This summer, President Obama signed into law the Moving Ahead for Progress in the 21st Century Act (MAP- 21). The Act brings new funding relief to plan sponsors in the form of interest rate stabilization but, on the flip side, increases the cost to plan sponsors by raising PBGC premiums.
Based on escalating concerns over underfunding of pension plans, the minimum funding rules applicable to single employer defined benefit pension plans were intensified by the Pension Protection Act of 2006. In addition to reducing the period over which funding shortfalls may be amortized, PPA dictates that minimum funding liabilities be calculated either by using a “yield curve” based on corporate investment-grade bond data published by the U.S. Treasury for the preceding month or by using three “segment rates” that are determined using averages from the most recent 24-month yield curve. As interest rates and investment returns declined, plan funding obligations have increased dramatically, and plan sponsors have been seeking relief.
MAP-21 modifies the corporate bond segment rates approach and provides some stabilization of the rate by adding both a cap and floor for the current year’s rate, based upon the 25- year average of each of these segment rates calculated as of September 30 of the preceding year. If a segment rate for an applicable month is less than the applicable minimum percentage, the segment rate is adjusted upward to match that minimum percentage; conversely, if the segment rate for a specific month exceeds the applicable maximum percentage, the segment rate is ratcheted downward to match that percentage. The applicable minimum and maximum percentages are as follows:
Click here for table.
These adjustments are expected to produce meaningful increase in the effective interest rate for most plans for 2012 and 2013 and, in turn, reduce required contributions by perhaps as much as 25 percent. Over the long term, however, the impact of the rate stabilization likely will subside because of the widening disparity between the minimum and maximum percentages.
Plan sponsors can choose to use the new stabilization provisions starting with plan years beginning on or after January 1, 2012, or defer application of the new rules until plan years beginning on or after January 1, 2013.
Counterbalancing the welcome funding relief brought by MAP-21 is the disconcerting news of escalating PBGC premiums. Most defined benefit plans are covered by the PBGC insurance program and pay a flat rate premium per participant to insure basic benefits. MAP-21 increases the current single-employer premium of $35 per participant to $42 for 2013, and to $49 per participant beginning in 2014.
In addition to the flat-rate premium, PBGC assesses a variable rate premium for unfunded vested benefits. This variable rate premium currently is $9 per $1,000 of unfunded vested benefits; the rate will be indexed to reflect inflation and will rise to $13 for 2014, and to at least $18 for 2015. The per participant variable rate premium will be subject to a cap, beginning at $400 for 2013 and indexed thereafter. Note that employers with 25 or fewer employees remain subject to the maximum variable rate premium of $5 per participant; that is not changed by MAP-21.
The law includes a more modest increase in PBGC premiums for multiemployer plans. These rates will increase from $9 per participant to $12 per participant for 2013 and thereafter will be adjusted for inflation.