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On March 1, 2021, the Senate Parliamentarian ruled that the pension provisions of the American Rescue Plan Act of 2021 (ARPA) do not violate the “Byrd Rule” and therefore may be included in this current round of budget reconciliation legislation.
Although many sponsors will welcome the funding relief in ARPA, in its current form that legislation does present some technical issues, mainly due to the early/retroactive effective dates of some proposals.
In this note, we briefly review those technical issues.
Background
We discussed the House version of this relief in January 2021. Summarizing, ARPA would:
Increase the “corridor percentage” of the 25-year average valuation interest rate from (current) 90% to 95%, extend that corridor through 2025, and put a floor on the average of the first, second, or third segment rate for any 25-year period of 5% (effective 2020, sponsor may elect not to apply to any year before 2021).
Switch from (current) 7-year amortization to 15-year amortization of funding shortfalls (effective for 2020 or, at the sponsor’s election, 2019).
The Senate is considering an amendment that would (generally) allow sponsors flexibility to apply/not apply these rules to the period 2020-2021 (2019-2021 in the case of 15-year amortization).
The House proposal also includes a freeze on cost of living adjustments on Internal Revenue Code maximum benefit/contribution limits and compensation limits, beginning in 2031.
Technical issues
In this context, we thought that, as this legislation makes its way through Congress, it would be useful to sponsors to agenda some of the technical issues this single employer DB funding relief proposal presents:
Will sponsors have the ability to elect into or out of the 15-year amortization relief for 2020? Many sponsor’s 2020 valuations are already completed – will those preferring not to undertake a revised valuation have that option?
For sponsor not electing out of 2020 application, will these changes require a revision to the 2020 Annual Funding Notice disclosures due April 30, 2021?
For sponsor not electing out of 2020 application, how will changes to the 2020 Adjusted Funding Target Attainment Percentage (AFTAP) resulting from the application of ARPA function? That is, for instance, if the pre-ARPA 2020 AFTAP was under 60%, and plan benefits were frozen in 2020, how would the sponsor be required to address this issue when the 2020 AFTAP is re-certified above 60% based on ARPA.
How will these changes affect the 2021 AFTAP, e.g., where a benefit restriction would apply for an AFTAP calculated on the current basis that would not apply for an AFTAP calculated on an “ARPA basis?” This issue is an especially acute with respect to the April 1, 2021 10-percent reduction presumption.
If the new amortization rules are applied to 2019, how will “excess contributions” (e.g., that were, when made, minimum contributions) and credit balances be handled?
The proposal being considered by the Senate, giving sponsors the ability to delay the effective date of these changes (at sponsor election) will allow some sponsors to avoid most of these issues. But for those sponsors who would like to, e.g., have 15-year amortization apply in determining minimum funding beginning in 2019, we will need guidance.
Outlook
As we understand it, the goal is to get this legislation passed by March 14, 2021. So we are on a very fast track.
Obviously, this is a moving target. We will continue to follow these issues.