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Member, Beacon International Group, Ltd.
WASHINGTON—Developing final regulations on acceptable ways that employers can add interest to employees' cash balance pension plan accounts is an Internal Revenue Service priority, the IRS said.
Finalizing the interest rate credit rules, proposed in October, is included in the IRS' 2011-2012 Priority Guidance Plan it released on Friday. Items included in the priority plan are those on which the IRS intends to work “actively” through June 2012.
The rules are needed to implement a provision in a 2006 pension plan funding law that allows plan sponsors to use a “market rate” to credit interest to employees' account balances. Prior to the proposed rules, the IRS had not provided definitive guidance on what would be considered a market rate.
Under the proposal, employers that use a fixed percentage to credit interest to participants' cash balance accounts would be capped at 5% a year.
For employers that use a formula that credits the greater of either the interest rate on certain bond-based indices or a fixed percentage, the fixed percentage could not exceed 4% under the IRS plan.
For employers that use a plan design in which the interest credited is linked to an equity-based rate, the interest credit could be either the rate of return earned by the equity index or a certain percentage, whichever is greater, up to 3% cumulatively.
For example, take the case of an employee who enrolled in a plan with such an indexing feature and a 3% interest credit guarantee. The employee retired after five years. The employee's account balance would be the greater of the amount based on the results of the equity fund index or the amount based on crediting 3% interest to the account balance each year.
Cash balance pension plans provide an accumulated benefit that is based on pay-related and interest credits and is expressed as cash lump sum.
WASHINGTON—Proposed and final Internal Revenue Service rules released last week are likely to give a modest boost to cash balance pension plans, experts say.