The “Moving Ahead for Progress in the 21st Century” (MAP-21) legislation signed into law last week included significant pension law changes. These included good news and bad news for sponsors of defined benefit pension plans.
The good news is that MAP-21 provided some relief from the historical low interest rate environment. The funding segment interest rates (which are based on 24 month average rates) will now be restricted to a range around the 25 year average rates. That range is 10% for 2012, ramping up to 30% for 2016 and beyond. This effectively increases the funding interest rates for 2012, which can significantly lower the liability and minimum contribution requirements from what they otherwise would be.
The bad news of MAP-21 is sharp increases in PBGC premium rates. The fixed and variable rate premiums will increase as shown in the table below. Rates will also be indexed for inflation.
Certain plans will also need to disclose the effect of the stabilized interest rates to participants on the Annual Funding Notice. This applies to plans with 50 our more participants, a funding shortfall of $500,000 or more (based on rates without stabilization), and stabilized Funding Target less than 95% of the Funding Target without stabilization.
It’s important to note that the interest rate changes are optional for 2012. Some plans, like professional firm cash balance plans, will not benefit from the interest rate changes and can avoid the expense of restating their 2012 valuation results.
Many plans will want to take advantage of the option to calculate the minimum contributions with the stabilized rates. Those that do will have the option to measure funded status for benefit restriction purposes with or without stabilization. MAP-21 does not allow the stabilized rates to be used for 2012 benefit restrictions without also using them for the minimum contribution calculation.
The interest rate stabilization of MAP-21 will not apply to the minimum lump sums under §417, maximum deductible contributions, PBGC variable rate premiums or PBGC §4010 reporting. Pension accounting under FASB ASC 715 is also not affected.
Additional guidance from the IRS is needed to determine the exact impact of this law change and how to implement it for 2012. Please contact Van Iwaarden Associates if you would like an estimate of the impact on your plan or to discuss the application of these rules in more detail.