Employers with pension plans have received some positive news over the last six months as it relates to temporary funding relief and non-discrimination rules. But as is usually the case, the positives have been mostly negated by the revenue needs of our Federal government. Most of the recent activity was linked to Federal budget deal (the Bipartisan Budget Act of 2015 or the “Budget Act of 2015”) that was inked in November by the President. The Budget Act of 2015 provides relief from pension funding obligations while increasing PBGC premiums which continues the “good news- bad news” pattern from past budget acts for sponsors of defined benefit plans.
HAFTA Pension Fund Relief Extended
The Budget Act of 2015 extends pension funding relief measures which were enacted in 2014’s Highway and Transportation Funding Act (HATFA) for an additional three years. Under the Budget Act of 2015, plan sponsors of single employer defined benefit plans may continue to measure pension liability using “MAP-21” rates (the 25-year average of Treasury interest rates with a corridor of plus or minus 10%) through 2020, with a 5% increase applying to each year thereafter through 2023. The corridor will remain at 30% after 2023. Prior to enactment of the Budget Act of 2015, the 10% corridor was scheduled to increase by 5% each year beginning after 2017 through 2020, and would have remained at 30% after 2020. With interest rates at historical lows, limiting the rates based on the 25-year average tends to increase the interest rates, and therefore lowers the minimum funding requirements.
Increased PBGC Premiums*
As is usually the case with pension oversight, good news comes with bad news. The Budget Act of 2015 increases both the annual fixed premiums and variable rate premiums that sponsors of single employer defined benefit pension plans (does not apply to multiemployer plans) are required to pay to the PBGC. The increases are effective for plan years beginning in 2017 through 2019. The fixed premium is a per participant fee and the variable rate premium is based on the plan’s level of underfunding. The per participant fee will jump from $64 to $69 in 2017. The increased premiums contained in the Budget Act of 2015 are even higher than the amounts originally proposed and reported.
The increased rates are as follows:
Plan-Specific Mortality Tables
The Budget Act of 2015 also added some flexibility to vary from mortality tables prescribed by the Treasury for funding determinations and other purposes, allowing adjustments based on credible plan experience. Only very large organizations have had credible plan experience up to now. Although unclear how other plans can exhibit credible plan experience, this option is now available to more plans.
New Mortality Table Implementation Delayed Until 2017*
Plan sponsors who were concerned about a spike in costs in 2016 now have a one-year reprieve as the IRS released Notice 2015-53 “Updated Static Mortality Tables for DB Pension Plans for 2016” in August. New mortality tables released by the Society of Actuaries will be used to determine the lump sum equivalence of a pension annuity. The new tables project greater longevity thus increasing the cost of lump sum calculations and overall pension liabilities. Notice 2015-53 defers the anticipated 2016 start date of the new tables to 2017. Those still waiting on the sidelines have another year to offer a terminated vested cash-out window before the new tables are implemented.
Proposed Nondiscrimination Rule Relief for Frozen Plans
In January, the IRS issued proposed regulations that will allow plan sponsors to maintain closed or “frozen” pension plans without running afoul of the nondiscrimination rules under IRC Section 401(a). Frozen defined benefit plans are plans that continue in existence covering older employees but that are closed to new employees. Because the “grandfathered” employees in the closed plan tend to have been with the company longer and the employees who are not in the plan are usually newer employees who are not as highly compensated, the plans often find it difficult to meet the nondiscrimination requirements.
Under Notice 2014-5, the IRS allowed defined benefit plans to be combined with defined contribution plans (called DB/DC plans) to meet the nondiscrimination requirements if they satisfied certain criteria. The notice also requested comments on whether other rules should be issued to ease the way for closed plans to continue to operate. The proposed regulations are in response to these comments
What Does it all Mean?
Sponsors of pension plans face a lot of uncertainty. Escalating longevity, unpredictable funding requirements and market volatility all contribute to significant business risk. The regulators are making things bearable short-term with funding relief but PBGC premium increases certainly are not sitting well. Contribution policy has always been an issue of “pay me now or pay me later” but hopefully the extended relief will allow a rising interest rate environment to soften the blow.
* These changes will cause the plan liability for determining the variable PBGC premium to increase for most plans by 5%-8%, causing an additional increase in the variable rate premium.