The Moving Ahead for Progress in the 21st Century (MAP-21) Act allows sponsors of defined benefit pension plans to decrease required contributions over the next several years. The new law changes the interest rate used for funding to be based upon rates over a 25 year period rather than a 24 month period, which was the rule prior to the new legislation.
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The new basis results in a higher current interest rate, allowing sponsors to contribute less to pay for future pension benefits. The funding relief provisions of the law reduce contribution requirements primarily in 2012 and 2013. Each year thereafter the relief diminishes until it disappears entirely. The amount of relief provided by the law will depend on changes in corporate yield rates in these later years.
The new law will also affect certain benefit restrictions that are sometimes triggered in accordance with the Pension Protection Act of 2006. Historically:
- If a plan’s AFTAP (see box at right) was not high enough, its sponsor sometimes could lose the ability to increase plan benefits and pay lump sum distributions
- The sponsor also could be required to freeze future benefit accruals.
The increased interest rates used for funding calculations over the next few years will increase all plans’ AFTAP and may help them avoid such restrictions for otherwise affected plans.
A plan sponsor may elect not to have the new interest rates apply for 2012 for all purposes or solely for purpose of the benefit restriction rules.
The new law will also affect PBGC premiums (insurance for underfunded terminating pension plans), which are required for some defined benefit plans:
- For well funded plans covered by the PBGC, the flat rate premium will increase from the current $35 per participant to $42 in 2013 and $49 in 2014.
- Underfunded plans currently pay an additional premium of $9,000 for every $1 million of unfunded vested benefits, and that premium will increase by more than 50% in 2014 and more than 100% in 2015.
Finally, the new law allows overfunded defined benefit plans to transfer their excess assets in order to fund group term life insurance for retired participants.
If you have questions about how the new MAP-21 law will affect your company’s defined benefit pension plan, please call Shore Tompkins at (312) 762-5960 or contact us by email.