special rule, while the adoption date of the amendment must have been after November 10, 2009, and on or before the last day of the first plan year that begins on or after January 1, 2009, the date by which the 204(h) notice was required to be provided relates to the date the amendment was effective.

For an overview of the requirements for qualified plans, including hybrid plans, see Practice Note, Requirements for Qualified Retirement Plans.