New guidelines from the U.S. Department of Labor help defined benefit plan sponsors see and report exactly what’s changed for their calculation of pension plan liabilities under Moving Ahead for Progress in the 21st Century Act requirements.
Several changes to ease funding requirements for DB plans arrived with the start of MAP 21’s transportation reauthorization legislation in October 2012. The relevant portion of the act allows pension sponsors to use an average of historical interest rates to determine their minimum funding levels. When interest rates are as low as they have been for several years, a DB plan’s assets may drop below the plan’s funding target of what it needs to meet potential obligations to participants. When that happens, employers must make contributions to increase the plan’s assets and cover the shortfall. Contribution amounts are based on complex formulas that take into account current and projected interest rates.
Plan administrators now must provide to participants and the public more information about how MAP-21 interest rate stabilization affects their funded status, as a provision of the act.
Today’s historically low interest rates have meant that employers have had to put more money than expected into their pension plans. When interest rates are low, pension plan liabilities are estimated to be higher, and employers must contribute more to meet their obligations. The MAP-21 Act changed the mechanism for determining interest rates for funding pension plans by using an average of interest rates going back 25 years. As a result, employers can contribute less money into their pension plans and remain funded. The new interest rate structure can only be used to calculate minimum required funding contributions, not the amount of lump sums or for variable-rate premiums.
DOL’s Field Assistance Bulletin 2013-01, released March 8, contains as an appendix a model supplement to MAP-21 annual funding notice disclosure requirements for certain single-employer DB plans. It also has a comparison table for entering interest rates used with and without MAP-21 changes to show the effect of the act for the applicable plan year and for each of the two preceding plan years. The FAB also provides several Q&As with more guidance on the notice requirement.
The first annual funding notices to include MAP-21 disclosures were due no later than April 30 (120 days after the close of the 2012 plan year) for calendar-year plans.
Plan administrators are not required to use the MAP-21 Supplement provided in this DOL FAB, but an “appropriately completed” MAP-21 Supplement and the model annual funding notice will satisfy ERISA requirements, according to the bulletin.
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For more information on pension funding requirements, see ¶131 in the Pension Plan Fix-It Handbook.