The American Rescue Plan Act of 2021 (“ARPA”, HR 1319), which was signed into law on March 11, 2021, includes changes to the employer funding requirements for single-employer pension plans. The changes are designed to reduce the amount of required contributions (i.e., provide “relief”). The ARPA also includes multi-employer pension plan funding relief; however, this article focuses solely on the funding relief provided to single-employer pension plans.

Author: Kelly Lazzara

Background

At the outset of the pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") extended the deadlines for single-employer defined benefit plans to make required minimum contributions and quarterly contributions due during 2020 until January, 2021. The CARES Act funding extension was welcome but for many it did not go far enough to address the financial impact of the pandemic. After being initially proposed last year, the Health and Economic Recovery Omnibus Emergency Solutions Act of 2020 (the "HEROES Act of 2020") stalled in the Senate and single-employer funding relief was not included in other subsequent legislation.

However, the funding relief initially proposed under the HEROES Act of 2020 was included as part of ARPA with just a few changes since its original proposal and has now been passed into law. The single-employer funding relief measures are similar to those enacted following the 2008 market crash and further extend the single-employer interest rate stabilization ("smoothing") provisions that were first introduced in the Moving Ahead Progress in the 21st Century Act ("MAP-21"). 

Single-Employer Funding Relief

There are two key aspects to the ARPA funding relief for single-employer plans. 

  1. First, ARPA provides extended period to amortize funding shortfalls along with a "fresh start".
  2. Second, interest rate smoothing originally introduced in MAP-21 is modified and the period is extended.

While our current understanding of these provisions is described below, we also expect there will be a number of technical issues to be addressed in guidance from Treasury. 

Extended Amortization

Under ARPA, the shortfall amortization bases in single-employer plans and the shortfall amortization installments determined with respect to those bases, are first reduced to zero. Those shortfalls, as recalculated, and all future funding shortfalls, are to be amortized over a 15-year period instead of the current seven-year period. 

An extended amortization period for funding shortfalls gives plan sponsors a longer period over which to pay for their long-term pension liabilities and will generally lower the required contribution each year. The effect is amplified by the interest rate relief below.

This provision of ARPA is effective for plan years beginning after December 31, 2021, but may, at the plan sponsor’s election, be applied to plan years beginning in 2019, 2020, and 2021. 

Interest Rate Relief

Under ARPA, pension funding interest-rate stabilization is extended through 2029. The current smoothed interest rates were scheduled to begin being phased out in years 2021 – 2024; however, ARPA reduces the 10% corridor around the 25-year historical rates to 5%, effective in 2020, and the 5% corridor is now delayed until 2026. In 2026, the corridor then increases by 5% each year until it reaches 30% in 2030. In addition, a new 5% floor applies to each of the 25-year interest rate averages. 

The impact on funding interest rates in 2020 and 2021 is shown below.

  Segment Rates Before ARPA Segment Rates Reflecting ARPA
2020
 
 First  3.64%  4.75%
 Second  5.21%  5.50%
 Third  5.94%  6.27%
2021    
 First 3.32%  4.75%
Second  4.79%  5.36%
Third  5.47%  6.11%
     

The higher interest rates under ARPA will result in a reduction in funding target liability in each year. The exact impact will vary by plan but could be a reduction in liability of up to 5% in 2020 and up to 10% in 2021.

The funding interest rate relief is effective for plan years beginning after December 31, 2019, but the plan sponsor can elect not to apply this relief for plan years beginning in 2020 and 2021. This election can be effective for all purposes or only for determining whether benefit restrictions apply. Note that each of these options will result in a different pattern of the subsequently determined results for a particular plan. 

Conclusion

The new law will generally lower required contributions over the next several years. This may bring relief to some organizations, but comes with the chance of higher PBGC premiums and potential for other plan reporting requirements to apply. No relief is provided for the PBGC premium calculations or for reporting to the PBGC under ERISA Section 4010. Plan sponsors should review the opportunities, options, and impacts for the application of these new funding provisions with their actuary in order to best align the outcome from this pension funding relief with their corporate objectives.

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