The bill’s funding relief

For purposes of minimum required contributions, the bill includes changes to:

• Amortization of funding shortfalls
• Interest-rate corridors

Changes to amortization of funding shortfalls

The Internal Revenue Code allows a plan sponsor to spread (amortize) contributions required to pay for plan underfunding. Changes in underfunding because of investment gain and loss and experience gain and loss (for example, actual mortality differing from predicted mortality) 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 starting with the 2020 plan year, unless the plan sponsor elects to apply it starting with the 2019 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 would narrow the corridor to 5 percent (from 10 percent) starting in the 2020 plan year and keep it at 5 percent until 2026. Starting in 2026, it would gradually widen 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 would be limited so it was no less than 5 percent.

The provision is effective for the 2020 plan year but the plan sponsor may elect to delay application until 2021. If the plan sponsor does not delay the application until 2021, it still may elect to delay the change in the interest rates for purposes of benefit restrictions.

What's next?

The American Rescue Plan Act of 2021 now goes to the Senate for consideration and possible changes. The bill is expected to go directly to the Senate floor. The bill is being passed under the budget reconciliation rules that require only 50 votes in the Senate.

However, reportedly, there are possible budget reconciliation technicalities that could result in the Senate Parliamentarian ruling that the single-employer funding provisions must be dropped  from the final bill.

Congressional leaders are aiming to send a bill to President Biden for signature by March 14, 2021. That’s when current unemployment compensation relief expires. We may not know the Parliamentarian’s ruling until close to that date.

Segal will keep you informed of further action.