President Obama Signs Pension Funding Relief Bill

      On June 25, 2010, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (Act).  The Act makes available pension funding relief to both single employer and multiemployer defined benefit plans.  Single employer defined benefit plans may elect one of two alternative extensions of the shortfall amortization period; however, additional contributions to the plan are required if an employer electing funding relief pays compensation in excess of $1 million to any employees, pays extraordinary dividends, or makes an extraordinary stock redemption during a portion of the relief period.  A multiemployer plan that meets a solvency test may amortize net investment losses for the two consecutive plan years ending on or after August 31, 2008, over a 30-year period.  In addition, the Act permits a multiemployer plan to change its asset valuation method to extend the period to smooth asset values from five years to 10 years and/or to liberalize the corridor in which the smoothed asset values must fall.

      Under the Act, the plan sponsor of a single employer defined benefit plan may elect one of two alternative extensions of the seven-year period over which the plan's "shortfall amortization base" must be amortized.  The Act provides that, for up to two of the plan years beginning in 2008, 2009, 2010 or 2011 (an "election year"), a plan sponsor may elect to amortize the shortfall amortization base established in such election year under either a "2 plus 7" amortization schedule or a 15-year amortization schedule. 

2 Plus 7 Amortization Schedule

      Under the 2 plus 7 amortization schedule, the amount of the shortfall amortization installments during the first two plan years of the amortization period beginning with the election year is equal to the interest on the shortfall amortization base (determined using the effective interest rate for the plan for the election year).  The remaining balance of the shortfall amortization base of the plan for the election year is then amortized over the final seven plan years of the amortization period, in level annual installments using the applicable segment rates for the election year.

15-Year Amortization Schedule

      Under the 15-year amortization schedule, the balance of the shortfall amortization base of the plan for the election year is amortized over 15 plan years, in level annual installments using the applicable segment rates for the election year.

Election and Notice Requirements

      The Internal Revenue Service will issue rules that describe the procedure for making an election to use an alternative amortization schedule.  If the plan sponsor elects to apply an alternative amortization schedule to two election years, it must elect the same schedule for both years.  In addition, plan sponsors that elect an alternative amortization schedule under the Act must provide notice to the plan's participants and beneficiaries of its election and must also inform the Pension Benefit Guaranty Corporation of its election.

Additional Contribution Requirements

      If the plan sponsor that elects an alternative amortization period under the Act or any member of its controlled group:

• pays "excess compensation" (generally compensation in excess of $1 million) to an employee;
• pays an extraordinary dividend; or
• makes an extraordinary stock redemption,

then during the "restriction period," the plan sponsor must make an additional contribution to the plan equal to the aggregate amount of the excess compensation, extraordinary dividend and extraordinary stock redemption.  The "restriction period" is either:

• the three-year period beginning with the election year (or, if later, the first plan year beginning after December 31, 2009) of the 2 plus 7 amortization period; or
• the five-year period beginning with the election year (or, if later, the first plan year beginning after December 31, 2009) of the 15-year amortization period, whichever is applicable.

Funding Relief for Multiemployer Defined Benefit Plans

Amortization of Net Investment Losses

      Under the Act, certain multiemployer defined benefit pension plans may elect to amortize, over a 30-year period, net investment losses incurred in either or both of the first two plan years ending after August 31, 2008, as an item separate from other experience losses.  Only plans that satisfy a "solvency test" are eligible for the relief.  To satisfy the solvency test, the plan's actuary must certify that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period, taking into account the extension of the amortization period. 

Expansion of Asset Smoothing Rules

      The Act also provides that certain multiemployer defined benefit pension plans may change their asset valuation method to:

• spread the difference between expected and actual returns for either or both of the first two plan years ending after August 1, 2008, over a period of not more than 10 years;
• expand the smoothing corridor to a range of 80 percent to 130 percent of the fair market value of such assets at such time; or
• make the changes under both of the above.

      Certain additional restrictions apply if a multiemployer plan elects to apply both the amortization of net investment losses and expanded asset smoothing provisions under the Act. 

Restriction on Benefit Increases

      If a multiemployer plan elects to apply either or both of the amortization of net investment losses or the expanded asset smoothing rules under the Act for any plan year, a plan amendment to increase benefits may not go into effect during either of the two plan years immediately following such plan year unless either:

• the amendment is required as a condition of qualification or to comply with other applicable law; or
• the plan's actuary provides a certification required by the Act.  

Notice Requirements

      Plan sponsors that elect an amortization of net investment losses or expanded asset smoothing under the Act must provide notice to the plan's participants and beneficiaries of its election and must also inform the Pension Benefit Guaranty Corporation of its election.

      If you would like more information regarding the Act or would like to discuss how the provisions of the Act might apply to your situation, you may contact Melissa Proffitt Reese, Marc Sciscoe, Craig Burke or your Ice Miller LLP employee benefits attorney.