The President has signed the “Moving Ahead for Progress in the 21st Century Act” (MAP-21) into law. The new law includes funding relief for defined benefit plan sponsors (in the form of a floor on the interest rate used to calculate DB liabilities) and an increase in Pension Benefit Guaranty Corporation premiums. We discuss MAP-21 in detail in our article Pension Funding Relief / PBGC Premium Increases, and we refer you to that article for the details of the law.
There are a number of questions about how the new law will be applied. Probably the most urgent is, what is the 25-year average of segment rates that will be used to determine the interest rate ‘floor?’ As we understand it, IRS is expected to publish this information by the end of August 2012.
We expect to post several articles on the details and application of the new MAP-21 rules. In this article we focus on the treatment of benefit restrictions in 2012. Because of the way the benefit restriction rules work — with presumptions applicable until there is an actuarial certification — and because MAP-21 is effective for 2012 but was not adopted until half way through the year, the application of the benefit restriction rules in 2012 may, especially for plans that were less than 90% funded in 2011, be somewhat complicated.
Benefit restrictions — background
The following is a very brief (and somewhat oversimplified) summary of the Pension Protection Act (PPA) benefit restriction rules that are affected (directly or indirectly) by the MAP-21 interest rate rules.
The PPA benefit restrictions limit or prohibit certain benefits if a plan’s adjusted funding target attainment percentage (AFTAP) falls below certain levels (80% and 60%). A plan’s AFTAP is, generally, assets divided by liabilities. For purposes of calculating the AFTAP (unless the plan is fully funded) credit balances are subtracted from assets. The chart below summarizes the restrictions.
Prior to the certification, there are a set of presumption rules. Where there is no certification: (1) for the period January-March, the AFTAP for the current year is equal to the AFTAP for the prior year; and (2) for the period April-September, the AFTAP for the current year is equal to the AFTAP for the prior year minus 10 percentage points.
In the case of plan amendments and UCE’s, the sponsor may avoid the restriction if it makes a contribution in an amount sufficient to cover the increase in cost attributable to the amendment/UCE.
Credit balances (which, under the general rule, are subtracted from plan assets in calculating the AFTAP) are deemed waived where the waiver brings a plan up to an applicable 60/80% threshold (but, except with respect to accelerated payments, only for collectively bargained plans). The sponsor may also voluntarily waive a credit balance to avoid the application of a benefit restriction.
Effect of MAP-21 — generally
MAP-21 changes the way the AFTAP is to be calculated, by putting a floor on the interest rates used to value plan liabilities. It, in effect, reduces the value of liabilities and thus increases a plan’s AFTAP. MAP-21 applies retroactively to the beginning of 2012. How does that affect plans that are or may be subject to benefit restrictions for 2012?
Where there has been no pre-MAP-21 2012 actuarial certification and there are no credit balances:
1. Plans that had a 2011 AFTAP of 90% or more: No benefit restrictions are currently applicable; actuarial certification can be made under the new (MAP-21) rules any time before October 1, 2012.
2. Plans that had a 2011 AFTAP of 80-89%: As of April 1, 2012 the 10% ‘haircut’ took effect and the ‘less than 80%’ benefit restrictions applied. When the 2012 actuarial certification is made, if the plan’s AFTAP is 80% or higher, restrictions will stop.
3. Plans that had a 2011 AFTAP of 70-79%: Benefit restrictions applicable in 2011 continue to apply. When the 2012 actuarial certification is made, if the plan’s AFTAP is 80% or higher, restrictions will stop.
4. Plans that had a 2011 AFTAP of 60-69%: The ‘less than 80%’ benefit restrictions applicable in 2011 continued to apply through March 2012; on April 1, 2012 the 10% haircut took effect and the ‘less than 60%’ benefit restrictions applied. When the 2012 actuarial certification is made, if the plan’s AFTAP is 60% or higher, the ‘less than 60%’ restrictions will stop, and if the AFTAP is 80% or higher all benefit restrictions will stop.
Sponsors of plans in situations 2-4 (in which benefit restrictions are currently applicable), will generally want to get a certification as soon as possible. This will put pressure on actuarial firms. Range certifications may, in some cases, be an option. We discuss, below (Restoration of benefits), the rules applicable when benefit restrictions are lifted during the year.
Effect of MAP-21 — credit balances, mitigating contributions and re-certification
The foregoing is the easy version. Some plans may present more complicated issues.
Where there is a waived credit balance: A sponsor may conceivably have had to waive a credit balance, e.g., as of April 1, 2012, in order to avoid the application of a benefit restriction. Alternatively, a sponsor may have voluntarily waived a credit balance in order to avoid the restriction. MAP-21 may change the calculation of liabilities in such a way that that waiver was, in hindsight, unnecessary. IRS has received a request to clarify the treatment of this situation and to advise whether, for instance, the credit balance can be ‘un-waived.’
Where the sponsor has made contributions to avoid an (unnecessary) benefit restriction: One way to avoid the application of a benefit restriction on, e.g., a plant shutdown benefit or plan amendment, is to make a contribution covering the cost of the shutdown benefit/plan amendment. Where such a contribution was made in 2012 to avoid a 2012 restriction (under old law) that (given the retroactive effect of MAP-21) would not have applied, how should that contribution be treated? IRS has received a request to clarify the treatment of this situation.
Where there has been a pre-MAP-21 actuarial certification: In some cases an actuary may already have provided an actuarial certification with respect to a plan for 2012 based on a pre-MAP-21 liability valuation. If, for instance, the plan’s (certified) AFTAP is under 80% (and therefore benefit restrictions apply) how is such a plan to be ‘re-certified’ and what is the effect of such a recertification? IRS has received a request to clarify the treatment of this situation.
Restoration of benefits
MAP-21, in effect and halfway through the year, changes the benefit restriction rules for 2012. There will (not uncommonly) be plans that have a benefit restriction in place that, after a post-MAP-21 actuarial certification, will be lifted. Current regulations include rules for the treatment of benefits that become ‘unrestricted’ during the year. Summarizing:
The general rule is that benefit restrictions/un-restrictions don’t apply retroactively; they begin to apply when a certification is made or a presumption takes effect; they cease to apply when, e.g., a new AFTAP is certified. But there are exceptions to this rule. For instance, a plan that, in February 2012, did not provide an unpredictable contingent event benefit because the certified 2011 AFTAP was less than 60% would have to go back and provide the benefit if there were a (post-MAP-21) certification before October 2012 that the AFTAP was 60% or greater. A similar rule applies for plan amendments.
With respect to a participant who is receiving part or all of his or her benefit as an annuity because there was a restriction on lump sum payments, the plan generally may re-offer a lump sum, at current lump sum rates (that is, current as of the re-offer) and subject to QJSA consent requirements.
Once a restriction lifts (e.g., because of a post-MAP-21 certification), a plan may also be amended to restore ‘lost’ accruals. Generally, that restoration would be treated as a new amendment, subject to any applicable restrictions on plan amendments (e.g., if the plan is less than 80% funded). But such a restoration is allowed without regard to any applicable amendment restrictions where: (i) the continuous period of the accrual restriction is 12 months or less; and (ii) the plan’s enrolled actuary certifies that the AFTAP for the plan would not be less than 60% taking into account the restored benefit accruals for the prior plan year.
Election to have MAP-21 interest stabilization not apply to 2012
A sponsor may elect not to have adjusted segment rates apply to the 2012 plan year either: (1) for all purposes; or (2) solely for purposes of the funding-based benefit restriction rules. IRS is expected to propose rules for these elections.
We expect the IRS to propose (when is unclear) MAP-21 regulations addressing some of the questions raised above and others that will arise in the course of implementation of the new rules. IRS may, indeed, provide different rules with respect to, e.g., the restoration of benefits than would otherwise apply under current benefit restriction rules. Of particular interest will be the extent to which the anti-cutback rules may apply to sponsor elections/decisions with respect to MAP-21.
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We will continue to follow this issue. We expect that, as noted, IRS regulations will clarify the treatment of some of the issues we have discussed.