Providing viable lifetime income options to their retiring employees has become an elusive goal for employers who have moved away from offering defined benefit plans in favor of 401(k) and other defined contribution (DC) plans.  Offering qualified longevity annuities (QLACs), which involves purchases from an insurer, is one possible avenue to provide lifetime income, especially with the improvements included in SECURE 2.0.  However, given the lackluster history of QLACs, that approach still may not be a satisfactory solution.

A one-sentence technical change in SECURE 2.0 has the potential to accomplish that objective but without involving third party insurers.  The provision is found in Section 348 in Title III, Simplification and Clarification of Retirement Plan Rules, entitled CASH BALANCE.  The law directs the sentence to be added to Section 411(b) of the Internal Revenue Code (and the corresponding ERISA section).  In essence, it clarifies how the so-called "accrual rules" – often referred to as the "anti-backloading rules" – apply to a cash balance plan that credits interest using a variable basis (i.e., anything other than a fixed rate such as 5%).  The language states that in performing an anti-backloading test, a reasonable rate not to exceed 6%, should be used in projecting cash balance benefits to normal retirement age.  Previously the IRS interpreted the law to require that the current interest rate at the time a test is performed be assumed to remain unchanged, no matter how anomalous that rate might be.