Single-Employer Pension Plan Funding Requirements Reduced

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (the Act). The Act reduces the funding requirements for single-employer pension plans, and revises the funding requirements for community newspaper plans. This alert describes the changes for single-employer pension plans, and decisions that plan sponsors may need to make concerning the effective dates.


 For single-employer pension plans, the minimum funding requirements are generally equal to the “target normal cost” for a plan year plus the amortization over 7 years of each “shortfall amortization base.” Each year the plan’s actuary determines the amount of the shortfall amortization base by calculating the “funding shortfall,” and subtracting the value of future amortization payments for prior shortfall amortization bases.

The funding shortfall and other relevant actuarial calculations are generally determined using “segment rates,” which are interest rates based upon corporate bond rates. There are three segment rates, with each rate based upon the period from the valuation date for the plan year. The first segment rate is for the period of the first 5 years from the valuation date. The second segment rate is for the next 15-year period (years 5-20 from the valuation date). The third segment rate is for the period after 20 years from the valuation date.

The segment rates are based upon a 24-month average of corporate bond rates for the relevant period. However, each segment rate is constrained to be within a specified range or “corridor” around the applicable 25-year average of the rates for the relevant period. Thus, for example, prior to the change in law, the first segment rate for 2021 would be constrained so that the 24-month average of that rate was not less than 85% of the applicable 25-year average, but not more than 115% of the 25-year average of that rate. The specified percentages change each year until the low percentage becomes 70% and the high percentage becomes 130%. The purpose of the applicable 25-year average was to “stabilize” the segment rates, which could otherwise be subject to extreme changes in a relatively short timeframe. The segment rates are published on a monthly basis by the Internal Revenue Service.

Changes Made by the Act

The Act makes two changes with respect to the minimum funding requirements. First, the 7-year amortization period is replaced with a 15-year amortization period. The Act provides for a fresh start for the first effective plan year so that all prior shortfall amortization bases (which were in their 7-year amortization period) will be set to zero and one new 15-year amortization base created. All future bases will also have a 15-year amortization period.

Second, the corridor used to stabilize segment rates around the applicable 25-year average is modified by narrowing and extending the timeframe until the low percentage is 70% and the high percentage is 130%. The Act also establishes a floor of five percent on the applicable 25-year average of a segment rate, before applying the corridor. Thus, for example, if the applicable  25-year average of the first segment rate is 3.90% (the 25-year average for plan years beginning in 2021), then the rate is set to 5%, before applying the corridor. The revised low percentage of 95% would then be applied to produce a first segment rate of 4.75%.

The revised percentages of the applicable 25-year average are shown in the following table:

Calendar Year in Which
Plan Year Begins
Low Percentage
High Percentage
2012 to 2019
2020 to 2025
2030 or later

Cheiron Observations – The effect of the changes is to lower the minimum funding requirement for plans. The biggest immediate impact will be with respect to plans that have a funding shortfall because of the switch to the 15-year amortization period. The change in the segment rates will reduce the calculated funding target and target normal cost, which therefore also lowers the funding requirements. Ultimately, the lowest segment rate that can possibly apply for minimum funding purposes will be 3.5% (70% of 5%).

The changes do not affect the segment rates used for other purposes such as to calculate lump sum benefits, the maximum deductible limit or the PBGC variable rate premium. For plans that reduce contributions because of the changes, the result may be an increase in the PBGC variable rate premiums. Plan sponsors may want to make larger contributions to avoid the higher premiums.

Effective Dates of Changes

The change from a 7-year amortization period to a 15-year amortization period is effective for plan years beginning after December 31, 2021. However, plan sponsors can elect that the change is effective for plan years beginning after December 31, 2018, December 31, 2019, or December 31, 2020.

The change in the segment rates applies for plan years beginning after December 31, 2019. However, the plan sponsor may elect not to have the change apply to any plan year beginning before January 1, 2022, either for all purposes, or solely for purposes of determining the adjusted funding target attainment percentage (AFTAP) to determine if certain benefit restrictions apply.

Cheiron Observations – The varying effective dates can be confusing. The earliest plan year the 15-year amortization period can apply is 2019, while the earliest plan year the change in segment rates can apply is 2020. A plan sponsor must take action in order to have both changes effective in the same plan year. If a plan sponsor wants to delay the effective date of both changes to 2022, an election must be made to defer the effective date of the change in the segment rates. In contrast, if a plan sponsor wants to have both changes effective for 2020, an election to change to the 15-year amortization period must be made.

There are questions that will not be resolved until the government publishes official guidance with respect to the changes. Many of the questions revolve around the use of credit balances that would not have been used under the new law if effective for earlier years.

Cheiron consultants can advise you on the impact of the changes.

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