IRS Stalls New DB(k) Hybrid

Because the Internal Revenue Service has not yet determined the market rate of interest return for so-called “DB(k)” plans—hybrids of pensions and 401(k)s—many companies eligible to begin offering them as of Jan. 1 are first waiting on the information. 

Companies with between two and 50 employees are eligible to offer the plans beginning this month. Based on rules in the 2006 tax code, Principal Financial and the American Society of Pension Actuaries developed DB(k)s, which would offer a small lifetime income stream based on an employee’s salary at retirement out of a lump cash sum. Both workers and their employers would make contributions to the plan.

The Pension Protection Act of 2006 required the IRS to determine an interest rate on the cash balance accounts that would not exceed the market rate of return, which the IRS has yet to determine.

Employers could go ahead and offer a DB(k) based on a rate that they determine and adjust it to the IRS figure by the beginning of 2011, but some employers would prefer to have certainty at the outset.