H.R. 4348, the Moving Ahead for Progress in the 21st Century (MAP-21) Act, was signed into law on July 6, 2012. Although the Act is primarily known for authorizing funding for the nation’s highways and for extending low interest rates for federal student loans, it also includes a package of pension provisions, which were largely included in the bill as revenue-raisers. The following is a summary of key pension provisions. In addition to the provisions below, the Act makes numerous changes related to the governance of the Pension Benefit Guaranty Corporation.
Traditional defined benefit pension plans are generally subject to minimum funding rules designed to make sure that plans have enough money in them to fund promised benefits. If a plan faces a funding shortfall — that is, the value of the plan’s assets are lower than the plan’s funding target – employers must make contributions to increase the plan’s assets and cover the shortfall. Contribution amounts are based on complicated formulas that take into account current and projected interest rates.
Today’s excessively low interest rates have meant that employers have had to put in more money than expected into their pension plans. That is because when interest rates are low, pension plan liabilities are estimated to be higher, and employers must contribute more money to meet their obligations. Conversely, when interest rates are high, pension liabilities are valued to be smaller and employers are required to contribute less money.
The Act changes the mechanism for determining interests rates to be used for funding pension plans by using an average of interest rates going back 25 years, resulting in employers being able to contribute less money into their pension plans today.
This new interest rate structure can only be used to calculate minimum required funding contributions. It will not affect calculations for determining the amount of lump sums or for determining variable rate premiums.
This provision was included in the highway bill, because Congress needed money to fill a shortfall between current gas taxes and projected highway spending. Because contributions employers make to their pension plans are not taxed by the federal government until the benefits are paid to workers, allowing companies to contribute less to their plans raises revenue for the federal government. The pension funding provision is estimated to raise about $9.4 billion over 10 years.
The Act increased premiums paid by traditional pension plans to the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures most private pension plans. The flat-rate premium for single-employer plans will increase from $35 per participant to $42 in 2013, $49 in 2014, and will be indexed for inflation in subsequent years. The variable-rate premium, now $9 for each $1,000 of unfunded vested benefits, will be indexed for inflation beginning in 2013 and increased by $4 in 2014 and $5 in 2015. The total variable premium for any plan year will be capped at $400 (indexed) per participant.
For multiemployer plans, the premium will increase from $9 to $12 per participant beginning in 2013 and then indexed to inflation thereafter.
The premium increases are estimated to raise about $11.2 billion over 10 years.
The Act establishes a new Participant and Plan Sponsor Advocate at the PBGC. This individual will act as a liaison between the PBGC and participants in terminated pension plans and ensure that participants receive all of the benefits they are entitled to receive under the law. The Advocate will also provide plan sponsors with assistance in resolving disputes with the PBGC. Each year, the Advocate will provide a report on its activities to key congressional committees, summarizing the issues raised by participants and plan sponsors and making recommendations for changes to improve the system.
Generally, funds in defined benefit pension plans cannot be transferred to the employer unless a plan is terminated and all liabilities are satisfied. However, if a pension plan is overfunded, current law allows for a limited transfer of excess pension assets to fund retiree health benefits if the transfers are made before December 31, 2013.
The Act extends the ability to transfer these funds through December 2021 and broadens the types of programs that can be funded to include group life insurance accounts benefitting retirees who participate in the pension plan.
This provision is estimated to raise $354 million over 10 years.
Under current law, workers who begin drawing on their retirement plans before they reach age 59½ are subject to a 10 percent penalty, in addition to any income taxes they would normally pay. There are a few exceptions to the rule, but they don’t allow workers to begin collecting retirement benefits while they are still working for the same employer. This limitation has made it difficult for workers interested in phased retirement — working on a part-time basis in their later years while supplementing their income with money from their retirement plans.
The Act includes a change in this limitation for federal employees. The bill creates a new Federal Phased Retirement Program that allows federal workers to receive a part of their retirement benefit while working part-time. This provision becomes effective after the Office of Personnel Management (OPM) issues implementing regulations.