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Interest on Employee Pension Contributions and Lump Sum Payouts: New Rules

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We recommend that pension plan sponsors check what their plan texts say about the crediting of interest on contributions made by employees to the plan and lump sums payable to terminated members.

New rules were recently introduced to clarify the interest that should be applied to those amounts. For defined benefit pension plans that are not insured, if the plan text is silent on this issue, the interest rate must be at least the prescribed bank deposit rate. A plan sponsor may be able to credit employee contributions with interest equal to the pension fund rate of return; however, this must be expressly provided for in the plan text for DB plans.

For defined contribution pension plans that are not insured, the new rules require that the interest rate be at least equal to the pension fund rate of return. These new rules were effective July 1, 2012.

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