Highway Bill Contains Pension Interest Rate Stabilization and PBGC Premiums Increase Provisions
On July 6, 2012, the President signed the Moving Ahead for Progress in the 21st Century Act (MAP-21). This highway reauthorization and student loan bill contains certain provisions which will impact sponsors of defined benefit pension plans. Specifically, MAP-21 provides for lower minimum funding requirements to pension plans beginning in 2012 and increased PBGC premiums beginning in 2013.
Short-term Interest Rate Relief
Currently, pension plan liabilities are determined using interest rates based on the 24-month average of corporate bond rates. These corporate bond rates are currently at historic lows causing increased pension liabilities and increased minimum funding requirements. Beginning in 2012, MAP-21 provides plan sponsors with an option to either:
Continue to determine minimum funding requirements using the current interest rate methodology, or
Determine minimum funding requirements using an interest rate within a 10 percent corridor of the 25-year average of corporate bond rates.
The 10 percent corridor will be incrementally increased to a 30 percent corridor by 2016. Because the 25-year average of rates is currently much higher than the 24-month average of rates, plan sponsors who elect to use the optional interest rate methodology will see meaningful reductions in minimum funding requirements in the short term. However, due to the expansion of the interest rate corridor, plan sponsors who elect relief would see increased funding requirements by 2016. Finally, plan sponsors who elect the interest rate relief will need to disclose such election in their annual funding notices to participants.
PBGC Premium Increases
Currently, plan sponsors of single employer defined benefit pension plans pay fixed and variable premiums to the PBGC. The fixed rate portion is currently $35 per participant. The variable rate portion is currently $9 per $1,000 of pension underfunding. Under MAP-21, these rates will increase starting in 2013 as follows:
The flat rate portion will increase to $42 for 2013, $49 for 2014 and then adjusted for inflation thereafter.
The variable rate portion will increase with inflation beginning in 2013 and will be further increased by an additional $4 per $1,000 of underfunding in 2014 and an additional $5 per $1,000 of underfunding in 2015. Additionally, a maximum variable rate premium of $400 per participant will be applied starting in 2013.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.