The Highway and Transportation Funding Act of 2014 (HAFTA), enacted last month, extended the current favorable interest-rate stabilization provisions for defined benefit pension plan funding for an additional five years. See our prior article for more information. These provisions were originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21), enacted in 2012.
In Notice 2014-53 (the Notice), the Internal Revenue Service has now provided guidance on the transition impact of the HAFTA provisions for the 2013 and 2014 plan years. The Notice addresses elections that are available, reporting requirements and the effect on certain required benefit restrictions. Decisions about the elections may be required as soon as Dec. 31, 2014. The Notice does not provide any elections that were not previously anticipated but does give important guidance on how and when elections are to be made.
Election to Defer HAFTA Segment Rates
HAFTA provides that plans will be deemed to apply its new rates (the HAFTA Segment Rates) for the 2013 plan year unless an election is made to defer the new rates until the 2014 plan year. The election to defer the rates can be made for all plan purposes or solely for purposes of calculating benefit restrictions under Section 436 of the Internal Revenue Code.
Under the Notice, this election to defer may be made either (1) through written notice to the plan actuary and administrator or (2) by a “deemed” election resulting from using the prior rates on the plan’s Form 5500, Schedule SB for the 2013 plan year. The notice to the actuary and administrator is irrevocable and must be given by the later of Dec. 31, 2014, or the Form 5500 filing deadline for the 2013 plan year. The deemed election based on the Schedule SB can be revoked by filing an amended Form 5500 or by providing written notice to the plan’s actuary and administrator and to the Pension Benefit Guaranty Corporation. Any revocation of the deemed election must be made by Dec. 31, 2014.
Funding Elections for 2013
If the HAFTA Segment Rates apply to a plan for 2013, funding for the 2013 plan year could be affected. The Notice gives a plan sponsor several choices about how to deal with these funding changes. These choices include reversing reductions in prefunding balances, adding excess contributions to the prefunding balance or designating a contribution originally made for the 2013 year as a 2014 plan year contribution. These elections would be made by notice to the plan’s actuary and administrator given by the last day of the 2014 plan year (Dec. 31 for calendar year plans).
Benefit Restriction Effects
Section 436 imposes benefit accrual and payment restrictions for some underfunded pension plans. The Notice explains how these restrictions would be affected by the HAFTA Segment Rates. The Notice also deals with how the restrictions may be affected by the elections discussed above. The Notice explains various presumptions, requirements, election options and correction methods that may be applicable depending upon a plan’s funded status.
In consultation with the plan’s actuary, plan sponsors are now in a position to make and implement decisions about the HAFTA segment rates. Dec. 31, 2014, is the deadline if the plan sponsor wants to make any of the elections for a calendar year plan. Special care should be taken in applying this guidance to plans already subject to, or potentially subject to, the Section 436 restrictions.