Welcome relief may be in store for employers that are facing significant minimum funding obligations to their defined benefit retirement plans. The Senate, on March 14, 2012, passed with strong bipartisan support a surface transportation reauthorization bill called the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813), which includes a pension funding provision that would stabilize interest rates used in calculating yearly minimum required contributions.
Sponsors of defined benefit plans that are subject to the funding requirements of Internal Revenue Code Section 412 must make regular funding contributions to their plans. The minimum required contribution for each plan year is based in part on segment rates, which represent the average corporate bond interest rates over the preceding two years. The amount of each contribution is inversely related to the segment rates used – the lower the rates, the higher the minimum contribution that an employer must make to its plan. Because of historically low interest rates prevailing in the last few years, employers have been subject to rising pension funding liabilities, at a time when liquidity is a serious concern for many.
The goal of the pension funding relief provision in MAP-21 is to stabilize the segment rates from year to year, which would offer near-term relief to plan sponsors. Under this provision, the corporate bond segment rates used to calculate minimum required contributions for a given plan year must be within a “corridor” (gradually increasing from 10 percent in 2012 to a maximum of 30 percent in 2016) of the average of the segment rates for the prior 25 years. In the current environment, this would have the effect of raising the segment rates used for minimum required contribution calculations (which are low due to being based on historically low post-2008 interest rates) by “smoothing” them using the significantly higher pre-2008 interest rates. This, in turn, would permit employers to make lower minimum required contributions in the near term (although it also would result in higher funding contributions during periods of abnormally high interest rates).
MAP-21 will be considered by the House, which has struggled to gather bipartisan support for its own version of the transportation reauthorization bill.