Cash balance plan sponsors that use a relatively high fixed rate to credit interest to employees' accounts would have to lower those rates under IRS rules proposed Oct. 18, according to Business Insurance, a sister publication of Pensions & Investments.
For employers that use a fixed percent to credit interest, the proposal would impose an annual 5% interest cap.
For employers whose interest crediting formula is one in which employees receive the greater of a fixed interest rate or the rate on certain bond-based indexes, 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 Oct. 18, 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.
“This is a major development for cash balance plan sponsors that they have been waiting for literally for years,” Mr. Glickstein said in an interview.
Added Richard Shea, a partner at the law firm Covington & Burling, said: “At first blush, the rules appear to be far more complicated than they need to be. The real question is whether plan sponsors are more likely to adopt or retain cash balance plans as a result of these regulations.”
The proposed rules and final rules, which also were released Oct. 18 and deal with certain other cash balance plan issues, such as vesting of account balances, are available at the Federal Register's website: http://www.ofr.gov. Both sets of rules were published in the Oct. 19 issue of the Federal Register.
Jerry Geisel writes for Business Insurance, a sister publication of Pensions & Investments. P&I Reporter Doug Halonen contributed to this story.