Tax Law

MAP-21 Act Enacted to Stabilize Pension Funding

On July 6, 2012, President Obama signed The Moving Ahead for Progress in the 21st Century Act ("MAP-21"), P.L. 112-141, into law.   One of the most significant aspects of the act involves changes to the funding requirements for single employer defined benefit plans.  These changes are expected to reduce minimum funding obligations for employers, and this development is shaking up the pension planning community.  Let's take a closer look at what pension plans are affected and the changes under MAP-21.

Defined Benefit Plans and the Significance of Segment Rates

Defined benefit pension plans provide a specified monthly benefit for employees upon retirement (generally based on earnings, service term, and age).  One can contrast this type of plan with defined contribution plans where the employer's annual contribution is specified. See Lexis Tax Advisor - Federal Topical § 1C:8.03[1].  Employers that maintain defined benefit plans must make regular contributions to satisfy minimum funding standards (set forth in both ERISA and the Internal Revenue Code: ERISA § 303(a), 29 USC § 1083(a); IRC § 430(a)).  Sanctions are levied if an employer does not meet the minimum funding standards.  See Lexis Tax Advisor - Federal Topical §1C:13.02[1][e]

In order to discount future pension benefits to present value and determine minimum funding requirements, interest assumptions are used, and the rate applied in making those assumptions depends upon particular segments, or future time frames, when the benefits will be paid. Minimum funding standards are determined by using:

  1. three sets of segment rates (averages of corporate bond rates for short, mid and long-term periods), or
  2. the full corporate yield curve (a plot of interest rates over six-month intervals that serves as a pricing chart).

Segment rates are published each month in an IRS Bulletin and the rates are drawn from the average yields over the preceding 24 months on high investment grade corporate bonds.  The full corporate yield curve is also published monthly in the IRS bulletins.  See Lexis Tax Advisor - Federal Topical § 1C:12B[6][a] for specific discussion on how to determine segment rates.

Segment rates are significant because higher interest rates reduce the value of liabilities for employers (thus lowering minimum required contributions), and lower rates increase that value.  Low rates have been driving up current pension contribution requirements and MAP-21's aim was to stabilize these rates.   

Segment Rate Stabilization Under MAP-21

Under MAP-21, the segment rates used to determine the present value of future benefits to be paid to a single employer defined benefit pension plan are constrained to a minimum of 90 percent of the 25-year average of these rates as of September 30 of the preceding year.  The IRS will now also publish monthly tables of the 25-year averages.  See IRC Section 430(h)(2)(C)(iv)

If a segment rate calculated according to the standard formula ends up below the acceptable range, it is to be increased.  If the segment rate ends up greater than the acceptable range, it will be decreased.  Because segment rates are currently on the low end of the 25-year average, the rates will definitely be adjusted upwards.  The effect will be a lowering in valuation and lower minimum contributions, at least in the short term.  The range for constraining rates is to be adjusted by five percentage points each year, until it becomes 70 percent to 130 percent in 2016.  By that time, the MAP-21 changes will likely be of no impact because even the current low rates are acceptable per this range.  See Lexis Tax Advisor - Federal Topical § 1C:12B[6][a][ii].

Practical Guidance from the IRS

The IRS issued its first notice with 25-year average of segment rates on August 16, 2012.  See Notice 2012-55.  The IRS also released further guidance on the special MAP-21 rules for pension funding stabilization in Notice 2012-61 on September 11, 2012.  The most recent guidance is especially helpful to plan sponsors who will need to make important planning decisions, including whether to make an election to defer the application of MAP-21, in whole or in part.  See Lexis Tax Advisor - Federal Topical § 1C:12B[6][a][ii].

While MAP-21 implements a strategy for stabilizing segment rates, the MAP-21 Act also increases the benefit insurance premiums that plans pay to the Pension Benefit Guaranty Corporation (PBGC), which will also impact multiemployer plans not affected by the pension funding stabilization measures of MAP-21. 

Although the long-term efficacy of the MAP-21 stabilization measures is unclear, the act does provide some relief in terms of pension funding requirements that have been adversely affected by low interest rates intended to stimulate the economy. 

RELATED LINKS: For further discussion on defined benefit plans and minimum funding standards generally, see:

For specific coverage and analysis of the MAP-21 legislation and subsequent segment rate changes, see:


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