Cycle 3 Defined Benefit Restatement Cycle Coincides with Large Rate Hikes

Cycle 3 Defined Benefit Restatement Cycle Coincides with Large Rate Hikes

March 22, 2024

Defined Benefit Cycle 3 Restatements

Every six years, pre-approved retirement plan documents (both defined contribution and defined benefit) are required to be restated onto an updated version freshly approved by the IRS. This is to incorporate any changes in IRS regulations, as well as any voluntary amendments that the plan may have adopted since the last time the document was re-written. This current restatement cycle is called “Cycle 3”. Defined Contribution plans were required to be restated onto Cycle 3 documents by July 31, 2022. The deadline for Pre-Approved Defined Benefit or Cash Balance Plans is March 31, 2025.

Restatement Cycle Coincides with Interest Rate Increases

Each month of the year the IRS releases a series of rates that are used for the plans actuarial calculations. Determining sufficient funding requires calculating the present value of future benefits which is, in part, based on discounting those benefits with interest. The three segment rates are the averages of the yields over different blocks of maturity periods of the Treasury high quality corporate bond yield curves averaged over 24-months. Since 2022 the Federal Reserve increased interest rates 11 times and over 500 BPS.

Higher interest rates in turn lower funding requirements and also lower lump sum equivalents since the plan assets are assumed to be growing at a higher rate. Many plans that were already overfunded coming into 2023, had little or no contribution requirements solely due to the changes in interest rates.

Now is the time to review annual funding objectives coinciding with the required document restatement of all defined benefit and cash balance plans. It may be that the benefit formula in the plan needs to be increased (if possible) to allow for a continuation of the annual funding/contribution targets originally desired at plan inception. Having to already restate the plan is an opportune time to make a course correction to adjust for a higher interest rate environment.