Ballard Spahr LLP: New Pension Funding Interest Rates Require Employer Action

By Brian M. Pinheiro and Samantha E. McMillan

On Friday [July 6th], President Obama signed the Moving Ahead for Progress in the 21st Century Act (H.R. 4348), which makes significant changes in pension law, including pension funding stabilization provisions and substantial increases to PBGC premiums over the next several years.

For plan years beginning after December 31, 2011, employers can temporarily use higher interest rates to calculate liabilities under their single-employer defined benefit pension plans, which will result in smaller minimum-funding contributions in the short-term. The pension funding stabilization provisions attempt to address employers' concerns that historically low interest rates have resulted in higher minimum-funding contributions during a weak economic climate.

The Act's interest rate provisions apply automatically to defined benefit pension plans that use segment rates rather than the corporate bond yield curve to calculate their funding requirements. Employers may elect to opt out or postpone the application of these interest rate provisions. These changes will have no effect on the calculation of pension liabilities on employers' financial statements.

The Act also increases the current $35-per-participant PBGC flat-rate premium to $42 per participant in 2013 and to $49 per participant in 2014. The current variable-rate premium of $9 per $1,000 of unfunded vested benefits (UVB) will increase to $13 per $1,000 of UVB in 2014 and to $18 per $1,000 of UVB for 2015. PBGC premiums will continue to be calculated using prior law interest rates.

Employers should consider how the Act's provisions will affect their minimum-funding contributions, PBGC premiums, and any current funding-based benefit restrictions before making any decisions. Although employers who choose to apply the new interest rates will have smaller minimum funding contributions for the next several years, contributing less to defined benefit pension plans can create other issues, such as higher PBGC variable rate premiums and significantly higher minimum funding contributions in future years.

Additionally, employers should consider how these changes may impact employee communications and funding and investment strategies. For example, employers that take advantage of the new interest rate provisions must include additional disclosures in their plans' annual funding notices, which must be provided to participants no later than 120 days after the end of each plan year.

If you have questions regarding the pension funding stabilization or PBGC premium increases, please feel free to contact Brian M. Pinheiro at 215.864.8511 or pinheiro@ballardspahr.com,Samantha E. McMillan at 215.864.8159 or mcmillans@ballardspahr.com, or any member of Ballard Spahr's Employee Benefits and Executive Compensation Group.

Copyright © 2012 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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