PBGC Issues Guidance on HATFA's Effect on Premiums | Practical Law

PBGC Issues Guidance on HATFA's Effect on Premiums | Practical Law

The Pension Benefit Guaranty Corporation (PBGC) issued guidance on the effect of the Highway and Transportation Funding Act of 2014 (HATFA) on PBGC premiums in light of the positions the Internal Revenue Service (IRS) took on related issues in IRS Notice 2014-53.

PBGC Issues Guidance on HATFA's Effect on Premiums

Practical Law Legal Update 4-582-4405 (Approx. 5 pages)

PBGC Issues Guidance on HATFA's Effect on Premiums

by Practical Law Employee Benefits & Executive Compensation
Published on 25 Sep 2014 • USA (National/Federal)
The Pension Benefit Guaranty Corporation (PBGC) issued guidance on the effect of the Highway and Transportation Funding Act of 2014 (HATFA) on PBGC premiums in light of the positions the Internal Revenue Service (IRS) took on related issues in IRS Notice 2014-53.
On September 24, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued Technical Update 14-1 which offers guidance on the effect of the Highway and Transportation Funding Act of 2014 (HATFA) on PBGC premiums. Technical Update 14-1 supersedes any conflicting guidance in its 2014 premium instructions but does not affect its guidance in Technical Update 12-1.

Background on MAP-21 and HATFA

HATFA, signed into law on August 8, 2014, extended the pension plan stabilization provisions that were part of the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) (see Legal Updates, President Obama Signs the Highway and Transportation Funding Act of 2014 with Pension Funding Provisions and President Obama Signs Transportation Bill with Pension Funding Provisions).
MAP-21 stabilized the interest rates used by underfunded defined benefit plans in calculating pension liabilities for purposes of the minimum funding rules under the Internal Revenue Code (IRC), beginning for plan years in 2012. Under MAP-21, the interest rates used to estimate pension liabilities and determine employer contributions were limited to a specific "corridor" (90 to 110% for 2012, increasing by 5% beginning in 2013).
HATFA extended the 90 to 110% interest rate corridor through 2017, which ultimately reduces an employer's minimum required contributions to these plans. The extension applies retroactively to 2013 in certain cases, if plan sponsors make timely elections (see Legal Update, IRS Notice 2014-53 Provides Deadlines and Requires Decisions on HATFA's Pension Funding Provisions).
A plan's decision to apply the HATFA rates retroactively for the 2013 plan year affects its 2014 premium because:
  • The value of contributions made for the 2013 plan year after the end of the year (discounted by the 2013 effective interest rate) is included in the plan's 2014 asset valuation.
  • The 2013 effective interest rate is determined in part by the plan's application of the HATFA rates.

IRS Notice 2014-53

Most plan sponsors have likely determined the plan's 2013 effective interest rate based on the wider MAP-21 rate corridor. However, IRS Notice 2014-53 allows plans to decide whether to use HATFA rates or MAP-21 rates for 2013 funding determinations up until December 31, 2014 (see Legal Update, IRS Notice 2014-53 Provides Deadlines and Requires Decisions on HATFA's Pension Funding Provisions).
Under current PBGC guidance, a plan that expects to ultimately use HATFA rates is required to amend its PBGC premium filing and pay the additional premium and late fee.

Technical Update 14-1

Technical Update 14-1 offers guidance on HATFA's effect on premium underpayments and the redesignation of 2013 contributions.

2014 Premium Underpayments

Technical Update 14-1 amends the current guidance and explains that the PBGC will not require an amended premium filing, additional premium or late fee from a plan that determined its 2014 premium filing using an asset valuation using MAP-21 rates (even if it ultimately uses HATFA rates) if:
  • The premium filing is due and made on or before December 31, 2014.
  • The plan has not filed a 2013 Schedule SB based on HATFA calculations as of the premium due date.
  • The 2014 asset valuation includes contributions made after the 2013 plan year that are discounted using the MAP-21 rates.
  • The 2013 contributions made after the plan year do not exceed $25 million.
The PBGC explained its reasoning for issuing the guidance, stating that:
  • The premium increase for plans using HATFA rates instead of MAP-21 rates is relatively modest and may be less than the cost of making an amended premium filing.
  • The PBGC expected that most plans will find it less administratively burdensome to determine their 2014 premium using MAP-21 rates even though the plans may ultimately use HATFA rates.
  • The PBGC premium filing is due less than ten weeks after HATFA was enacted.

Redesignation of 2013 Contributions

IRS Notice 2014-53 allows a covered plan, in certain circumstances, to redesignate all or a portion of contributions that were originally to be included in the 2013 plan year to the 2014 plan year.
In light of this provision, Technical Update 14-1 provides that plans that redesignate 2013 contributions for 2014 in accordance with IRS Notice 2014-53 may amend their 2014 premium filings to exclude the discounted value of the redesignated contributions. The redesignation will affect both 2014 and 2015 premiums.
If the redesignation is made after the 2014 premium filing, the 2014 filing should be amended to reflect the higher premium.

Practical Impact

The guidance simplifies the calculation of premiums for plans that may use HATFA rates for 2013 but have already calculated their premiums based on MAP-21 rates. Sponsors of underfunded defined benefit plans should work with their actuaries to determine if Technical Update 14-1 impacts their plan.