Now that employers have elected the funding relief that came with the recently enacted Moving Ahead for Progress in the 21st Century Act (MAP-21), they may have gotten more than they bargained for. Yes, the new law has provided defined benefit (DB) plans with temporary relief that means considerably smaller pension contributions in the short term, but there are strings attached.
If plans didn’t opt out of the relief for pension administration purposes, their newly improved funded status could bring with it some administrative headaches. The key measurement of a plan’s funded status is the adjusted funding target attainment percentage (AFTAP), and when the AFTAP goes below certain levels, different restrictions may kick in:
As plan funding has become worse over the last few years, many plans found themselves moving down the chart and implementing restrictions.
Now, thanks to MAP-21, they may see themselves moving back up the chart and having to undo what they’ve done. As soon as the new AFTAP is certified, the plan may find itself in a new situation and, in some cases, having to retroactively reinstate benefits.
Moving above 60%
Plans that cross the 60% threshold will have to unfreeze plan accruals prospectively (plans may be amended to restore “lost” accruals). “Accelerated” options, such as lump sums and level incomes, will immediately become available only on a limited basis (generally 50%).
If the plan was prevented from paying unpredictable contingent event benefits, they will become payable retroactively.
Moving above 80%
If the MAP-21 relief moves the plan above 80%, the plan will have to start offering any accelerated forms of payment that it had previously restricted. Furthermore, participants should be notified that these options are now fully available. Be prepared for participants who received partial lump sums during the restricted period to come looking for the other half. We’re in uncharted waters now, so you may want to chat with the plan’s actuary to determine the best way to calculate the remaining lump sum.
The plan can also be amended to increase benefits as long as the increase doesn’t bring the plan below 80% funding.
The MAP-21 relief was designed to wear away after a few years, in the hope that, by that time, the economy will have rebounded, plan asset levels will have improved, and plan contributions will be much lower. If that doesn’t happen (for example, see Tim Herman‘s article about the fiscal cliff), the same plans that just moved out of restrictions will find themselves falling back in again.