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Pension Plan Funding Stabilization Finally Here under MAP-21 Law

July 16, 2012

After many months of discussion, the Moving Ahead for Progress in the 21st Century Act (MAP-21) became law on July 6, 2012. The provisions in MAP-21 on pension plan interest rates will provide much-needed relief on pension plan funding and liabilities. However, the good news is offset by provisions in the new law for higher termination-insurance premiums payable to the Pension Benefit Guaranty Corporation (PBGC) in the future.

Summary of Pension Provisions of MAP-21

MAP-21 is primarily a transportation bill that also includes student-loan interest-rate relief. However, as a revenue-raiser, it includes pension plan provisions that:

  • Reduce the adverse impact of historically low interest rates on the three “segment rates” (corporate-bond interest rates) used by many pension plans to calculate funding liabilities. The primary change is to smooth segment rate changes by calculating each rate based on the average of that segment rate over 25 years — a much longer period than the two-year period currently used to determine segment rates.
  • Impose a minimum floor and maximum cap on the percentage of the 25-year average segment rate that can be used. The floor-and-cap corridor expands in future years.
  • Create additional disclosure requirements to participants about the impact of the new rates.
  • Provide for additional opportunities to transfer excess assets to other retiree benefits.
  • Increase PBGC premiums, starting in 2013.

Impact of 25-Year Averages for Segment Rates

MAP-21 sets the 2012 segment rates at a floor of 90 percent and a cap of 110 percent of the 25-year average of each segment rate (short-, mid- and long-term). Because interest rates are at historic lows, this corridor around the 25-year average will increase the permissible interest rate used to determine funding liabilities. This increase will reduce funding targets and the “normal cost” of a pension plan. Estimates are that typical plans will see their contributions reduced 15 percent to 25 percent and their target funding liability decreased by around 15 percent.

Because the floor will drop in 5 percent increments annually beginning in 2013, falling to 70 percent in 2016, the minimum permissible rate will be less in future years. Nevertheless, the use of a 25-year average will continue to be of assistance as long as the current low interest rate environment continues.

Plan Sponsors Face Choices

There are several choices that employers will need to make under the new law. Some decisions may be influenced by future IRS guidance. The decisions will include:

  • Whether to use the new rates for 2012 or 2013. We expect most plans to make this change for 2012.
  • Whether to begin using the segment rates if the plan previously used the “yield curve” rate for funding. MAP-21 does not change the interest rate for plans that use the yield curve rate instead of the segment rates; however, a plan can change to the segment-rate method without IRS approval under MAP-21.
  • Whether also to use the new rates for calculating benefit restrictions under Section 436 of the Internal Revenue Code for 2012, if applicable. This use can be delayed to 2013.

The required annual funding notice to plan participants must include a comparison of old-law and new-law funding information, along with other disclosures. The Department of Labor is to update its model annual funding notice to include this information, but the release date for this revision is unknown.

Excess Asset Transfers

Under existing law, a plan with assets more than 125 percent of its funding target and normal cost currently can use the excess to pay for retiree medical benefits. MAP-21 extends this provision, set to expire in 2013, for eight years to the end of 2021. The 125-percent threshold will continue to be determined under pre-MAP-21 requirements.

In addition, MAP-21 expands the potential use of these excess assets to fund retiree group term life insurance. The life insurance cannot exceed $50,000 per retiree.

Higher PBGC Premiums

Under MAP-21, the per-participant PBGC premium for single-employer plans will increase from $35 to $42 in 2013 and $49 in 2014. The $49 premium will be inflation-adjusted after 2014. Also, the minimum variable-rate premium will increase to $13 in 2014 and $18 in 2014, with future inflation indexing. The maximum variable-rate premium is capped at $400 per participant (also inflation-adjusted after 2013).

The per-participant premium for multiemployer plans will increase $2, to $12, in 2013 and be indexed for future years.

For further information about the pension provisions of MAP-21, please contact any member of the McGuireWoods employee benefits team.