On January 21, 2021, Congressman Neal (D-MA), Chairman of the House Ways and Means Committee, and Congressman Scott (D-VA), Chairman of the House Education and Labor Committee, introduced single employer plan funding relief proposals. Both bills are titled the “Emergency Pension Plan Relief Act of 2021.” The single employer plan funding relief proposals under both bills are identical. Both bills also include (differing) multiemployer plan relief proposals.
In this article we briefly review the bills’ single employer funding relief proposal.
1. Increase/extend interest rate stabilization relief
In the sidebar we review current rules with respect to the interest rate required to be used to determine liabilities for minimum funding purposes under ERISA, as amended by the PPA and HATFA. The Emergency Pension Plan Relief Act would both increase and extend current 25-year average interest rate stabilization relief.
The table below summarizes interest rate stabilization under (current) HATFA rules and (alternatively) under the Emergency Pension Plan Relief Act proposal.
Thus, under the proposal, valuation interest rates would (beginning in 2020) be increased from 90% to 95% of the 25-year average, with that higher percentage relief extended through 2025.
Obviously, in the current very-low interest rate environment, this change would considerably reduce minimum funding requirements.
2. 5% floor on 25-year average rate
The bill provides that “if the average of the first, second, or third segment rate for any 25-year period is less than 5 percent, such average shall be deemed to be 5 percent.” This floor would have the effect of immediately increasing the first segment rate. If interest rates continue at their current levels, this floor will apply to the second segment rate beginning in 2025 and the third segment rate beginning in 2029. By 2030, rates will have reached the lowest level achievable under this law, 3.50%.
The chart below shows the effect of proposals 1 and 2 on valuation interest rates.
3. Amortization bases set to zero as of 2020, 15-year amortization going forward:
Current (PPA) rules require amortization of shortfalls over seven years. This change would (again, obviously) allow funding of shortfalls over a much longer period.
We note that changes 1 and 2 would be especially useful to plans/sponsors concerned about falling below the 80% benefits-restriction trigger.
Sidebar: HATFA, 24-month average and spot interest rates
HATFA rates are minimum funding interest rates determined under the Highway and Transportation Funding Act (HATFA), as amended by the Bipartisan Budget Act of 2015 (BBA). For 2019 and 2020, HATAFA rates are based on 90% of the average of rates for a (trailing) 25-year period. They may generally be used for determining minimum funding, but not for determining PBGC variable-rate premiums. HATFA rates are significantly higher than 24-month average and spot rates in the near term.
24-month average rates are minimum funding interest rates determined under the Pension Protection Act (PPA). They are the average of rates for a (trailing) 24-month period. They are used for determining minimum funding and may (subject to certain limitations) be elected as an “alternative” method for determining PBGC variable-rate premiums.
Spot rates are 1-month average rates and can be thought of (more or less) as market rates. They may (alternatively) be used for plan funding and are the default method for determining variable-rate premiums.
In each case, the index for calculating these rates is high quality corporate bonds.
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We will continue to follow this issue.