IRS to Focus on Cash Balance Interest Credit Rules

September 7, 2011 ( - The IRS' 2011-2012 Priority Guidance Plan says developing final regulations on acceptable ways that employers can add interest to employees' cash balance pension plan accounts is a priority.

 Business Insurance explained 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 rules proposed in 2010 (see IRS Corrects Hybrid DB Plan Rule), the IRS had not provided definitive guidance on what would be considered a market rate.  

Business Insurance reports 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.