IRS bumps up maximum interest rate for cash balance plans
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Final Internal Revenue Service regulations will allow cash balance pension plan sponsors to use slightly higher rates when crediting interest to employees’ account balances.
Under the final regulations, which take effect Jan. 1, 2016, employers that use a fixed percent to credit interest will be allowed a maximum rate of 6%, up from 5% under an earlier proposed regulation.
For employers whose cash balance plan interest-crediting formula is one in which employees receive the greater of a fixed interest rate or the rate on certain bond-based indices, the fixed rate could not exceed 5%, instead of 4% as earlier proposed.
The rules — years in the making — were mandated under a 2006 law that gave employers the option to use a “market rate” to credit interest on participants’ account balances.
Employers had urged the IRS to boost the maximum interest rate credit and the IRS responded positively to those comments, said Jim McHale, a principal with PricewaterhouseCoopers L.L.P. in New York.
Cash balance plans are so named from their design in which employees’ accrued benefits are expressed as a cash lump sum.
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