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Employer Defined Benefit Plan Funding
PPA extends the 2004 Pension Funding Equity Act's (PFEA) funding relief,
including the use of a four-year weighted-average corporate-bond-based discount
rate, through the 2007 plan year, but with potentially deduction limits. The
following major funding reforms take effect beginning in the 2008 plan year,
unless otherwise noted:
Funding targets. Funding targets are determined as the present value of accrued benefits. The goal of PPA is to force plan sponsors to fully fund all accrued benefits.
Minimum required contribution. The minimum required contribution for an underfunded plan equals the "target normal cost", plus amortization charges. "Underfunded" means assets are not sufficient to cover the benefits that are already accrued. Target normal cost is the present value of benefits expected to be accrued during the current plan year. Funding shortfalls and experience gains are amortized in seven annual level-dollar payments. The minimum required contribution for overfunded plans equals the target normal cost reduced (but not below zero) by the amount of overfunding.
At-risk plans. A higher funding target and target normal cost applies to at-risk plans. However, plans with 500 or fewer participants are exempt from the complex at-risk rules.
Credit balances. The use of a credit balance to meet minimum funding is restricted if a plan is less than 80% funded.
Maximum deductible contributions. Starting in 2008, the maximum deductible contribution generally equals (a) the target normal cost, plus (b) 150% of the applicable funding target, plus (c) an allowance for future pay or benefit increases, minus (d) assets. If the plan is not at risk, the maximum deductible amount may not be less than the unfunded maximum at-risk liability. Also, except for sole proprietors, the maximum deductible amount may never be less than the minimum required contribution. A sole proprietor's deduction still may not exceed net earned income for the year.
For 2006 and 2007, the existing alternative deduction limit is raised from 100% to 150% of current liability minus plan assets. After 2007, the bill repeals this alternative maximum deductible contribution, replacing it with the amount described above. For both the calculation of current liability in 2006 and 2007, and the funding target after 2007, the restriction on including the value of benefit increases to HCEs within the last two years remains in place.
Contributions to plans covered by the PBGC do not count toward the combined DB/DC plan deduction limit (25% of covered compensation).
Special relief for airlines. The bill offers two relief options to commercial passenger airlines and airline catering companies.
Delayed effective dates for certain plans. The bill delays the effective date of the funding (and benefit restriction) rules for defense contractors until as late as 2011. The effective date is delayed until 2014 for certain plans rescued from distress termination through a PBGC settlement and until 2017 for rural agricultural, electric, or telephone cooperatives' multiple employer plans.
Lump-sum interest and mortality. Minimum lump-sum payments are determined based on the segmented yield curve (without 24-month averaging), which is phased in over 5 years. The IRS will prescribe lump-sum mortality rates based on the mandated rates for minimum funding.
Benefit restrictions. Depending on the plan's funded status, a plan may be prohibited from paying benefits as lump sums or amending to increase benefits. A plan may even be required to freeze benefit accrual until funding satisfies prescribed minimum thresholds..
In addition, if any plan is at risk, the employer may not fund nonqualified benefits for top executives in a rabbi trust or similar arrangement without triggering substantial tax penalties.
Benefit restrictions generally take effect in 2008, with a delayed effective date for collectively bargained plans.
PBGC premiums. The full-funding exception to the PBGC variable-rate premium is repealed. The value of vested benefits is determined similar to the funding target, but taking into account only vested benefits and using the segmented yield curve for the month before the plan year begins, not a 24-month average. Assets are valued at market.
Budget legislation enacted earlier this year increased flat-rate premiums to $30 per participant and added a temporary special distress termination premium expiring in 2010. PPA makes the special termination premium permanent.
For plan years beginning in 2007 and after, for plans of employers with 25 or fewer employees, the variable rate premium per participant is capped at $5 times the number of participants in the plan. For example, for a plan with 5 participants, the variable rate premium per participant is capped at $5 x 5, or $125. The total variable rate premium is capped at $125 ($25 times 5 participants).
Section 4010 filings. Currently, ERISA section 4010 requires employers to file annual controlled-group financial information and plan actuarial information with the PBGC if the total unfunded vested benefits (UVBs) in all controlled-group defined benefit plans (ignoring plans with no UVBs) exceeds $50 million. The bill eliminates the $50 million gateway test for 4010 filings. Instead, a filing is required if any of the employer's plans was less than 80% funded and must include additional information about the plan's funded status (including at-risk liability). The PBGC must submit an annual summary report on 4010 information to Congress. This information will also be available to the public.