In 2006, Congress passed the Pension Protection Act (PPA), which allows employers to more easily move employees from defined benefit plans to defined contribution plans. It also established tougher standards for employers to meet to ensure existing pensions’ solvency.
The PPA requires employers to evaluate their defined benefit plans weighing a plan’s assets versus its benefit obligations. Plans are then classified as fully funded, overfunded, underfunded or at risk.
For single employer plans, the law limits the steps employers may take if their plans are underfunded. If less than 80% of the plan’s obligations are funded, employers may not:
- Amend the plan to increase benefits
- Establish completely new benefits
- Change the rate of benefit accrual
- Change the benefit vesting schedule.
If the plan’s funding level is below 60%, employers face two additional restrictions: (1.) All benefit accruals are frozen for one year. (2.) No benefits may be paid for an “unpredictable contingent event.”
Under the PPA, when calculating assets, employers may use the corporate bond yield curve to calculate future value of current assets at the time they are likely to be disbursed. Prior to the law, employers had to calculate based on the traditionally lower 30-year Treasury bond rate.
Employers may now automatically enroll employees in 401(k) plans, although employees may elect not to participate. Additionally, the PPA states that cash-balance or defined contribution plans are not discriminatory. This means employers that convert defined benefit plans to defined contribution plans are not subject to Age Discrimination in Employment Act lawsuits.