How Funding Relief (MAP-21) Affects Your Plan Financially
Date: August 21, 2012 at 11:00 am – 12:00 pm Pacific time
The Moving Ahead for Progress in the 21st Century (MAP-21) Act was signed into law on Friday, July 6, 2012. In general, this Act affects the interest rates used to calculate the Funding Target (Liability) for single-employer defined benefit (DB) plans subject to ERISA, and also raises Pension Benefit Guarantee Corporation (PBGC) premiums. In addition, MAP-21 requires additional disclosures for the annual funding notice.
MAP-21 is effective for plan years beginning in 2012. The Act provides funding relief by allowing higher interest rates to be used to value funding liabilities, when compared to the segment rates that exist in today’s low interest rate environment. The current segment rates are compared to a 25-year average of spot rates, and then apply a minimum/ maximum (shown below) to the 25-year average.
(2012) 90% / 110%
(2013) 85% / 115%
(2014) 80% / 120%
(2015) 75% / 125%
(After 2015) 70% / 130%
As a result, we estimate that funding liabilities for many DB plans will decrease by 10% – 20% for 2012 and future decreases will be phased out until 2015 and beyond.
Where Relief Does Not Apply
The following sections of the Internal Revenue Code (IRC) below highlight areas where MAP-21 does not apply:
• Maximum deductible contributions under IRC Section 404
• Minimum lump sums under IRC section 417
• Excess assets under IRC section 420
• PBGC variable-rate premium liability calculations
• PBGC reportable events under ERISA 4010
PBGC Premium Increases
Currently, the PBGC flat-rate premium is $35 per participant (indexed for inflation). The PBGC variable rate premium is calculated as 0.9% of the unfunded vested benefits in a pension plan (not indexed for inflation). MAP-21 increases the flat-rate premium per participant to $42 in 2013 and $49 in 2014 and beyond, with inflation indexing after 2014. Generally, the variable rate premium percentage of unfunded benefits increases from 0.9% to 1.3% in 2014 and to 1.8% in 2015 and beyond, including inflation indexing after 2015.
Overall, most pension plans will see large increases to PBGC premiums after 2012, and underfunded pension plans will see much larger increases due to the changes to the variable rate premium laws.
Annual Funding Notice Disclosures
Generally, MAP-21 adds additional disclosures to the annual funding notice required of pension plans. The Act includes a statement that the Department of Labor will publish a revised model notice that includes the requirements of the new law.
We expect additional information to be released with further guidance on MAP-21. The actuaries at Atéssa Benefits, Inc. can help you determine how the new laws will affect your pension plan in the future. Please contact us at (858) 673-3690 for additional information.