Tag Archives: MAP-21

2014 annual funding notice: Changes you need to know

Moliterno-MariaThe Highway and Transportation Funding Act of 2014 (HATFA) modified some of the content to be included on the 2014 annual funding notice (AFN) for single-employer defined benefit (DB) plans. Pension law requires employers that sponsor defined benefit plans to share certain financial information about the plan‘s funded status with plan participants via the AFN. Because the AFN due date is approaching for 2014 calendar-year plans, actuaries and plan sponsors should be aware of the necessary changes. The U.S. Department of Labor issued Field Assistance Bulletin (FAB) 2015-01 addressing updates to the 2014 AFN to reflect the application of HATFA.

In general, the AFN must be distributed to pension plan participants 120 days after the end of the plan year. Therefore, for calendar-year plans, the AFN must be distributed by April 30.

If a plan sponsor did not opt out of HATFA for plan year 2013 (“opt out” refers to the selection of the interest rate used to calculate the plan’s funding target) and had previously issued a 2013 AFN without reflecting HATFA, the 2013 AFN does not need to be revised or reissued to reflect the updates addressed in FAB 2015-01. However, the plan year 2013 results reflecting HATFA will need to be disclosed on the 2014 AFN.

Throughout the AFN, any references to Moving Ahead for Progress in the 21st Century Act (MAP-21) interest rates must refer to interest rates as amended by HATFA. A temporary supplement section was added to the 2012 AFN to disclose the effect of the change that is due to the MAP-21. Prior to HATFA, the temporary supplement was only required for applicable plan years beginning before January 1, 2015. Subsequent to HATFA, this temporary supplement is required for applicable plan years beginning before January 1, 2020.

An applicable plan year is defined as any plan year within the period in which the following three requirements are met:

1. The funding target under adjusted interest rates is less than 95% of the funding target without regard to adjusted interest rates.
2. The plan’s funding shortfall determined without regard to adjusted interest rates is greater than $500,000.
3. The plan had 50 or more participants on any day during the preceding plan year.

Previously, the first two items above were calculated using MAP-21 interest rates. Subsequent to HATFA, these same calculations are determined using HATFA interest rates. The wording on the supplement section of the AFN has replaced any references to MAP-21 rates with “adjusted interest rates.”

Prior to HATFA, if the value of plan assets was determined without regard to the MAP-21 interest rates, the AFN was to include a statement with the asset value and an explanation of how it differs from the value of plan assets used for funding purposes. Subsequent to HATFA, the Department of Labor rescinded this requirement after recognizing that it may result in complex requirements.
While most of the changes required by FAB 2015-01 are modest, they will still need to be reflected in the 2014 AFN. Be sure to update your 2014 AFN accordingly.

HATFA-14 provides opportunities to reduce 2013 and/or 2014 cash contributions and 2014 PBGC premiums

Herman-TimThe recently enacted Highway and Transportation Funding Act of 2014 (HATFA-14) provides opportunities for plan sponsors to reduce cash contributions and Pension Benefit Guaranty Corporation (PBGC) premiums. For the approaches that involve contributions for the 2013 plan year, prompt action is needed to ensure the applicable funding requirements are satisfied. For calendar year plans, the final date to designate cash contributions and/or add excess contributions to the prefunding balance for the 2013 plan year is September 15, 2014.

HATFA-14 opportunities
1. Reduce cash contributions required for the 2013 plan year.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• With the use of the higher interest rates for the cash funding valuation, the minimum required contribution may be lower.

2. Reduce cash contributions required for the 2013 and 2014 plan years.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• Plan sponsors are required to revise the 2014 actuarial valuation.
• With the use of the higher interest rates for the cash funding valuations, the total minimum required contributions (combined 2013 and 2014 plan years) may be lower.

3. Reduce 2014 PBGC variable rate premiums.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Designate some or all of the cash contributions previously used for the 2014 plan year as receivable contributions for the 2013 plan year.
• This reduces the unfunded liability for PBGC variable rate premium.

4. Manage credit balances for 2013 and 2014 plan years.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Create and use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forgo the opportunities provided by HATFA-14. One example is a plan sponsor with planned cash contributions to reach a specified funding threshold. These plan sponsors will still need to revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year (required). However, they may elect to opt out of the HATFA-14 relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the Moving Ahead for Progress in the 21st Century Act (MAP-21) rates.

Cash savings opportunities under HATFA-14 will vary by a plan’s funded status, amount of credit balances available, etc. Also, different plan sponsors will have different goals and objectives regarding cash funding to the pension plan. Your Milliman consultant can help you review the opportunities that are available and decide on a course of action that is appropriate for your situation.

HATFA requires immediate action on 2013 defined benefit plan valuations

President Obama is expected to sign into law the recently passed Highway and Transportation Funding Act (HATFA). As enacted, single-employer and multiemployer defined benefit pension plan sponsors will see temporary reductions in minimum required contributions and may be able to avoid benefit restrictions. Because the new law as written applies retroactively to the 2013 plan year (absent an election to opt out), affected plan sponsors will have to make decisions soon, ideally equipped with yet-to-be published technical guidance from the Internal Revenue Service (IRS).

At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out.

In general, the new law modifies the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) Act interest-rate corridors used by affected sponsors to determine their minimum funding liabilities. HATFA maintains a narrower corridor than MAP-21 for the 2013 to 2017 plan years and then phases in a wider corridor over four years beginning in 2018. A plan sponsor may elect, in writing, to retain its use of the MAP-21 interest-rate corridor only for the 2013 plan year; starting in 2014, use of the HATFA corridors by all plan sponsors is required.

Plan sponsors face a number of time-sensitive decisions and actions as a result of HATFA’s enactment. For example, absent an election to opt out, the narrower 2013 plan year interest-rate corridor will require a revised actuarial valuation. Plan sponsors will also have to revise their disclosures to reflect the HATFA changes in the next annual funding notices. As the HATFA change temporarily reduces the amount a sponsor must contribute and the tax deductions for those contributions, the employers’ taxable income could increase. And longer term, required pension plan contributions should increase after the temporary “smoothing” provision expires, depending on corporate bond interest rates and other factors at that time.

The HATFA provision does not affect multiemployer defined benefit pension plans nor Pension Benefit Guaranty Corporation (PBGC) premiums. The pension-related provisions in HATFA also include changes for certain plan sponsors in bankruptcy, and companies subject to the rules of the Cost Accounting Standards Board (CASB) will have to adjust their CASB recovery calculations. Cooperative/small employer charity plans will need to recalculate their plans’ full funding limits.

For additional information about HATFA’s pension provisions and assistance with exploring the short- and long-term pension funding options, please contact your Milliman consultant.

HATFA-14 and discount rates: The latest in “pension smoothing” provisions

Yu-LynnOn July 15, 2014, the U.S. House of Representatives voted 367-55 to approve H.R.5021, the Highway and Transportation Funding Act (HATFA-14), which provides funding for the Highway Trust Fund on a short-term basis (through May 2015). HATFA-14 also includes an extension of the “pension smoothing” provisions that had been adopted in the Moving Ahead for Progress in the 21st Century (MAP-21) Act. The bill would extend the MAP-21 funding stabilization provisions for five years (through 2020).

MAP-21 was enacted in July 2012. MAP-21 uses a 25-year average of a bond yield curve, which produces significantly higher rates than the 24-month average used before MAP-21. MAP-21 then imposes the minimum and maximum rate using a 10% corridor around these average rates. The corridor for determining the minimum and maximum rate expands 5% each year, ultimately reaching 30% by 2016.

HATFA-14 revises the minimum and maximum percentage ranges for a plan year as follows:

• 90% to 110% for 2012 through 2017
• 85% to 115% for 2018
• 80% to 120% for 2019
• 75% to 125% for 2020
• 70% to 130% for 2021 or later

The proposals relating to the applicable minimum and maximum rates are generally effective for plan years beginning after December 31, 2012. Under a special rule, an employer may elect, for any plan year beginning before January 1, 2014, not to have these proposals apply either (1) for all purposes for which the proposals would otherwise apply, or (2) solely for purposes of determining the plan’s adjusted funding target attainment percentage in applying the benefit restrictions for that year. A plan will not be treated as failing to meet the requirements of the anti-cutback rules solely by reason of an election under the special rule. By electing out in 2013, plans that have already prepared the 2013 Form 5500 will not be disrupted.

This is great news for plan sponsors who have short-term cash flow issues. Even though the Pension Benefit Guaranty Corporation (PBGC) variable rate premium calculation does not use rates under HATFA-14 relief, there was no PBGC premium increase in this bill, unlike MAP-21. Upon HATFA-14 being enacted, our first course of action will be to revisit 2013 plan year valuations. This should make for more exciting times in the world of pension funding!

Possible MAP-21 extension presents additional funding stabilization

A provision appended to the Emergency Unemployment Compensation Extension Act of 2014 may offer defined benefit (DB) plan sponsors continued funding relief. The provision would extend the funding stabilization authorized under the Moving Ahead for Progress in the 21st Century Act (MAP-21) another five years.

In a recent Bloomberg BNA article, Zorast Wadia talks about the benefits of lengthening the MAP-21 provision. Here is an excerpt:

The MAP-21 provisions stabilize the discount rates used to calculate employers’ pension funding obligations by adjusting rates if they fall outside of an interest rate “corridor” tied to average rates over a 25-year period. Those corridors gradually widen through 2016, weakening their impact. The provisions were designed to raise revenue by lowering companies’ required pension contributions and thereby driving up taxable income and projected tax receipts.

As the MAP-21 smoothing provisions enter the midway point in 2014, plan sponsors are beginning to see the relief wear off, said Zorast Wadia, a principal and consulting actuary in the New York office of Milliman.

Interest rates continually declined from 2009 to 2012, and only began to rebound in 2013, so pension liabilities still remain at all-time highs, Wadia said. Lessening the relief could put many sponsors in a “tough situation again,” he said.

Under MAP-21, the corridor incrementally widens from 10 percent in 2012 to 30 percent in 2016. Under the unemployment insurance legislation, the corridor would remain at 10 percent through 2017 and incrementally widen to 30 percent after 2020.

There is a lot of incentive to fully fund plans more quickly, one reason being rising premiums set by the Pension Benefit Guaranty Corporation, Wadia said. “But those [plans] that are cash-strapped will probably welcome this opportunity, and continue to eke by, to do what they need to get on through,” he said.

Results from the 2014 Pension Funding Study (PFS) suggest that plan sponsors took advantage of MAP-21’s funding relief. Contributions declined significantly during 2013, according to the PFS.

The $44.1 billion in contributions during 2013 (down $18.1 billion from $62.2 billion in 2012) was the lowest level in five years. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategy in light of the MAP-21 interest rate stabilization legislation, passed in July of 2012. Seven companies decreased their contribution by more than $1 billion in 2013 compared with 2012, for a total of $13.3 billion….

Discount rates up, but beware of potential funding issues

Kliternick,-Stuart_mugShotCurrent discount rate yield curves have increased by approximately 80 basis points since the December 2012 yield curves. For plans that have to disclose their pension plan liabilities under FASB ASC Subtopic 715-20 at the end of the year, that is great news. Assuming a plan not weighted toward active or retired participants, December 31, 2013, disclosure liabilities will be lower than in 2012 by about 8% to 9%. Combined with asset gains, plans should see a significant increase in their funded status. The December 2013 Milliman 100 Pension Funding Index shows an improvement of 16.7% on funded status from December 31, 2012, with a little more than half of that improvement attributable to the rise in discount rate.

However, this may not be true when it comes to the calculation of the cash contributions, done separately under rules from the IRS, and which are referred to as the funding side. The 2014 segment rates will be 4.43%, 5.62%, and 6.22%. This represents a drop in each segment of more than 50 basis points from the 2013 MAP-21 rates of 4.94%, 6.15%, and 6.76%, respectively. Assuming a plan with intermediate duration as described above, this corresponds to an increase in liabilities that is solely due to the change in segment rates of approximately 6%.

There are two reasons for this drop in segment rates: (1) a widening of the corridor used as a minimum to determine the segment rates from 85%/115% of the 25-year average segment rate in 2013 to 80%/120% in 2014; and (2) the 25-year average of segment rates used to calculate the MAP-21 corridor replaces high historical rates with significantly lower current rates.

Moreover, because both the corridor will widen again in 2015 (to 75%/125% of the 25-year average), and low rates will be replacing high rates when calculating the 25-year average, this trend will continue for 2015 valuations. Assuming a constant yield curve from the November 2013 Pension Protection Act (PPA) yield curve, the 2015 low-end MAP-21 corridor rates would be 3.93%, 5.09%, and 5.68%. Because the segment rates prior to MAP-21 would not be higher than these rates, they would be the rates for 2015 valuations. In fact, they would be the segment rates for 2015 valuations (with maybe a movement of 1 basis point) if every segment of the PPA yield curve were to increase or decrease by 10 basis points every month for the next 10 months.

So despite the improvement on the accounting side, pension plans may not see much of an improvement on the funding side in 2014 results from 2013. And depending on if assets can keep up the gains over the past two years, pension plans may be in a position where they will be approaching 100% funded status on an accounting basis but still require a significant level of contributions on a funding basis in 2015. While plan sponsors may want to celebrate the good news on the accounting side, now is the time to work on a plan to help the funding side for the next couple of years.