Signed into law on March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) contains provisions that benefit both single employer and multiemployer pension plans:
Single Employer Provisions
Extended amortization of funding shortfalls. Under the Internal Revenue Code, plan sponsors have been allowed to amortize contributions required to pay for plan underfunding over a period of seven years. ARPA lowers a plan sponsor’s minimum required contributions by spreading amortizations over 15 years, which becomes effective for plan years beginning in 2022. Shortfall amortization bases and installments that apply to plan years before 2022 are reduced to zero, with new funding shortfalls amortized over 15 years. Plan sponsors are allowed to adopt these changes retroactively to 2019, 2020, or 2021 plan years.
Extension of interest rate corridor. To deal with concerns that low interest rates were inflating pension obligations, Congress has enacted legislation several times since 2012 to provide temporary interest rate relief that provided a higher “smoothed” interest rate. The last piece of legislation that provided this relief — the Bipartisan Budget Act of 2015 — began phasing out in 2021. The ARPA extends and enhances the interest rate smoothing relief as follows:
- Reduces the 10% interest rate corridor to 5% for plan years 2020 through 2025;
- Delays the phasing out of the 5% corridor until 2026; and
- Imposes a permanent 5% floor on the 25-year interest rate averages.
Multiemployer Pension Provisions
Special financial assistance. Under the ARPA, certain financially troubled plans are eligible for financial assistance from the Pension Benefit Guaranty Corporation (PBGC) if the plan:
- Is certified as being in critical and declining status for any plan year beginning in 2020, 2021, or 2022;
- Has been approved for a suspension of benefits under the Multiemployer Pension Reform Act (MPRA);
- Is certified as being in critical status for any plan year starting in 2020 through 2022, has a modified funding percentage less than 40%, and a ratio of active to inactive participants of less than 2 to 3; or
- Became insolvent after December 16, 2014, and has not been terminated as of March 11, 2021 (ARPA’s date of enactment).
Plan sponsors that apply for PBGC assistance will receive sufficient financial assistance to cover all benefits due through 2051 without any reduction in earned benefits for participants. Plan sponsors are not required to repay the funds received from the PBGC. Plans that had previously reduced benefits are required to restore those benefits to the affected participants and are not eligible to apply for a new suspension of plan benefits.
Plans that receive financial assistance must segregate those funds from other plan assets and invest them in investment-grade bonds.
Temporary relief. Under the ARPA, plans are allowed to:
- Temporarily delay a designation of endangered, critical, or critical and declining status through retention of their funding zone status for plan years beginning in 2020 and 2021. Plans in endangered or critical status are not required to update their plan or schedules until the first plan year beginning after March 1, 2021.
- Extend their funding improvement or rehabilitation period by five years if the plan is in endangered or critical status for plan years beginning in 2020 or 2021.
- Amortize the investment and employment losses over a 30-year period for the first two plan years ending after February 29, 2020.
PBGC premiums increase. The ARPA includes provisions that increase the PBGC multiemployer plans premium to $52 per participant beginning in 2031 and then indexed for inflation thereafter.