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IRS delays cash balance pension plan rules

IRS delays cash balance pension plan rules

WASHINGTON—The Internal Revenue Service is delaying by at least a year the effective date of cash balance pension plan rules it proposed last year.

The proposed rules involve a provision in the Pension Protection Act of 2006 that allows plan sponsors to use a “market rate” to credit interest to participants' account balances.

When the rules were unveiled last year,

the IRS said they would take effect on Jan. 1, 2012.

But in Notice 2011-85, the IRS said Wednesday that finalized rules would be effective no earlier than Jan. 1, 2013. The IRS gave neither a reason for the delay nor an indication when the rules would be finalized nor if they would differ from the proposed rules.

Delay welcomed

Benefit experts, though, welcomed the delay.

“The notice allows plan sponsors to continue to wait for final regulations before making any changes to their cash balance plan,” said Alan Glickstein, a senior retirement consultant with Towers Watson & Co. in Dallas. “The notice provides expected and welcome relief” from what would have been an impossible compliance situation, he added.

Under the proposed rules, employers that use a fixed percentage to credit interest to participants' cash balance accounts would be capped at 5% per year. Cash balance plans provide an accumulated benefit as a cash lump sum that is based on pay-related and interest credits.

In addition, employers that use a design 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%.

Equity-based plans

For employers that use a design in which the interest credit 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. Few employers now use such an approach.