Kravitz has released an analysis of the long-awaited final IRS regulations for Cash Balance (hybrid) retirement plans.
The IRS rules published on September 19 finalize the Cash Balance regulations originally proposed in 2010, clarifying a number of issues and creating new investment options.
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Plan sponsors now have a broader choice of Interest Crediting Rates (ICR), helping minimize investment risk in many cases. While the IRS has deferred decision on some changes requested by the industry, it is allowing greater flexibility and Cash Balance plans are likely to become an even more compelling option for many employers.
Also known as "hybrid" plans, Cash Balance Plans combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k). Plan assets are invested collectively by the plan sponsor, and participants receive both an employer contribution and an annual interest credit that cannot exceed a "Market Rate of Return."
In 2010, the IRS published proposed regulations that dramatically 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. We analyzed these proposed regulations in a previous Information Release.
Actual Rate of Return
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By GlobalDataAs discussed in our September 19 Information Release, the final regulations now allow plan sponsors who choose 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 service employees and a different strategy for other groups of employees. Each investment strategy must meet certain requirements such as the "diversification requirement" outlined in our October 2010 Information Release. However, it is not yet clear how these differing investment strategies will impact IRS non-discrimination testing and other actuarial calculations.
Fixed Rates
The final regulations allow an ICR equal to a fixed rate of up to 6%, while the 2010 proposed regulations had capped the fixed rate at 5%.
Combined Rates
Under the final regulations, plan sponsors can combine an annual floor of up to 5% with any safe harbor rate. Previously, the 2010 proposed regulations had capped the annual floor at 4%. For example, a plan sponsor can now choose an ICR equal to the greater of the 30-year Treasury rate or 5%.
Participant Direction of Investments
The option to allow participant choice of investments for the ICR is "under further study" by the IRS.
Proposed Regulations
The IRS also released proposed regulations addressing the transition from a non-compliant ICR to one that is permitted under the final rules, and has invited comments from the industry and the public on this topic.
