The latest in pension funding relief, the Moving Ahead for Progress in the 21st Century Act (MAP-21), addresses the problems facing pension plans in several ways. The legislation tinkered with the governance structure at PBGC, increased premiums for sponsors of single and multiemployer pension plans, and allowed excess pension assets to be used to fund retiree health and life insurance benefits. Of particular interest to struggling defined benefit plans, however, is a method of stabilizing interest rate assumptions that will have the effect of reducing minimum funding contributions for many plans.

Sponsors of single employer plans must use prescribed interest rates to calculate minimum funding contributions. Each month, the IRS publishes three “segment rates” for this purpose based on investment-grade corporate bonds. MAP-21 stabilized the segment rates by establishing a floor and a ceiling for variable rates based on the average annual segment rates over a 25-year period. The floor and ceiling for 2012 is 90% and 110% of the 25-year historical average. For example, if the first segment rate for September 2012 is lower than 90% of the 25-year average, then the plan sponsor would use the rate that is 90% of the 25-year average for that month. Plan liabilities still will be determined using corporate bond segment rates, but because current interest rates are at an historic low, the use of a floor raises the interest rate and reduces the required plan contribution.

Although the IRS has not yet published the 25-year average rates, plan sponsors are already considering the potential effect of the modified segment rates on 2012 minimum funding contributions. Plan sponsors have the option to defer the new rules until the 2013 plan year. Also, plans that had already made an election prior to MAP-21 to use the 24-month average rate rather than segment rates may revoke that election before July 6, 2013, without the Treasury’s consent. Some plan sponsors may be required to disclose the effect of segment rate stabilization in annual funding notices distributed to participants and beneficiaries.

Are plans ready to implement the pension relief provisions of MAP-21?

Bloomberg BNA will host its inaugural Tax Policy & Practice Summit on November 13-14, 2012, in Washington, DC. One week after the November election, the Summit will focus on the impact of the election on tax policy and the future of tax reform. For more information and to register, please visit our Summit microsite at the following link: http://www.bna.com/tax-policy-summit.

--Vanessa Walts

Compensation Planning Group