Attorney Seeks Guidance on Plan Termination Rules Under Pension Law

The Company has maintained a cash balance plan since 1989. The plan documents have been approved by 2 determination letters, which were reviewed at the highest levels of the IRS.

Over the past year, the Company has undergone significant restructuring (including dispositions of major business units and significant employee retirements), resulting in a large number of deferred vested plan participants who are entitled to receive distributions. Earlier this year, the Company amended the cash balance plan to stop accruals at December 31, 2006 (although continuing the interest credit), and now wishes to terminate the plan as soon as practicable thereafter (currently targeting March 31, 2007).

The cash balance plan currently credits interest at the greater of a fixed rate (5%) and a variable rate (average of the interest rate on 1 Yr. Constant Maturity Treasuries on the last day of the month from December 2005 to November 2006, plus 1%); until a distribution is processed, active and term vested participants are both credited with interest at the same rate.

The plan calculates annuity values for distributions by projecting interest to age 65 at the fixed rate (if under age 65), and dividing by 10 (regardless of the participant's age). Since 1989, the plan has calculated lump sums using a whipsaw calculation methodology.

For the last 6 years, the plan has credited interest at 5% but for 2007, under the formula described above, the rate is projected to increase to between 5.8% and 5.9%.

On plan termination, PPA appears to require calculating the annuity value by projecting future interest at the 5 year average rate of interest credited under the plan and dividing by a specified mortality table factor.

Depending on the average interest rate, the participant's current age, and the mortality table selected, the resulting annuity could be higher or lower than would result under the plan's normal method.

If the plan termination date were set at 3/31/2007 (as currently proposed) and the 2007 rate were 6%, the 60 month average rate would be 5.05%.

Are PPA plan termination requirements currently effective? If not, can the employer elect to apply them (along with interest crediting/vesting rules)? What applies in the absence of these requirements?

Will transition relief be granted under PPA § 1107 to allow plans to reset the interest crediting rate?

Under PPA plan termination rules, must a plan adopt a single annuity methodology to apply to ordinary distributions made to terminated participants as well as distributions upon plan termination?

Under PPA plan termination rules, may a plan calculate the annuity benefit payable on plan termination as the greater of the value under its normal method (that used for ordinary distributions) or the value calculated using the 5 year average rate of interest and a specified mortality table? Are annuity values fixed as of the date of termination?

Assuming the above "greater of" methodology is permissible, from the date of plan termination to the date of payment, what interest rate must be credited to a participant's account balance: the 5 year average rate, whichever rate is used to calculate the higher annuity value, the greater of the two rates, a reasonable amount to reflect the time value of money, something else?