In a rare unified vote, Congress passed the Moving Ahead for Progress in the 21st Century Act of 2012 (“MAP-21”), signed in early July. This massive new law, which is almost 600 pages long, provides funding for highway and road construction.
Alert: The new law also eases funding requirements for employer-provided “defined benefit” retirement plans, like pension plans, as well as incorporating numerous related changes. Here’s the skinny on the key pension plan provisions in MAP-21.
Funding for many pension plans is based on three “segment rates” that use the “average yield curves” for corporate bonds during the previous 24-month period. The main change smooths out the segment rates by using the average yield curve over 25 years instead of 24 months. Also, the new law imposes a minimum floor and maximum cap on the percentage of the 25-year average segment rate that may be used.
For plan years beginning in 2012, the floor of the 25-year average is 90% and the cap is 110%. These thresholds will be raised by 5% annually. For plan years beginning in 2016, the floor is 70% and the cap is 130%. As a result, the minimum funding for pension plans will drop in the short-term, although required contributions in the future may be higher than they would have been under current funding rules.
The Pension Benefit Guaranty Corporation (PBGC) protects participants in pension plans in the event plan sponsors (employers) fail to meet their obligations. The PBGC is funded partially through premiums paid by sponsors. Under MAP-21, PBGC premiums are going up, starting next year.
- The premium for each participant for single-employer plans increases from $35 to $42 in 2013 and to $49 in 2014 (inflation-adjusted after 2014)
- The minimum variable-rate premium increases to $13 in 2014 and $18 in 2014 (inflation-adjusted after 2014)
- The maximum variable-rate premium is capped at $400 per participant (inflation-adjusted after 2013).
The premium for each participant for multiemployer plans increases from $10 to $12 in 2013 (inflation-indexed after 2013).
Excess asset transfers
Previously, certain overfunded plans could use excess assets to fund health insurance benefits for retirees.
But these provisions were scheduled to expire in 2013. MAP-21 extends the availability of using excess asset transfers through 2021. It also adds an option for using excess assets to fund group-term life insurance for retirees.