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Acceptable Interest Rate In A Cash Balance Plan


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See Treas. Reg. 1.411(b)(5)-1(d) and (e).

You might find this page helpful as well: https://www.irs.gov/retirement-plans/issue-snapshot-how-to-change-interest-crediting-rates-in-a-cash-balance-plan

Any fixed interest crediting rate of not more than 6% annually is fine. The IRS is generally concerned about interest crediting rates being too high, not too low.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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17 minutes ago, C. B. Zeller said:

See Treas. Reg. 1.411(b)(5)-1(d) and (e).

You might find this page helpful as well: https://www.irs.gov/retirement-plans/issue-snapshot-how-to-change-interest-crediting-rates-in-a-cash-balance-plan

Any fixed interest crediting rate of not more than 6% annually is fine. The IRS is generally concerned about interest crediting rates being too high, not too low.

Perfect, so there's a limit on the highest but we can go lower.  So if it's 3.75% interest rate, that's not going to be an issue?

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Exactly, we have plans with fixed rates anywhere from 0% (yes 0% and have D-letters on that) to 6%. The best ICR choice depends on a lot of different variables and there are advantages and disadvantages to relatively higher or lower rates. Is it owner(s) only or are there employees covered, age(s) and risk tolerance of the owner(s), will it facilitate passing nondiscrimination testing, will it facilitate meaningful benefits for minimum participation, what are the investment advisor's recommendations? Some of these variables may be of little to no concern while others very important. Depending on the circumstances, we usually recommend 3% to 5%. However, lower while rates can support higher contributions/deductions, be careful of over funding relative to the maximum lump sum.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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On 9/23/2022 at 1:37 PM, CuseFan said:

passing nondiscrimination testing, will it facilitate meaningful benefits for minimum participation,

These are the two biggest obstacles with lower interest rates.  If you have NHCEs in the group, make sure you are looking at the impact before you go forward.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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It's kind of a "waterbed" issue - pushing down the interest rate increases the testing leverage of the DCP (where NHCEs get majority of their contributions) versus the CBP (where HCEs get majority of their contributions), but makes it more difficult to satisfy 401a26 and may require higher NHCE contribution credits - or the converse, where higher ICR helps 401a26 but makes NDT more challenging. That highlights the case for a knowledgeable actuary and/or consultant developing/analyzing the proper design given all the above mentioned variables in conjunction with the (prospective) client's objectives. (The fun part of the job IMHO.)

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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As an actuary, I am also concerned that using the higher interest rates (over 4%) will increase the funding liabilities  (Funding Target)  and, if covered by PBGC,  the PBGC liabilities, which can lead to fairly high PBGC Variable Premiums.     For small plans wanting to pay Lump Sums to HCE's, increasing the funding liabilities can make it harder to pass the "110% test" which usually must be passed to pay Lump Sums to restricted employees (like the top-25 HCE's).

 

 

....  Jeff

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I have been using anything from 3% to 6% range depending on client's objectives.   Although it does not appear "illegal" to use a fixed rate below 3% I personally not comfortable pushing it lower than 3%.   However, I did a couple of designs using 30/10 Yr Treasury rates (variable, oh) when the objectives were met with sub-3% rate.

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