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Pension Provisions in Highway and Transportation Funding Act of 2014

On Friday, August 8, 2014, the President signed into law the Highway and Transportation Funding Act of 2014 (HATFA), which makes changes in the interest rates used to determine the minimum required contributions for single-employer pension plans. The changes modify the interest rates that had been set by the Moving Ahead for Progress in the 21st Century Act (MAP-21), so that required minimum contributions will be less than under current law. HATFA also made related changes to the annual funding notice and the restrictions on certain benefits for underfunded plans. The changes will require some immediate action for 2013. The effective date of the HATFA changes is generally for plan years beginning in 2013, but with an ability to defer changes till 2014.

Action Needed Now: Plan sponsors will need to decide if they want to use the HATFA changes for 2013 or to delay the effect until 2014. (The effect of the changes is discussed more below.) If a plan sponsor wishes to use the changes for 2013, then calculations of the minimum required contribution will be needed soon so that the revised minimum contribution due no later than September 15, 2014 for calendar year plans can be timely determined.

Single-Employer Plan Funding Rules

The minimum funding standards for single-employer pension plans are generally based on the value of the benefits earned in a plan year (the target normal cost) and an amount to amortize the difference between the value of benefits earned at the beginning of the plan year (the funding target) and plan assets. Current law generally requires that the funding target be calculated using interest rates that are based on a 24-month average of the rates on high-grade corporate bonds.1 Because the interest rates used to determine the target normal cost and funding target have declined over the past few years, the value of the benefits has increased substantially. As a result, the minimum required contribution has increased.

In 2012, MAP-21 was passed to dampen the effect of short-term changes in interest rates. This was done by comparing the interest rates calculated under the 24-month average with the average interest rates for the 25 years preceding the plan year for which the minimum contribution is being determined. If the 24-month average is lower or higher than a corridor created by the law, the interest rate used to determine the target normal cost and funding target is adjusted to the minimum or maximum value of the corridor, whichever is applicable. The minimum and maximum percentages of the 25-year average applicable for plan years under MAP-21 are as follows:

Plan Year beginning in

MAP-21 Minimum

MAP-21 Maximum

2012

90%

110%

2013

85%

115%

2014

80%

120%

2015

75%

125%

2016 or later

70%

130%

HATFA extended the time period for the reduction of the percentages in the above table so that the minimum discount rate will not decrease as quickly. Under HATFA, the minimum and maximum percentages of the 25-year average applicable for plan years are as follows:

Plan Year beginning in

HATFA Minimum

HATFA Maximum

2012-2017

90%

110%

2018

85%

115%

2019

80%

120%

2020

75%

125%

2021 or later

70%

130%

For 2014, the minimum rate increases from 80% of the 25-year average to 90% of that average. We estimate this could decrease a plan's funding target by as much as 10-15%, depending on plan provisions and demographics.

Effective Date - The new limits on interest rates are effective for plan years beginning after 2012 and do not apply to the determination of minimum lump-sums, the maximum lump-sum that may be paid under the section 415 limit on benefits, the limit on employer deductions to pension plans, the calculation of PBGC variable rate premiums, or the determination of events reportable to PBGC.

An employer may elect not to use the new interest rate limits for a plan year beginning in 2013 either for all purposes, or only for application of the benefit restrictions. Thus, an employer may elect to use the new interest rate limit for reducing its required contributions while at the same time using the old rules for applying the restrictions on benefits. Post-2013, the new limits on interest rates are required.

Cheiron Observation: The increase in the interest rate may reduce the minimum required contribution for 2013 that is due by September 15, 2014 for calendar year plans. However, plan sponsors should also look at the impact the lower contribution could have on the PBGC premium requirements. Previous credit balance elections and quarterly contribution requirements may need to be revisited as well.

Annual Funding Notice

MAP-21 modified the Annual Funding Notice by requiring additional disclosure of the plan's funded status and required contributions for plan years beginning after 2012 and before 2015, including a statement that use of the 25-year average may reduce the contribution the employer is required to make to the pension plan. HATFA extended the time period for this additional disclosure to years before 2020. The Department of Labor is instructed to issue a new model annual funding notice to incorporate the HATFA changes.

Benefit Restrictions

HATFA made one change to the benefit restrictions for underfunded plans. Under current law, if the plan sponsor was in bankruptcy, the plan could not pay out accelerated distributions (generally, lump sums) unless the plan was 100% funded. The changes made by MAP-21 allowed a plan to use the higher rate that was used for funding purposes. Under HATFA, the determination of the funding percentage for a plan where the plan sponsor is in bankruptcy will not use the higher interest rate provided by the 25-year average rates. This change is effective for plan years beginning after 2014 (beginning after 2015 in the case of a plan maintained pursuant to one or more collective bargaining agreements).

We expect that additional information will be forthcoming in releases from the DOL, IRS, and PBGC. Based upon the guidance issued with respect to MAP-21, the forthcoming guidance may cover the method of electing to defer until 2014, the treatment of plan benefits that would now be payable in 2013 if no election to defer is made, and the ability to revoke elections to reduce a funding standard carryover balance or pre-funding balance that may have been made. In the meantime, Cheiron consultants can assist you in determining the effect of the changes upon your plan.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.


1The funding standards use three different interest rates (referred to as segment rates) depending on when benefits are payable. The first interest rate applies to benefits payable within the first 5 years after the valuation date, the second rate applies to benefits payable between 5 and 20 years after the valuation date, and the third rate applies to benefits payable more than 20 years after the valuation date. Plans may choose to use one of four reference months for averaging the three rates, or they may opt to use the yield curve for the month preceding the date of the valuation.

 
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