The Moving Ahead for Progress in the 21st Century Act ("MAP-21"), signed by President Obama on July 6, 2012, includes several provisions affecting defined benefit pension plans. In particular, MAP-21 stabilizes pension funding requirements, increases Pension Benefit Guaranty Corporation ("PBGC") premiums, extends and expands upon the allowance of transferring excess pension assets, and improves governance and oversight of the PBGC.
First, MAP-21 provides for pension fund stabilization by altering the applicable interest rate for determining pension funding requirements. To qualify for tax benefits relating to defined benefit pension plans, employers must abide by certain requirements specified in the Internal Revenue Code of 1986, as amended (the "Code"). One of the requirements is that the employer makes an annual minimum required contribution to its pension fund. The amount of the minimum required contribution depends on the net value of current plan assets compared to the present value of expected future plan benefit payments. Ideally, these two numbers should match, and the minimum required contribution for the year should represent the present value of the increased benefits that will vest for plan participants during the plan year. To determine the present value of expected future payments, the total expected future payments are discounted using established interest rates.
Prior to the enactment of MAP-21, the interest rate used for discounting expected future payments was based on an average of corporate bond interest rates over the previous two years. Over the last few years, the Federal Reserve has lowered interest rates, inadvertently placing a financial strain on employers with defined benefit pension plans. A low interest rate results in less discounting of expected future plan payments, and in turn requires a higher annual contribution.
MAP-21 addresses the higher annual required contributions caused, in part, by low interest rates. In general terms, MAP-21 allows employers to use the average interest rate for the past twenty-five years (instead of two) for purposes of determining their minimum required contributions. This effectively raises the applicable interest rate, which in turn lowers the present value of expected future plan payments, subsequently reducing the minimum required contribution.
Second, MAP-21 increases PBGC premiums. For single-employer defined benefit pension plans, PBGC premiums are currently $35 per participant. MAP-21 increases such premium to $42 in 2013, $49 in 2014, and will index the premium for inflation thereafter. MAP-21 will also increase variable premiums, which are currently set at a rate of $9 per $1,000 of unfunded vested benefits divided by the number of plan participants. The $9 variable premium will be indexed for inflation, and will additionally increase by $4 in 2014 and another $5 in 2015. MAP-21 also increases PBGC premiums for multiemployer plans from $9 per participant to $12 per participant, with the number indexed for inflation thereafter.
Third, MAP-21 extends and expands upon the allowance of transferring excess pension assets to retiree health benefits. A provision allowing for employers to transfer excess pension assets to a retiree health account was set to expire in 2013, but MAP-21 extends this provision to 2021. In addition, MAP-21 allows for companies to transfer excess pension assets to a broader range of accounts -- including group term life insurance -- without suffering adverse tax consequences.
Finally, MAP-21 provides for improvements of the PBGC. The improvements include more detailed governance provisions, the creation of a Participant and Plan Sponsor Advocate, additional quality control procedures, and the repeal of a line of credit previously extended to PBGC.
Fraser Stryker is a leader in tax and employee benefits law. Attorneys in the Firm's Taxation and Employee Benefits Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. For more information on defined benefit pension plans and the consequences of MAP-21, please contact Nicole R. Konen.