Pension Funding Smoothed for Another Five Years

August 11, 2014

The favorable interest-rate stabilization rules for defined benefit pension plan funding included in the Moving Ahead for Progress in the 21st Century Act (MAP-21), enacted in 2012, have been extended for an additional five years. The extension is part of H.R. 5021, the Highway and Transportation Funding Act of 2014 (the 2014 Act), which President Obama signed into law on August 8. The pension funding change is a revenue-raising provision in connection with an appropriation in the 2014 Act for the Highway Trust Fund through May 2015.

Our prior article on MAP-21 can be found here. In general, MAP-21:

  • Reduced 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 was 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 previously used to determine segment rates.
  • Imposed 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 expanded in future years through a phase-in process.

The 2014 Act extends the time when the 25-year averaging will apply. In addition, the phase-in of the expanded corridor has been delayed until after 2017. The new phase-in percentages and applicable years are:

Calendar Years Minimum Percentage Maximum Percentage
2012-2017 90% 110%
2018 85% 115%
2019 80% 120%
2020 75% 125%
After 2020 70% 130%

The new rules apply to the 2013 plan year, but a plan sponsor can elect to have the extension apply beginning with the 2014 plan year. If a plan sponsor imposed benefit restrictions in the 2013 year based on the expiration of MAP-21, it may be necessary to elect that the extension apply starting with 2014.

A change in the rules for paying lump sums when the plan sponsor is in bankruptcy is also made. As under prior law, lump sums are allowed when the sponsor is in bankruptcy if the plan is 100-percent funded. However, under the 2014 Act, the determination of the funding percentage must be made without regard to the 25-year averaging rule. All defined benefit plans will need to be amended in 2016 or later to comply, but must be operated in a manner consistent with this change in the law immediately.

For additional information, please contact the author of this article, Steven D. Kittrell, or any other member of the McGuireWoods employee benefits team.