Pension Funding Relief Under MAP-21 to be Extended Until 2017

As part of the Highway Transportation and Funding Act of 2014 (the Act), which Congress passed on July 31 and President Obama is anticipated to sign into law, the pension smoothing provisions that were first enacted in 2012 under the Moving Ahead for Progress in the 21st Century Act (MAP-21) have been extended until 2017.

Background

When enacted in 2012, MAP-21 provided for a special 10% funding stabilization corridor, which allowed sponsors of defined benefit plans to smooth out the minimum funding requirements of their plans.  The effect of this was to reduce the required minimum funding for many plans in 2012 with funding requirements increasing as the funding stabilization corridor was increased annually.  The corridor, which is applied to the 25-year segment rates for funding, was scheduled to reach 30% by 2016.

Extension of the Funding Stabilization Corridor

As passed, the Act extends the 10% funding stabilization corridor for the plan years beginning in 2013 through 2017.  The net effect of this will be to reduce the required minimum contributions for many defined benefit plans for those years.  For plan sponsors that have already had their actuaries calculate their minimum contributions, liabilities, PBGC premiums, etc. for 2013, the Act allows them to elect to apply the new corridor beginning in 2014 rather than have to redo all of the 2013 valuation work.

In addition to extending the funding stabilization corridor, the Act extended the requirement that plans with more than 50 participants disclose to plan participants in their annual funding disclosures their funded percentages, funding shortfalls, and minimum required contributions with and without applying the stabilization corridor if the effect of applying the stabilization corridor reduces the plan’s funding target amount by more than 5% and the plan has a funding shortfall of more than $500,000.  This disclosure requirement was scheduled to expire after the 2014 plan year, but has now been extended to plan years beginning before January 1, 2020.

Conclusion

While many plan sponsors may welcome continued funding relief for their pension plans, they will pay the price of higher contributions in the future when the extension of the funding stabilization corridor expires at the end of the plan year beginning in 2017.  In fact, the extension of the MAP-21 relief was opposed by many groups that advocate for adequate funding of pension plans, as well as those that oppose funding gimmicks used by Congress to make bills budget neutral, as Congress used the MAP-21 extension as a revenue raiser (reduced tax deductible contributions by plan sponsors raise federal tax revenue) to pay for some of the highway spending in the Act.