IRS Notice 2016-54 Specifies Interest Rates for Defined Benefit Plan Funding Under MAP-21 | Practical Law

IRS Notice 2016-54 Specifies Interest Rates for Defined Benefit Plan Funding Under MAP-21 | Practical Law

The Internal Revenue Service (IRS) issued Notice 2016-54, which provides the interest rates that are used to determine the minimum funding requirements for defined benefit plans under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA).

IRS Notice 2016-54 Specifies Interest Rates for Defined Benefit Plan Funding Under MAP-21

by Practical Law Employee Benefits & Executive Compensation
Published on 19 Sep 2016 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Notice 2016-54, which provides the interest rates that are used to determine the minimum funding requirements for defined benefit plans under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA).
On September 16, 2016, the IRS issued Notice 2016-54, which provides the corporate bond monthly yield curve, corresponding spot segment rates, weighted average interest rates, and the 30-year Treasury securities interest rates that are used to determine the minimum funding requirements for defined benefit plans under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA).

Background: MAP-21, HATFA, and the BBA

The Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) stabilized and limited to a specific corridor the interest rates used in calculating pension liabilities and determining employer contributions for purposes of the minimum funding rules under the Internal Revenue Code (Code) and ERISA (see Legal Update, President Obama Signs Transportation Bill with Pension Funding Provisions). These stabilized rates were extended through 2017 by the Highway and Transportation Funding Act of 2014 (HATFA) (see Legal Update, President Obama Signs the Highway and Transportation Funding Act of 2014 with Pension Funding Provisions). The interest rate corridor was then extended through 2023 by the Bipartisan Budget Act of 2015 (BBA) (see Legal Update, Bipartisan Budget Act of 2015 Includes Pension Funding Provisions and Repeals Automatic Enrollment Under the ACA).

Notice 2016-54

Under the minimum funding requirements of Code Section 430, the present value is determined using three 24-month average interest rates (known as segment rates), each of which applies to cash flows during specified periods. The segment rates are adjusted under Code Section 430(h)(2)(C)(iv), which was added by MAP-21. Notice 2016-54 provides that the spot first, second, and third segment rates for the month of August 2016 are, respectively, 1.39, 3.27, and 4.18.
The monthly yield curve may be used in place of the segment rates. Table I of Notice 2016-54 includes the monthly corporate bond yield curve derived from August 2016 data.
For more information on funding requirements for pension plans under Code Section 430, see Practice Note, Minimum Funding Standards for Defined Benefit Plans.
The Notice also provides other rates which are used in calculating plan funding requirements, including:
  • The 25-year average segment rates for the period ending September 30, 2016.
  • The three 24-month average corporate bond segment rates applicable for September 2016 without adjustment for the 25-year average segment rate limits.
  • The 24-month averages applicable for September 2016 adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates.
  • The rate of interest on 30-year Treasury securities for August 2016.
  • The weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rate used to calculate current liability.
  • The minimum present value segment rates determined for August 2016.

Practical Implications

For more information on MAP-21 and subsequent regulations, as well as the BBA, see these Legal Updates: