IRS Issues Pension Funding Stabilization Rates

August 22, 2012

As part of a recently-enacted law known as MAP-21 (“Moving Ahead for Progress in the 21st Century”), defined benefit plan sponsors were promised significantly lower contribution requirements through the “stabilization” of the interest rates used for pension funding purposes. With each month bringing historic interest rate lows, this was welcome relief for most plan sponsors.

The IRS has just published these “stabilization rates” which adjust the current 24-month average segment rates (PPA rates) by creating a corridor around the 25-year average segment rates. In 2012, the corridor is 90% – 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. For a typical plan, the adjusted rates will decrease liability by roughly 15% – 25% in the short term, and then to a lesser extent over time as the corridor widens. A lower liability will not only reduce a plan’s contribution requirements, but also improve its funded percentage used to determine the applicability of benefit restrictions.

The 2012 MAP-21 rates are as follows (compared to the January 2012 PPA rates in parentheses):

• 1st segment: 5.54% (1.98%)
• 2nd segment: 6.85% (5.07%)
• 3rd segment: 7.52% (6.19%)

Plan sponsors are required to use the MAP-21 rates unless they opt out of the new rules. However, given that the likely reduction in 2012 contribution requirements is 25% or more for a typical plan, most sponsors will gratefully embrace these rules.

While some IRS guidance is still pending on the calculation methodology, benefit restrictions, transition rules, and compliance issues, the availability of these rates will give plan sponsors a good indication of their 2012 obligations.

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