Alert: Provides Funding Relief Extended

August 18, 2014

On Friday, August 8, 2014, President Obama signed into law the Highway and Transportation Funding Act of 2014, which will come to be known to pension plan sponsors as HATFA. HATFA modifies the 2012 pension funding relief, known as MAP-21, by providing an extended reprieve from low interest rates, which for plan sponsors translates to a higher funded status and lower required contributions through 2020. Much like MAP-21, the pension provisions are being used to partially fund highway and transportation improvements by reducing tax-deductible contributions required to be made to pension plans. The law does not decrease the ultimate cost of a plan but merely defers contributions to future plan years.

Immediate Action
The pension provisions can be elected retroactive to the 2013 plan year, impacting the final contributions due by September 15, 2014. Plan sponsors will need to decide quickly whether to reflect the changes for 2013 so that the minimum required amounts can be recalculated in time for the September due date. Please contact Harper Danesh if you would like an analysis of the impact this legislation will have on your pension plan contributions.

Funding Rules for Single-Employer Plans
The Pension Protection Act of 2006 (PPA) required plan sponsors to use a 24-month average of corporate bond yields to determine the interest rate used to calculate pension liabilities. When those interest rates hit historic lows after 2008, pension contributions skyrocketed for most plan sponsors. In response, the government has passed a series of laws providing temporary relief from low interest rates, including MAP-21 and now HATFA. MAP-21 modified the PPA rates by extending the averaging from two years to 25 years with a 10% corridor around the 25-year rates that would increase by 5% each year, from 10% in 2012 to 30% in 2016. A tighter corridor results in higher interest rates, meaning lower minimum contributions in the short-term. The impact of MAP-21 was expected to wear away over the next five years.

In response to a continuation of low interest rates, HATFA resets the corridor to 10% through 2017 and defers the start of the 5% per year expansion to 2018, capping out at 30% in 2021. The modified interest rates only apply to the calculation of liabilities for determining the minimum required contribution and the funded status for the application of benefit restrictions. They do not apply to the determination of lump sum payments, the maximum deductible contribution amount, or the calculation of PBGC variable rate premiums, among other things.

The changes can be reflected for plan years beginning in 2013 or can be first applied to plan years beginning on or after January 1, 2014.

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