Releasing the Pressure Valve for Single Employer Pension Plans under American Rescue Plan Act

On March 11, 2021, President Biden signed into the law the American Rescue Plan Act (“ARPA”) containing $1.9 trillion in financial stimulus.  Though not highly publicized, the ARPA provides important relief related to plan funding for both single employer and multiemployer pension plans.  This article will focus solely on the single employer pension plan provisions of the ARPA.

Pension plans are required to maintain certain funding levels.  Funding levels are determined by a series of complex calculations usually performed by actuaries hired by plan sponsors.  These calculations measure the present value of the plan’s assets against the present value of the plan’s obligation to provide future benefits.  If a plan’s obligations exceed the value of its assets, it is considered “underfunded” and the plan sponsor may be required to make additional contributions to the plan.

Extended Period to Amortize Funding Shortfall

The ARPA provides an extended period for single employer pension plans to amortize any funding shortfalls.  Under the ARPA, underfunded single employer plans may amortize underfunding over an extended period of 15 plan years, rather than seven as previously allowed, for plan years beginning after December 31, 2021 or if the plan sponsor elects, plan year beginning after December 31, 2018, 2019, or 2020.  The shortfall amortization base for each plan year preceding the first plan year beginning after December 31, 2018, 2019, 2020, or 2021 (depending on the plan sponsor’s election), and all shortfall amortization installments determined from those bases are reduced to zero.

Extended and Modified Pension Smoothing

The ARPA also extends the funding stabilization changes that were enacted by Congress over the past 10 years that were scheduled to begin phasing out this year.  The stimulus plan extends the pension funding stabilization percentages through 2029 and creates a 5% floor.  The 10% interest rate corridor is retroactively reduced to 5% for 2020.  The phase-out of the 5% corridor is delayed to 2026, at which point the corridor increases by 5 percentage points each year until it reaches 30% in 2030, and at which point it will remain.  A 5% floor is established on the 25-year interest rate averages.

The effect of these changes is that a single employer pension plan will be allowed to use a higher interest rate when calculating the present value of its future benefit obligations.  The present value of the future benefits will be reduced as a result of the use of the higher interest rate and, therefore, the plan’s funded status will improve.

Taken together, these two changes represent a significant relief for many pension plans still facing COVID-related economic issues.

Information regarding the provisions of the ARPA applicable to multiemployer plans will follow in a subsequent article.

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