Cash Balance interest credit reduction

[AndyH]

Sponsor has a floating interest crediting rate with a 4% floor. Assuming that the floating rate is in compliance with the market rate of return rules(e.g. Treasury Bond rate), can the 4% floor be reduced or removed? What are the ramifications? This would require a 204(h) notice, right?

[Effen]

My initial reaction is the 4% is a protected right and feature of the benefit and cannot be reduced for past accruals.

I think you could reduce it on future accruals with proper 204(h) notice, but what a mess that would be administratively.

[AndyH]

Thanks, I have the same reaction. But it seems that if the prior rate(s) did not comply with the (pending) market rate rules there might still be an opportunity to change, would you agree?

[Effen]

I don't know. I think the IRS has said the interest crediting rate is protected regardless of whether or not it falls under a safe harbor. Be happy you aren't one of those people who were using a 5.5% crediting rate. I think if it is in the document, you are probably stuck with it. I don't see the IRS allowing you to lower it, but who am I to say.

[Mike Preston]

More than might, Andy. The IRS has stated multiple times that if the crediting rate you have in the plan doesn't conform to the rules as they eventually are written, you will be given the opportunity to change them. At the least, this change will be prospective and be given a 411(d)(6) free pass. What some people wonder is how far back the IRS will require one to go in order to receive the relief. One would hope that the answer would be "not at all", but I'm not convinced the IRS won't require something other than that. All we can do is wait and see.

[AndyH]

Thanks Mike.

By "might", I'm hedging on what will eventually be considered non-compliant and how the final 411(d)(6) relief will work. I would assume that a flat 5.50% would be non-compliant, but we can't be certain at this point. If I am not mistaken, that issue was "reserved" in the most recent regulations.