New Pension Funding Interest Rates Require Employer Action

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By Brian M. Pinheiro, Esq., and Samantha E. McMillan, Esq.  

Ballard Spahr, Philadelphia, PA

On July 6, 2012, President Obama signed the Moving Ahead for Progress in the 21st Century Act (P.L. 112-141), which makes significant changes in pension law, including pension funding stabilization provisions and substantial increases to PBGC premiums over the next several years.

For plan years beginning after December 31, 2011, employers can temporarily use higher interest rates to calculate liabilities under their single-employer defined benefit pension plans, which will result in smaller minimum-funding contributions in the short-term. The pension funding stabilization provisions attempt to address employers' concerns that historically low interest rates have resulted in higher minimum-funding contributions during a weak economic climate.

The Act's interest rate provisions apply automatically to defined benefit pension plans that use segment rates rather than the corporate bond yield curve to calculate their funding requirements.  Employers may elect to opt out or postpone the application of these interest rate provisions. These changes will have no effect on the calculation of pension liabilities on employers' financial statements.

The Act also increases the current $35-per-participant PBGC flat-rate premium to $42 per participant in 2013 and to $49 per participant in 2014. The current variable-rate premium of $9 per $1,000 of unfunded vested benefits (UVB) will increase to $13 per $1,000 of UVB in 2014 and to $18 per $1,000 of UVB for 2015. PBGC premiums will continue to be calculated using prior law interest rates.

Employers should consider how the Act's provisions will affect their minimum-funding contributions, PBGC premiums, and any current funding-based benefit restrictions before making any decisions.  Although employers who choose to apply the new interest rates will have smaller minimum funding contributions for the next several years, contributing less to defined benefit pension plans can create other issues, such as higher PBGC variable rate premiums and significantly higher minimum funding contributions in future years.

Additionally, employers should consider how these changes may impact employee communications and funding and investment strategies. For example, employers that take advantage of the new interest rate provisions must include additional disclosures in their plans' annual funding notices, which must be provided to participants no later than 120 days after the end of each plan year.

For more information, in the Tax Management Portfolios, see Kushner, 361 T.M., Reporting and Disclosure Under ERISA, and in Tax Practice Series, see ¶5570, Reporting and Disclosure Requirements for Benefit Plans.

Copyright © 2012 by Ballard Spahr LLP.