New IRS Regulations Broaden Investment Options for Cash Balance Retirement Plans

Kravitz Will Host a National Webcast on October 21

LOS ANGELES & NEW YORK--()--Kravitz released an analysis of the long-awaited final IRS regulations for Cash Balance (hybrid) retirement plans, and announced a public webcast to be held on October 21. 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. 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.

What Has Changed?

Actual Rate of Return

As 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.

Implications for Plan Sponsors

The new ICR options, particularly Actual Rate of Return, appeal to many employers as a way to reduce investment risk and manage annual funding issues. Since this option first became available in 2010, more than 30% of Kravitz’ large plan clients (>100 participants) have chosen Actual Rate of Return. We discussed the advantages and growing popularity of Actual Rate of Return in our February 2014 Information Release. However, for some plan sponsors, particularly those with smaller plans, this option could generate unexpected costs and complications. We suggest proceeding with caution and having an experienced actuary perform the appropriate analysis prior to adopting an Actual Rate of Return ICR.

Learn More about the New Cash Balance Regulations: October 21 Webcast

Kravitz is hosting a webcast from 10 - 11 a.m. PDT on October 21 to further discuss these new regulations and the impact on plan sponsors and retirement plan consultants. The webcast, entitled “New Rules, New Opportunities: Understanding the 2014 Cash Balance Regulations” is free and open to the public. For registration, visit

About Kravitz: Since 1977, Kravitz has brought its clients the latest in design, administration, and management of corporate retirement plans. The company designed its first Cash Balance Plan in 1989. Today Kravitz administers over 1,200 plans, including more than 500 Cash Balance Plans, helping over 150,000 people retire successfully. Headquartered in Los Angeles, Kravitz has offices in New York and satellite offices in nine states. Visit


Kravitz, Inc.
Daniel Kravitz, President

Release Summary

Newly released IRS regulations have broadened investment options for Cash Balance Retirement Plan sponsors. Kravitz has published a helpful analysis and will host a free webcast on October 21.


Kravitz, Inc.
Daniel Kravitz, President