President Obama recently signed into law the Highway and Transportation Funding Act of 2014 (“HATFA”), which extends the pension smoothing provisions included in the 2012 Moving Ahead for Progress Act for the 21st Century (“MAP-21”). MAP-21 amended Section 430 of the Internal Revenue Code (the “Code”) to set interest rates for pension plan funding valuations at a range around the 25-year average of historical interest rates. Under MAP-21, the range was between 90% and 110% of the 25-year average for 2012, and would gradually expand to be between 70% and 130% in 2016. Under HATFA, the 90% and 110% range is extended for five years through 2017, after which the range expands to be between 70% and 130% in 2021.
HATFA’s stabilization provisions are effective retroactive to the 2013 plan year, and the legislation permits plan sponsors to elect to defer using the HATFA rates until the 2014 plan year. In addition, the plan sponsor has the option to defer use of HATFA stabilization provisions for all purposes, or solely for determining whether the applicable plan would be subject to the benefit payment restrictions set forth in Section 436 of the Code. In Notice 2014-53, the IRS provided additional guidance on how plan sponsors can make this election.
According to the IRS, a plan sponsor can irrevocably elect to defer use of the HATFA rates until the first plan year beginning after January 1, 2014, by providing written notice of the election to the plan’s enrolled actuary and plan administrator. The notice needs to include the name of the plan, the plan number, the plan sponsor’s employer identification number, and whether the HATFA rates will be deferred for all purposes or only for determining whether the Code Section 436 benefit payments restrictions apply to the plan. The plan sponsor must make this election by the later of (1) the deadline for filing the Form 5500 (including extensions) for the plan year beginning in 2013; or (2) December 31, 2014.
A plan sponsor will be deemed to elect to defer the HATFA rates to 2014 if the Form 5500 and Schedule SB for the plan year beginning in 2013 uses the MAP-21 rates. The IRS permits a plan sponsor to revoke a deemed election to defer in one of several ways. First, the plan can file an amended return utilizing the HATFA rates. The plan sponsor could also provide written notice of the revocation (which includes the plan name, employer identification number and plan number) to the plan’s enrolled actuary and plan administrator or by electing to defer use of HATFA rates only for purposes of Code Section 436 (in the manner described in the preceding paragraph), as long as the election is made no later than December 31, 2014, a copy of the notice is provided to the PBGC, and the plan sponsor is not in bankruptcy at the time of the revocation or election.
Notice 2014-53 also provided additional guidance on various Code Section 430 elections available for the 2013 plan year if the HATFA rates apply to the plan for 2013. The decision of whether to defer use of the HATFA rates can be very complex and can have significant implications on a plan sponsor’s current and future funding obligations. Plan sponsors should work with their actuary and ERISA counsel before making a final decision on whether to apply the HATFA rates for 2013.