The substance of the funding provisions are unchanged from what we described in our March 1, 2021 compliance insight. The bill Congress passed continues to include changes to the amortization of funding shortfalls and interest-rate corridors for purposes of minimum required contributions.

However, the bill changes the applicable plan years and provides additional election options for the plan sponsor. In addition, the bill eliminates the freeze on cost-of-living increases for benefit and compensation limits and replaces the revenue lost by elimination of that provision with a new provision increasing the number of executives covered by the $1 million deduction limit of the Internal Revenue Code.

Changes to amortization of funding shortfalls

The Internal Revenue Code allows a plan sponsor to spread (amortize) plan underfunding in calculating minimum required contributions. Changes in underfunding (because of investment and other experience gain and losses or changes to assumptions or plan provisions) are amortized over seven years. The bill lowers a plan sponsor’s minimum required contributions by spreading amortizations over 15 years, rather than seven years, and by providing the sponsor a fresh start (complete recalculation) for the existing underfunding.

This new amortization rule applies for the first plan year beginning after December 31, 2021. However, the plan sponsor may elect to have the provision apply starting with the 2019, 2020 or 2021 plan year.

Changes to the interest-rate corridor

The higher the interest rates a plan can use to value plan liabilities, the lower the value of the liabilities. The interest rates used for minimum funding are based on recent market interest rates, but the law places limits on these interest rates based on a corridor around a 25-year historical average of interest rates.

The 25-year corridor was enacted to assure the required interest rates were not too low during the recent period of historically low rates. The corridor widens over time, thereby reducing the impact of the corridor on the required interest rates. The narrower the corridor around the 25-year average, the higher the interest rates that plans may use to value the liabilities.

The bill narrows the corridor to 5 percent (from 10 percent) starting in the 2020 plan year and keeps it at 5 percent until 2026. Starting in 2026, it gradually widens by 5 percentage points per year until it reaches 30 percent in 2030. In addition, the 25-year historical average around which the corridor is determined is limited so it is no less than 5 percent.

Sponsors may start applying this provision either in the 2020 or 2022 plan year (it is not yet clear whether a sponsor may start in the 2021 plan year). If the plan sponsor elects not to start until 2022, the sponsor may elect “not to start” for all purposes or only for purposes of not changing the 2020 and 2021 adjusted funding target attainment percentage used for benefit restrictions.

Action items for plan sponsors

Plan sponsors will need to make decisions about the optional years under both the amortization and interest rate provisions.

To take full advantage of the retroactive application of these rules, plan sponsors may need to revoke prior credit balance elections, make new retroactive credit balance elections or assign prior contributions to a different plan year.

Regulatory guidance will be required to outline the extent that this will be allowed.