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President Obama Signs Transportation Bill with Pension Funding Provisions
Practical Law Legal Update 4-520-2642 (Approx. 4 pages)
President Obama Signs Transportation Bill with Pension Funding Provisions
by PLC Employee Benefits & Executive Compensation
| Law stated as of 09 Jul 2012 • USA (National/Federal) |
President Obama signed HR 4348 into law. HR 4348, also known as the "Moving Ahead for Progress in the 21st Century (MAP–21) Act, is a comprehensive transportation bill that contains three significant revenue-generating provisions relating to the funding of defined benefit pension plans.
On July 6, 2012, President Obama signed HR 4348 into law. HR 4348, which is also known as the Moving Ahead for Progress in the 21st Century (MAP–21) Act, is a comprehensive transportation bill to authorize funds for federal-aid highways, highway safety and transit programs, and other purposes. The bill contains three revenue-generating provisions relating to the funding of defined benefit plans.
Interest Rate Stabilization
This provision stabilizes the interest rates used in calculating pension liabilities for purposes of the minimum funding rules under the IRC, beginning for plan years in 2012. Under this provision, the interest rates used to estimate pension liabilities and determine employer contributions (which are based on the two-year average of interest rates) would be adjusted so that they are within:
- 10% of the average of such segment rates for the 25-year period preceding the current year (beginning in 2012).
- 30% of the average of such segment rates for the 25-year period preceding the current year (beginning in 2016).
This provision will result in employers contributing less money into their pension plans by using calculations that allow them to value their pension liabilities using higher interest rates than the current low interest rates. In addition, it requires the plan to notify participants of the funded status of their plan using current law interest rate assumptions and this change for three years.
This provision is estimated to raise $9.394 billion in revenue over ten years.
Increased PBGC Premiums
This provision adjusts the fixed-rate, variable and multiemployer premiums that employers who sponsor pension plans must pay to the Pension Benefit Guaranty Corporation (PBGC) as follows:
- Flat rate premiums are increased from the current $35 per participant to $42 in 2013 and $49 per participant in 2014, with continuing indexing for inflation.
- Variable-rate premiums are:
- increased based on a plan's funding level, by $4 per $1,000 of unfunded vested benefits for 2014 and by $5 for 2015, using the applicable interest rate for the preceding year, and subject to a cap; and
- adjusted for inflation beginning in 2013.
- Multiemployer flat-rate premiums are increased by $2 beginning in 2013.
This provision is estimated to save $10.575 billion (including interactions with the interest rate stabilization provision) over ten years.
Increased Availability of Section 420 Transfers
IRC Section 420 permits employers to transfer excess pension assets to fund retiree health benefits. This provision:
- Increases the ability of employers to transfer excess pension assets under IRC Section 420 to fund retiree health benefits.
- Expands current provisions permitting transfers of excess pension assets for retiree life insurance.
This provision is estimated to raise $354 million over ten years.