Final Cash Balance Rule Expands Rate Options

By © Kravitz Inc. Sep 22, 2014

IRS regulations for so-called "hybrid" defined benefit pension plans, published in the Federal Register on Sept. 19, 2014, include a long-awaited final version of the cash balance regulations originally proposed in 2010.

The final rule, Additional Rules Regarding Hybrid Retirement Plans, allows plan sponsors broader options for choosing an interest crediting rate (ICR), which may make cash balance plans a more compelling option for employers.


A cash balance plan is a defined benefit plan that specifies an employer contribution along with an ICR that cannot exceed a “market rate of return” on plan assets. Plan assets are pooled and invested collectively by the plan sponsor, and each participant has a hypothetical account.

Prior to October 2010, the IRS had not finalized the definition of a “market rate of return.” Previous guidance allowed several safe harbor rates including the 30-year Treasury rate.

The 2010 proposed regulations expanded the definition of “market rate of return,” allowing for certain fixed rates, investment-based rates, and the “actual rate of return” on plan investments.

What Has Changed

The final regulations are similar to the 2010 proposed regulations with a few significant differences.

Actual rate of return. The final regulations allow plan sponsors who choose the actual rate of return as the ICR to create different investment strategies for different groups of participants. For example, a plan sponsor could use a more conservative portfolio for longer-serving employees and a different strategy for other groups of employees.

Each investment strategy must meet certain requirements such as the diversification requirement. However, it is not yet clear how these different investment strategies will impact IRS nondiscrimination testing and other actuarial calculations.

Fixed rates. The final regulations also allow an ICR equal to a fixed rate of up to 6 percent, while the 2010 proposed regulations had capped the fixed rate at 5 percent.

Combined rates. Under the final regulations, plan sponsors can combine an annual floor of up to 5 percent with any safe harbor rate. Previously, the 2010 proposed regulations had capped the annual floor at 4 percent. For example, a plan sponsor can now choose an ICR equal to the greater of the 30-year Treasury rate or 5 percent.

Participant direction of investments. The option to allow participant choice of investments for the ICR is “under further study” by the IRS.

New Proposed Rule

The IRS also released a proposed rule in the same issue of the Federal Register, Transitional Amendments to Satisfy the Market Rate of Return Rules for Hybrid Retirement Plans, addressing the transition from a noncompliant ICR to one that is permitted under the final rules, and invited comments from the industry and the public on this topic. The 90-day comment period ends on Dec. 18, 2014.


The advantages of the new interest crediting rates, in particular the actual rate of return option, are appealing to many employers as a way to reduce investment risk. Since this option became available in 2010, more than 30 percent of Kravitz’ large plan clients (>100 participants) with cash balance plans have chosen to use the actual rate of return. However, for some plan sponsors, particularly those with smaller plans, this option could generate unexpected costs and complications.

Performing an ICR impact analysis is recommended to determine the effect of using an ICR other than a safe-harbor rate.

Kravitz is an independent provider of design, administration and management services for corporate retirement plans. © 2014 Kravitz Inc. All rights reserved. Reposted with permission.

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