On March 14 the Senate overwhelmingly approved a transportation funding bill that includes an amendment (S. Amdt. 1830) that would ease pension funding rules. Specifically, the provision included in the Moving Ahead for Progress in the 21st Century (MAP-21) Act (S. 1813) would amend section 430(h)(2) of the Internal Revenue Code (IRC) and section 303(h)(2) of the Employee Retirement Income Security Act (ERISA) by adding provisions designed to stabilize the interest rates used to calculate plan liabilities for pension funding purposes.

As explained by the American Benefits Council in a proposal (pdf) similar to that set forth in the amendment:

For pension funding purposes, plan liabilities are calculated by discounting projected future payments to a present value by using legally required interest rates based on corporate bonds: the lower the rate, the greater the liability. Thus, today’s artificially low rates are triggering artificially high pension liabilities.

To remedy this situation, the amendment states that beginning in 2012 for purposes of the minimum funding rules, the interest rates used to calculate plan liabilities (“segment rates”) must fall within a certain percentage range of the average segment rates for the prior 25-year period. The minimum and maximum percentage rates are set forth below: 

If the segment rate falls outside of this percentage window, the rate “shall be equal to the applicable minimum percentage or the applicable maximum percentage of such average, whichever is closest.” The amendment further states that “The Secretary shall determine such average on an annual basis and may prescribe equivalent rates for years in any such 25-year period for which the rates described in any such clause are not available.” The overall purpose of these changes is to stabilize the fluctuation of interest rates from year to year.

The amendment makes the following exception: 

A plan sponsor may elect not to have the amendments made by this section apply to any plan year beginning on or before the date of the enactment of this Act solely for purposes of determining the adjusted funding target attainment percentage under sections 436 of the Internal Revenue Code of 1986 and 206(g) of the Employee Retirement Income Security Act of 1974 for such plan year. A plan shall not be treated as failing to meet the requirements of sections 411(d)(6) of such Code and 204(g) of such Act solely by reason of an election under this paragraph. 

If enacted, the changes made by this amendment would apply to plan years beginning after December 31, 2011. The bill next moves to the House of Representatives for consideration.

Photo credit: Kirby Hamilton