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Pension Smoothing Extended Without Premium Hike
Good news for employers interested in reducing their minimum required pension contributions

By Stephen Miller, CEBS  8/7/2014

updated 9/15/2014

Update:
In Notice 2014-53, the IRS provided guidance on the transition impact of pension smoothing provisions for the 2013 and 2014 plan years under the Highway and Transportation Funding Act (HAFTA). The notice addresses available segment-rate elections, reporting requirements and the effect of certain required benefit restrictions.

“In consultation with the plan’s actuary, plan sponsors are now in a position to make and implement decisions about the HAFTA segment rates,” states a Sept. 12 alert by law firm McGuireWoods LLP. The firm advises, “Dec. 31, 2014, is the deadline if the plan sponsor wants to make any of the elections for a calendar year plan. Special care should be taken in applying this guidance to plans already subject to, or potentially subject to, the Section 436 restrictions.”

A Sept. 15 analysis by PricewaterhouseCooopers comments: “The deemed election rules are welcome and will make it easier for plan sponsors who do not wish to have to redo their already completed 2013 valuations and annual reports.” However, “valuations already done for the 2014 plan year will need to be redone to reflect the HATFA segment rates.”

PwC’s takeaway: “Notice 2014-53 provides some breathing room for plan sponsors, allowing many elections to be made as late as Dec. 31, 2014 and permitting changes in elections made in accordance with calculations made for 2013 based on MAP-21 segment rates. It is very important for plan sponsors to consult with their enrolled actuaries concerning the effect of these changes, and of course to discuss the revised calculations and valuations necessitated by the new law.”


Plan sponsors will need to redo their 2013 actuarial valuation calculations or elect to opt out of interest rate “smoothing” options, following congressional extension of the provision for funding defined benefit pension plans.

On Aug. 8, 2014, President Obama signed legislation extending available interest rate smoothing options for funding defined benefit pension plans. The extension, supported by the Society for Human Resource Management (SHRM), was included in the Highway and Transportation Funding Act (HATFA), passed by Congress at the end of July.

The new measure does not include a premium increase requested by the Pension Benefit Guaranty Corp. (PBGC), which SHRM and other groups representing pension plan sponsors had advocated against.

Changes in Smoothing ‘Corridors’

Pension smoothing, or rate stabilization, changes the calculation that employers use to fund their pension plans. The Moving Ahead for Progress in the 21st Century Act (MAP-21), enacted in 2012, allowed employers to put less money into their pension plans by using calculations that value liabilities using higher interest rates than the prevailing low rates. Under MAP-21’s smoothing provision, the interest rates used to estimate pension liabilities and determine employer contributions—which statutorily have been based on the two-year average of interest rates—were adjusted so that they were based on the average of interest rates for the 25-year period preceding the current year.

The 25-year average rates were constrained to a specified percentage corridor that started at a minimum 90 percent to a maximum 110 percent of the 25-year average interest rate, taking effect for plan year 2012, with gradual 5 percent expansions in the rate corridors starting in 2013.  

Pension smoothing under the Moving Ahead for Progress in the 21st Century Act (MAP-21) of 2012:

For plan years beginning in:

The applicable minimum percentage of the 25-year average rate is:

The applicable maximum percentage of the 25-year average rate is:

2012

90%

110%

2013

85%

115%

2014

80%

120%

2015

75%

125%

2016 and later

70%

130%


HAFTA adjusts and extends the smoothing corridors as follows:  

Pension smoothing under the Highway and Transportation Funding Act (HAFTA) of 2014:

For plan years beginning in:

The applicable minimum percentage of the 25-year average rate is:

The applicable maximum percentage of the 25-year average rate is:

2012 - 2017

90%

110%

 

 

 

2018

85%

115%

2019

80%

120%

2020

75%

125%

2021 and later

70%

130%


“At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out,” advised actuarial firm Milliman.

“Plan sponsors will need to assess the cost of redoing 2013 valuation work against the temporary contribution relief and possible reduction in PBGC premiums for 2013 plan years through reassignment of contributions to 2012,” concurred Buck Consultants in a legislative alert.

The advisory addded, “The extension of MAP-21 pension smoothing is good news for employers interested in reducing their minimum required pension contributions. And stable premium rates are welcome by all plan sponsors of PBGC-covered plans. Employers should keep in mind, however, that the ultimate cost of a plan is the amount of benefit that it pays. If future investment returns are not sufficient to make up for lower contributions today, contributions in the future will be larger.”​

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related External Articles:

Quick Action May Be Needed Under Pension Funding Transition Guidance, McGuireWoods LLP, September 2014 

IRS Issues HATFA Guidance for Pension Funding and Benefit Restrictions, Buck Consultants, September 2014 

IRS Posts Guidance on HATFA Interest Rate Change for Defined Benefit Plans, PricewaterhouseCoopers LLP, September 2014  

HATFA requires immediate action on 2013 defined benefit plan valuations, Milliman’s Retirement Town Hall, August 2014

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