Welcome relief may be in store for employers that are facing significant minimum funding obligations to their defined benefit retirement plans. The Senate, on March 14, 2012, passed with strong bipartisan support a surface transportation reauthorization bill called the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813), which includes a pension funding provision that would stabilize interest rates used in calculating yearly minimum required contributions.

Sponsors of defined benefit plans that are subject to the funding requirements of Internal Revenue Code Section 412 must make regular funding contributions to their plans. The minimum required contribution for each plan year is based in part on segment rates, which represent the average corporate bond interest rates over the preceding two years. The amount of each contribution is inversely related to the segment rates used – the lower the rates, the higher the minimum contribution that an employer must make to its plan. Because of historically low interest rates prevailing in the last few years, employers have been subject to rising pension funding liabilities, at a time when liquidity is a serious concern for many.

The goal of the pension funding relief provision in MAP-21 is to stabilize the segment rates from year to year, which would offer near-term relief to plan sponsors. Under this provision, the corporate bond segment rates used to calculate minimum required contributions for a given plan year must be within a “corridor” (gradually increasing from 10 percent in 2012 to a maximum of 30 percent in 2016) of the average of the segment rates for the prior 25 years. In the current environment, this would have the effect of raising the segment rates used for minimum required contribution calculations (which are low due to being based on historically low post-2008 interest rates) by “smoothing” them using the significantly higher pre-2008 interest rates. This, in turn, would permit employers to make lower minimum required contributions in the near term (although it also would result in higher funding contributions during periods of abnormally high interest rates).

MAP-21 will be considered by the House, which has struggled to gather bipartisan support for its own version of the transportation reauthorization bill.

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Photo of Monique Warren Monique Warren

Monique Warren is a principal in the White Plains, New York, office of Jackson Lewis P.C. She counsels employers on employee benefits compliance and administrative matters, represents employers to government agencies, and prepares plan documents and related employee communications.

Monique’s expertise includes health…

Monique Warren is a principal in the White Plains, New York, office of Jackson Lewis P.C. She counsels employers on employee benefits compliance and administrative matters, represents employers to government agencies, and prepares plan documents and related employee communications.

Monique’s expertise includes health and welfare plans as well as retirement plans. She has extensive experience helping plan sponsors navigate COBRA, HIPAA, and other ERISA and Internal Revenue Code provisions and correct compliance issues. A significant part of her practice currently focuses on defending employers in federal investigations of their group health plans as well as assisting government contractors with fulfilling fringe benefit obligations. She also has extensive experience helping retirement plan sponsors comply with ERISA fiduciary requirements and the Code’s qualification requirements and correcting plan errors under the Department of Labor’s and Internal Revenue Service’s voluntary correction programs.

Photo of Brian P. Goldstein Brian P. Goldstein

Brian Goldstein focuses his practice in the areas of executive compensation, employee benefits, and ERISA fiduciary counseling. He is a founding member of the firm’s ESOP class action practice.

For over 30 years, Brian has assisted clients with the design and implementation of…

Brian Goldstein focuses his practice in the areas of executive compensation, employee benefits, and ERISA fiduciary counseling. He is a founding member of the firm’s ESOP class action practice.

For over 30 years, Brian has assisted clients with the design and implementation of all types of pension, profit sharing, 401(k), employee stock ownership, stock-based compensation, nonqualified deferred compensation and tax-sheltered annuity plans. His practice has a particular concentration on ESOPs, structuring ESOP transactions by public and private companies, representing clients who are buying or selling ESOP companies, and representing institutional and other ESOP fiduciaries in transactions and related compliance matters and controversies. He also regularly represents clients before the IRS in connection with resolving defects with their qualified plans, and in IRS audits, DOL investigations and PBGC matters.