WASHINGTON—Cash balance pension plan sponsors that use a relatively high fixed rate to credit interest to employees’ accounts would have to lower those rates under rules the Internal Revenue Service proposed Monday.

For employers that use a fixed percent to credit interest, the proposal would impose an annual 5% interest cap.

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 4%.

The rules were mandated under a 2006 law that gave employers the option to use a “market rate” to credit interest on participants’ account balances. The Pension Protection Act also protected new cash balance plans from age discrimination suits, while every appeals court that has examined the issue has ruled that existing plans did not violate age discrimination law.

Since those developments, roughly a dozen major employers, including Coca-Cola Co. of Atlanta and Dow Chemical Co. in Midland, Mich., have set up cash balance plans.

Until Monday, however, the IRS had not provided definitive guidance long awaited by employers on what would be considered a market rate.

It isn’t known how many of the hundreds of major U.S. employers that have set up cash balance plans—so named because employees’ accrued benefits are expressed as a cash lump sum—would not comply with the proposed limits on crediting interest.

But the number could be considerable. “Clearly, a significant number will have to lower their interest crediting rate,” said Alan Glickstein, a senior consultant in the Dallas office of Towers Watson & Co.

The so-called market interest requirements, Mr. Glickstein added, are only proposed, and employers will have plenty of time to comment before their Jan. 1, 2012, proposed effective date.

The proposed rules and final rules, which also were released Monday and deal with certain other cash balance plan issues, such as vesting of account balances, are available at http://www.ofr.gov/OFRUpload/OFRData/2010-25942_PI.pdf and http://www.ofr.gov/OFRUpload/OFRData/2010-25941_PI.pdf.

Both sets of rules will be published in the Oct. 19 issue of the Federal Register.