On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA). ARPA includes significant single-employer defined benefit plan interest rate stabilization/funding relief. In this article we review those provisions of the new legislation.
Interest rate stabilization relief
Increase/extend interest rate stabilization “corridor percentage”: ARPA both increases and extends current 25-year average interest rate stabilization relief as summarized in the table below:
Table 1: Interest rate stabilization pre- and post-ARPA
|Applicable year||Reduction factor under HATFA (pre-ARPA)||Reduction factor under ARPA|
(For a more detailed discussion of how this interest rate “corridor” works, see our January 2021 article.)
A plan sponsor may elect not to have the higher ARPA 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). This will allow sponsors, who, e.g., have implemented benefit cutbacks for 2020 or 2021 under pre-ARPA rules that would not apply if they used ARPA interest rates, to implement the ARPA rules for funding but leave the pre-ARPA restrictions in place (at least until 2022).
5% floor on 25-year average rate: ARPA 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 will immediately increase 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 the interest rate stabilization rules on valuation interest rates.
Amortization bases set to zero as early as 2019, 15-year amortization going forward:
Pre-ARPA (PPA) rules required amortization of shortfalls over seven years. ARPA resets all amortization bases to zero in 2022 and requires amortization of shortfalls over 15 years thereafter. Employers may elect to have this change apply in 2019, 2020, or 2021.
This change would allow funding of shortfalls over a much longer period.
Where application of 15-year amortization is elected for a year on which the books have been closed (e.g., 2019), we will need guidance on how contributions in excess of the (new) minimum are to be handled.
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These changes are welcome relief for sponsors subject to ERISA minimum funding requirements, especially in the current context of very low interest rates.
We are going to provide a follow-on article discussing the decision points/issues the new legislation presents for plan sponsors.
We will continue to follow these issues.