On Friday, May 15th, the US House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act, appropriately donned the HEROES Act. This $3 trillion bill reaches just about every corner of the country – and the economy – impacted by the Coronavirus. Perhaps the most interesting provision for those of you reading this update will be the much-anticipated and needed pension relief for defined benefit plan sponsors.
Even before the virus struck, DB plan sponsors were gearing up for increased contributions over the next several years, as low interest rates persisted and the air was letting out of the latest funding relief. As you might recall, beginning in 2012, Congress has implemented rounds of relief, through the use of higher interest rates, which has relieved plan sponsors of unintended contribution increases as interest rates have fallen year over year. Just as one term of relief was about to expire, Congress renewed it, allowing plan sponsors to continue using 90% of the 25-year average of IRS segment rates, instead of the 24-month average as defined in the 2006 Pension Protection Act. The relief was again poised to wear away beginning next year, but the government had been silent on any intent to extend it. Until now…
It’s hard to see many silver linings from the pandemic, but for single-employer DB plan sponsors, this could be one. The HEROES Act provides for two key changes to current funding rules, which will have a dramatic effect on the short and long-term funding requirements of DB plans. Beginning for plan years after December 31, 2019,
- The interest rate used to determine plan liabilities for calculating the annual contribution requirement will be defined as 95% of the 25-year average of IRS segment rates. The 95% will be in effect through 2025, after which it will reduce by 5% per year until it is at 70% of the 25-year average in 2030 and thereafter. More importantly, a 5% floor will be placed on the 25-year interest rate averages, so in essence, a plan’s effective interest rate can never be less than 5%.
- The period used to amortize unfunded liabilities would be extended from seven years to 15. In effect, all prior amortization bases beginning before January 1, 2020 would be wiped out and all future shortfalls would be amortized over 15 years, rather than seven.
This is exactly the sort of relief we’ve been supporting in conversations with the US Chamber of Commerce and our local Congressman. Not only does it recognize that historically low rates have been unintentionally inflating pension costs, but it also recognizes the longer-term nature of pension plans and allows them to be funded over a more reasonable time horizon. As opposed to the CARES Act, which was merely a band-aid to be ripped off in a few months, the HEROES Act provides a sustainable model for plan funding that will, we hope, last longer than the virus.
Before we get too excited, the HEROES Act still needs to clear the Senate and the President. With bipartisan support lacking, the final bill could look quite different. However, regardless of political party, everyone seems to agree that more relief is needed and retirement plan sponsors will likely be one of the recipients of it.
We will continue to update you on the progress of this bill. In the meantime, if you would like to see the impact the proposed rules would have on your pension plan, please contact Harper Danesh at firstname.lastname@example.org or 585.319.4218.