Plan Sponsor’s Prayers Answered – Pension Funding Legislation Brings Immediate Relief

Much-anticipated and needed pension funding relief is expected to be approved by the House and Senate this week. As part of a transportation bill, the legislation intends to increase tax revenue by significantly reducing the tax-deductible contributions required to be made to pension plans – a welcome reprieve for plan sponsors who are finding their 2012 contribution requirements at the highest levels ever.

Currently, plan liabilities are calculated based on segment interest rates, published by the IRS, averaged over 24 months. Under the proposed legislation, the regular funding interest rate would be adjusted if it falls outside of a specified range. Beginning in 2012, this range is between 90% and 110% of the segment rates averaged over 25 years. This range will increase by 5% per year until it expands to 70% to 130% in 2016 and later. In the short-term, this expected increase in rates will translate directly to a significant reduction in contributions. While the higher interest rates do not apply to lump sum calculations or the determination of PBGC variable rate premiums, they can be used to determine whether benefit restrictions apply.

The trade-off to the decrease in contribution requirements is an increase in the PBGC per-participant premium which will rise from $35 in 2012 to $42 in 2013 and $49 in 2014, indexed thereafter for inflation. Plan sponsors may feel this is a small price to pay, at least in the short term, for the considerable relief in contribution requirements.

Please contact Harper Danesh if you would like an analysis of the impact this legislation will have on your pension plan contributions.