What is the Interest Crediting Rate (ICR) and how does it work?

Most TPAs will use 4-5% in today’s market. This rate is a safe harbor rate and tends to work out better when cross testing a plan with employees.

You can, of course, use other rates like the 30-year treasury bond or actual return. Actual rate of return can eliminate many of the over-funding or under-funding issues that create challenges. But we tend to use actual return for larger plans with higher plan assets and many employees.

At the end of the day, the 4-5% rate offers testing benefits and does not require the actuary to recalculate the rate each year. But the 4-5% rate also offers one big advantage. It will be higher that the 30 year treasury rate, so it will allow for larger contributions.

The #1 reason these plans exist is for the tax deferral, so small plans can allow larger contributions for the business owner. Also, another big issue is that the higher 4-5% rate will create a wider funding range. This will help these same employers fund at a higher level if they choose.

So bottom line, the 5% rate will allow better funding and simplicity and is used for smaller plans (under 20 employees). But if you have a larger plan, you can consider the other options that can limit plan over-funding and create consistent funding levels.

Take a look at the following article for more information:

https://www.emparion.com/cash-balance-plan-interest-crediting-rate/