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Employee Benefits Law Report Reporting on recent trends and developments affecting employee benefits

Congress Finally Passes Pension Funding Stabilization Provisions

Posted in ERISA Fiduciary Compliance, Health and Welfare Plans

Now that the excitement (or was that dread?) surrounding the Supreme Court’s ruling upholding the constitutionality of the health care reform legislation has dissipated somewhat, it seems timely to talk a little about pensions. At long last, and after several stalled efforts, meaningful pension funding stabilization legislation was enacted this summer. Congress passed and President Obama signed the Moving Ahead for Progress in the 21st Century Act (one has to wonder who comes up with these names over in Congress). The act, also known as “MAP-21″, makes important changes to how the interest rates used in defined benefit pension plan funding calculations are determined, potentially expands participant disclosure requirements and adds provisions that considerably increase PBGC premiums.

MAP-21 essentially makes two key changes that are applicable to defined benefit pension plans, as follows:

1.     For plan years beginning after December 31, 2011, employers may use adjusted interest rates to calculate liabilities under single employer defined benefit pension plans (although the ultimate cost of the pension plans will not be affected). These provisions are aimed at resolving current concerns that the use of prevailing but historically low interest rates artificially inflate required pension contributions at a time when economic conditions make higher contributions difficult to handle for plan sponsors. The provisions in MAP-21 modify the rules for determining interest rates for funding pension plans by applying averages of interest rates going back over a 25 year period. In an era of comparatively low interest rates, these new provisions in effect will permit plan sponsors to make smaller contributions to their pension plans in the short term than would have been required under previous law, although adjusting contributions downward now could increase contribution obligations over the longer term. These new provisions apply to pension plans that use segment rates to calculate funding requirements (although under a special transition rule, plan sponsors can postpone the application of these provisions for some or all purposes to which the new rates apply with respect to any plan year beginning before January 1, 2013). Plan sponsors that currently use the full yield curve as opposed to segment rates can elect to use the modified segment rates (without the need to secure IRS approval) if they make an election to do so within the one year period after enactment of MAP-21 on July 6, 2012. Funding experts predict that these new provisions would lower current funding obligations significantly.[1]

These new interest rate provisions also are applicable to help prevent the imposition of benefit restrictions (e.g., restrictions on lump sum distributions) on pension plans that do not satisfy certain established funding level targets. However, the stabilization provisions are not applicable for purposes of determining (a) the amount of a lump sum payments to be made by pension plans, (b) the limits on deductible contributions to pension plans, (c) qualified transfers of excess pension assets to retiree medical accounts, (d) the amount of PBGC variable rate premiums and (e) ERISA Section 4010 reporting to the PBGC for certain underfunded pension plans.

Depending on the funding status and size of their pension plans, plans sponsors may be required to include additional disclosures in their plans’ annual funding notices, as required under ERISA Section 101(f), that describe the implications of the MAP-21 provisions.

2.     MAP-21 increases the per-participant flat-rate premium rate to $42 for the 2013 plan year (now $35) and to $49 for plan years beginning after 2013 (beginning after 2012, the premium rate will be adjusted for cost of living adjustments). The flat-rate premium rate for multi-employer pension plans is increased to $12 in 2013 (after 2013, the premium rate will be adjusted for cost of living adjustments). While the variable-rate premiums will remain unchanged in 2012 and 2013 (i.e., $9 per every $1,000 of unfunded vested benefits), the variable premium will increase to $13 per every $1,000 of unfunded vested benefits in 2014 and to $18 per every $1,000 of unfunded vested benefits in 2015 (thereafter, the amount will be adjusted to reflect increases in national average wages). As noted above, the PBGC variable rate premiums will be calculated using prior law interest rates. The per-participant variable-rate premium per participant will be subject to a limit (that limit will be $400 in 2013) and will be indexed to inflation thereafter.

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Plan sponsors should carefully consider how the new provisions will affect their pension plans. While applying the new interest rate provisions in the short term will result in lower required contribution amounts in the current rate environment, making lower current contributions can result in future unpleasant developments, such as higher PBGC variable rate premiums and higher minimum required contributions. Each plan sponsor’s situation will be different.

On a related manner, MAP-21 expands IRC Section 420 (which currently permits the transfer of excess pension plan assets to fund retiree health benefits) to permit such transfers to also cover retiree life insurance. Section 420 generally permits these transfers of assets only from significantly overfunded pension plans (i.e., pension plans that hold assets in excess of specified percentages of liabilities).

Please contact us if you have any questions or concerns about the application of these new stabilization provisions.

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[1]  As an example, The McClatchy Co., a newspaper publisher, recently announced publicly that it hopes to reduce its pension plan contributions by $43 million over the next two years by applying the new provisions to its frozen pension plan.  Before passage, McClatchy reportedly had expected to contribute an aggregate amount of $78 million to the plan in 2013 and 2014, thus producing a quite significant reduction in short term funding obligations.