On July 30, 2021, IRS released Notice 2021-48, Guidance on Single-Employer Defined Benefit Pension Plan Funding Changes under the American Rescue Plan Act of 2021. The Notice provides detailed guidance on the elections available to plan sponsors with respect to the timing of the adoption of the changes made by the American Rescue Plan Act (ARP).
In what follows we provide a brief note on the issues addressed in the Notice. Sponsors of defined benefit plans affected by ARP will want to discuss with their actuary the application of the Notice to their plans.
ARP elections generally
ARP (1) changed the 25-year average interest rate “corridor” for defined benefit plan valuation interest rates under ERISA’s minimum funding and benefit restriction rules, in effect increasing valuation interest rates, (2) put a 5% “floor” on the 25-year average of valuation segment rates used in the interest rate corridor, and (3) increased the funding shortfall amortization period from 7 to 15 years.
The ARP interest rate changes are effective for 2020 valuations. A plan sponsor may, however, elect not to have the higher ARP rates apply to any plan year beginning before January 1, 2022, either for all purposes or solely for purposes of determining the plan’s adjusted funding target attainment percentage (AFTAP) (used to determine whether certain benefit restrictions apply).
15-year amortization takes effect in 2022. Employers may, however, elect to have this change apply in 2019, 2020, or 2021.
Issues presented by ARP elections
The changes made by ARP will affect minimum funding requirements generally. The possible retroactive application of these changes, and the elections permitted with respect to their application, raise a number of issues, including: the treatment of contributions made (at the time) to satisfy minimum funding requirements that, after application of ARP, are lower; their effect on credit balances and credit balance waivers; and the treatment of benefit restrictions.
There are also decisions for sponsors about whether to apply the interest rate changes in 2020 and 2021 for all purposes (including benefit restrictions) or just for purposes of minimum funding.
The guidance generally provides wide latitude on the treatment of these issues.
Timing and method of election
The Notice also provides guidance as to the timing and method of making any of the foregoing elections. Again, the guidance in this regard is both practical and flexible. In general, elections must be made by the end of the 2021 plan year.
Need for timely review
Sponsor choices with respect to the ARP changes and the requirements of the guidance in the Notice are complicated, technical, and very situation specific. Sponsors will want to review their own situations, the choices available to them, and the consequences of different choices relatively quickly, so as to be in a position to implement the best approach for their plans under the new ARP rules.