Hitting the Highlights: 2010 Cash Balance Plan Regulations

​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 looked at the Pension Protection Act of 2006, which clarified the legal status of cash balance plans and increased their popularity. Today, we’ll give a brief overview of the 2010 IRS regulations that further defined the status of cash balance plans and sent their popularity soaring. Major points from the 2010 legislation include: Increased flexibility regarding rate of return: When crediting interest to employees’ hypothetical accounts, the Pension Protection Act permitted the use of any interest crediting rate not greater than the market rate of return. This meant that most plans relied on the 30-year Treasury bond rate, which didn’t allow for much flexibility and often led to funding issues. The 2010 regulations increased flexibility and added more interest rate options for plan administrators, including fixed rates and the option to use the investment’s Actual Rate of Return. Clarification of wear-away protection for employees: Some employees expressed concern that converting to a cash balance plan would decrease their earned benefits, but protection against this is written into the legislation. When employers add a cash balance plan on top of a profit-sharing 401(k) plan, this becomes a non-issue. Vesting: This requirement was first introduced in 2006 but, again, was further developed in 2010. It declares that participants must be 100% vested in the cash balance plan after three years of service, as a form of employee protection. On the whole, these regulations clarified certain parts of the Pension Protection Act of 2006 while adding increased flexibility and options for cash balance plan administrators. This flexibility made adding a cash balance plan an even more appealing option for thousands of businesses and accelerated the growth of the cash balance plan as a retirement savings option.