On August 8, 2014, President Obama signed into law the Highway and Transportation Funding Act of 2014 (HATFA). HATFA contains revenue-generating provisions relating to the funding of defined benefit plans.

The HATFA provisions relating to pension plans extend the pension plan stabilization provisions that were part of the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) passed on July 6, 2012.

The MAP-21 provisions stabilized the interest rates used in calculating pension liabilities for purposes of the minimum funding rules under the Internal Revenue Code (IRC), beginning for plan years in 2012. Under these provisions, the interest rates used to estimate pension liabilities and determine employer contributions were limited to a specific "corridor" which was 90 to 110% for 2012 and increased by 5% beginning in 2013.

HATFA extends the 90 to 110% corridor through 2017, resulting in reductions in minimum required contributions for 2013 through 2017. The 5% increases then begin in 2018. Employers may delay using these new rates until the 2014 plan year for all purposes or only for purposes of determining the plan's adjusted funding target attainment percentage (AFTAP).

For more information on MAP-21, see Legal Update, President Obama Signs Transportation Bill with Pension Funding Provisions.

Under IRC Section 436, in the event of an employer bankruptcy, the plan may not make accelerated benefit payments (for example, lump sum payments) unless the AFTAP is at least 100%. The accelerated payment restriction continues to apply to an underfunded plan until the actuary certifies the plan's actual AFTAP to be 100% or greater. HATFA prohibits plan sponsors from using the 25-year average rates for purposes of this determination effective for plan years beginning after December 31, 2014 (December 31, 2015 for collectively bargained plans). For more information on IRC Section 436, see Practice Note, Benefit Restrictions under IRC Section 436.

HATFA provides some welcome relief to plan sponsors by reducing minimum required pension contributions. Plan sponsors should be sure to review these changes with their actuaries to determine the impact on pension plan funding and minimum required pension contributions.