In perhaps the last big legislative push of 2015, the Bipartisan Budget Act of 2015 (the “Act”) was passed by the House of Representative on a 266-167 vote on Wednesday, October 28, 2015 — in the waning moments of outgoing Speaker John Boehner’s tenure. In the vote, 79 Republicans joined 187 Democrats to pass the package — which means a fairly large number of Republicans voted against the Act suggesting the days of the political turbulence in the House may not completely be over. Subsequently, the Senate also voted to approve the Act by a 64-35 vote (overcoming objections from a group of conservative senators, including a few presidential candidates). On Monday, November 2, 2015, President Obama signed the bill into law at a brief ceremony at the White House.
The Act encompasses a compromise two-year budget bill that was negotiated between House leadership and the White House, and it raises spending caps on domestic and defense spending over the next two years by an aggregate amount of $80 billion. Generally, the additional spending is split evenly between domestic and defense concerns — thus allowing all participants in the negotiations to declare themselves winners. The Act also makes changes to the Social Security disability program. In addition, the Act extends the federal borrowing limit through March 15, 2017 — at which time there will be a new Congress and a new president. The days of crisis governing in Congress may be over—at least we are taking a welcome break.
The Act does contain some employer benefit provisions, which chiefly are used as fundraisers. Significantly, there are no provisions in the Act that directly impact defined contribution plans—such as 401(k) plans. The Act does affect traditional defined benefit retirement plans in several ways that generally were unexpected and that have not been greeted warmly by the industry. Those provisions are as follows:
The Act increases the annual flat rate premium that single employer defined benefit retirement plans must pay to the Pension Benefit Guaranty Corporation (the “PBGC”), which is calculated by multiplying a flat premium rate by a plan’s participant count. To add context, the scheduled flat rate premium for the 2016 plan year is $64 per participant (under previous law, the flat rate premium was to be indexed for inflation after 2016). The Act increases the flat rate premium to $69 in 2017, $74 in 2018 and $80 in 2019 (the flat rate premium will be indexed for inflation after 2019).
The Act increases the additional variable rate premium that single employer defined benefit retirement plans with unfunded vested benefits must pay to the PBGC, which is calculated as a specified dollar amount for each $1,000 (or a fraction thereof) of a plan’s unfunded vested benefits as of the end of the preceding year. Again , for context the variable rate premium is $30 per $1,000 of unfunded vested benefits with respect to plan years beginning in 2016. The Act requires further increases in the variable rate premium (as indexed) of $3 in 2017, $4 in 2018 and $4 in 2019.
The Act accelerates the duel date for PBGC premiums under a very narrow window (under current law plans must pay required premiums no later than the 15th day of the 10th full calendar month in the plan year). The Act accelerates the date by which premium payments must be made be made, effective for plan years commencing after December 31, 2024, and before January 1, 2026 to the 15th day of the 9th calendar month that begins on or after the first day of the plan. In essence, and to eliminate any doubt as to the budget balancing aspect of this change, the Act accelerates the premium due date for only the 2025 plan year.
Effective for plan years beginning after December 31, 2011, the segment rates used for determining the present value of the plan’s liabilities have been modified in a manner designed to stabilize those rates (by providing a floor and a ceiling to the applicable rates). Under these revised rules, the interest rates used for valuing liabilities in 2012-2017 generally are deemed not to vary more than 10 percent from the average interest rates over the prior 25 years. That range increases over time and for plan years beginning after 2020 the segment rates are not less than 70 percent or more than 130 percent of the corresponding 25-year average. The intended effect of these segment rate stabilization provisions has been to offer to plan sponsors the ability to defer otherwise required employer contributions. In turn, lower employer contributions, which generally would be deductible, result in higher government revenues for the federal government. Effective for plan years beginning after December 31, 2015, the Act extends the funding stabilization percentages (set at 10 percent) currently in effect through 2020. That corridor then would increase by 5 percent per year through 2024, and would be set at 30 percent thereafter.
Generally, sponsors of defined benefit retirement plans are permitted to apply a substitute plan-specific mortality table (i.e., a mortality table other than those prescribed by the Treasury), but only under certain conditions. The Treasury generally will not approve a plan-specific mortality table without a showing that the proposed table reflects the actual experience of the plan and that there are a sufficient number of plan participants and the plan has been maintained for a sufficient period of time to permit the generation of have credible information to support such a table’s use. The Act permits plans to use such mortality tables so long as they are based on plan experience. For this purpose, the credible information determination must be made based on established actuarial credibility theory.
Not wanting to leave health care plans out of this process, the Act contains one provision that directly affects those plans. That provision affects the automatic enrollment provisions that were added as part of the Affordable Care Act (the “ACA”). These ACA provisions required employers with more than 200 full-time employees to automatically enroll new full-time employees in the employer’s health benefits plans. The industry has been waiting for guidance on these provisions before implementing the new requirements, but that wait now is over. The Act repeals the automatic enrollment provisions of the ACA in their entirety. While this provision is scored as a revenue raiser here in Washington, the elimination of this provision generally is cheered by the health care industry as well. On this one, most everyone seems happy.
With our “boots on the ground” here in Washington, D.C., our Washington staff is directly involved on a daily basis with developments affecting the employee benefits industry—whether those developments are legislative or regulatory in nature. Please feel free to contact us if you have any questions concerning employee benefit developments here in Washington.