With the passage of a massive $1.9 trillion Covid-19 stimulus bill, comes much-needed pension funding relief for single-employer pension plan sponsors, along with significant aid to multiemployer pension plan sponsors. As prior relief provisions began to wear away this year, plan sponsors were looking at higher, and in some cases unsustainable, contribution payments over the coming years.
The American Rescue Plan Act of 2021 (ARPA) contains two key provisions that together will result in significant reductions in future contribution requirement for single-employer pension plans:
Interest rate relief – Currently, the interest rate used to determine the IRS minimum contribution amount is based on a 25-year average of interest rates, with a 10% corridor applied to the average. ARPA narrows the corridor to 5%, so instead of 90% of the average, plan sponsors can now use 95% of the average through 2025. After that, the corridor will widen by 5% per year until plan rates are at 70% of the 25-year average in 2030, where they will stay. In addition, a 5% floor is applied to the 25-year interest rate averages, protecting against significant interest rate volatility.
Amortization period for funding shortfall – Currently, each year’s funding shortfall is paid off over a seven-year period. ARPA resets the amortization amounts, by eliminating all prior bases and lengthening the amortization period for funding shortfalls to 15 years.
While these changes will be effective for the 2022 plan year, plan sponsors can elect to apply the interest rate relief to their 2020 and 2021 valuations, and the amortization changes starting in any year from 2019 to 2022.
For some plan sponsors, it may be obvious how to apply these provisions, while for others, an analysis may be necessary to determine the optimal strategy, given that actuarial valuations have already been performed and contributions may already have been made. Please contact Harper Danesh at email@example.com or 585.319.4218 if you would like to see the impact this legislation will have on your pension plan contributions.