The 2014 Final Regulations: A New Era of Flexibility for Cash Balance Plans

​This letter is part of a series on cash balance retirement plans, one of the best strategies to help high-earning Americans reduce taxes and accelerate their retirement savings. Since the loosening of IRS restrictions in recent years, cash balance plans have become extremely popular and only continue to grow, commanding over $1 trillion in assets. Adding a cash balance plan on top of a 401(k) profit-sharing plan can generate hundreds of thousands of dollars in annual tax savings. We’ve already reviewed the exciting changes to cash balance plans that took place in 2006 and 2010. Now it’s time to look at the most recent significant cash balance plan regulations, released by the IRS in 2014. These “final regulations” opened the way for even more flexibility, including multiple investment strategies within a single plan and more diverse options for interest rates. The most important feature of the 2014 regulations is that, for the first time, multiple investment strategies were allowed within a single cash balance plan. This means that a business owner can divide his or her employees into subsets with different levels of investment risk for each one. For example, the owner of a consulting firm may wish to place a portion of the plan’s assets in conservative investments on behalf of the firm’s senior partners, while making more aggressive investments on behalf of junior partners. This provides for excellent flexibility when compared to the old rules, which required that all investments remain in a single pool. Prior to 2010, cash balance plans had to use a fixed interest rate to measure the growth of a participant’s account. To avoid any potential problems with the IRS, most businesses used the 30-year Treasury rate. This strategy, while safe, severely limited options for plan administrators and weakened the effectiveness of cash balance plans. In 2010, IRS regulations permitted additional fixed rate and combined rate options and, most importantly, allowed for the calculation of interest based on the Actual Rate of Return. The 2014 regulations specify higher limits and new choices for fixed and combined rate options. They also allow administrators to combine Actual Rate of Return interest computing with the power of multiple investment strategies within a single plan to custom-tailor plans to fit the needs of many more businesses. The result of these 2014 regulations was to make cash balance plans a better and more popular option than ever. In 2016, cash balance plans made up 29% of all defined benefits plans, up from only 2.9% in 2001 (Kravitz 2016 National Cash Balance Research Report). Many small and midsize companies, particularly those that employ high-earners, began adding cash balance plans to supplement 401(k)s, attracted by the flexibility and excellent tax benefits. While previous legal uncertainty and administrative difficulty had stunted the growth of cash balance plans, 2014 opened the way for a new wave of participants