In an effort to help the nation recover from the COVID-19 pandemic and related economic crisis, President Biden signed the $1.9 trillion American Rescue Plan Act of 2021 (ARPA) on March 11, 2021. The law includes stimulus checks, state and local government aid packages, and other measures to support the ongoing economic recovery.
The stimulus package also seeks to help U.S. pension plans deal with the impact of 2020’s dramatic economic downturn, as well as the ensuing market volatility and record-low interest rates. The ARPA does this by providing funding relief for single-employer defined benefit plans and special financial assistance for failing multiemployer plans.
Single-Employer Plan Funding Relief
In general, plan sponsors are required to make a minimum funding contribution each year, which is a combination of participants’ benefits earned or accrued during the year and an amortized shortfall payment based on the level of unfunded liability each year. The ARPA makes two changes in actuarial assumptions that lower minimum funding requirements for single-employer pension plans: modified interest rate stabilization provisions and extended amortization of funding shortfalls.
Modified Interest Rate Stabilization Provisions
The interest rate stabilization provisions in the ARPA are designed to increase the interest rate used to calculate contribution requirements, which has the effect of lowering required contributions. Previously, the interest rate used to calculate minimum required contributions was stabilized by adjusting the underlying corporate bond rates to within 10% above or 10% below their 25-year average rate. But because the interest rate corridor was set to widen beginning in 2021, stabilized interest rates were set to decrease—thus increasing plans’ minimum required contributions—if Congress didn’t act.
The ARPA makes a few important adjustments to interest rate stabilization. The law establishes a 5% floor on the interest rates used to calculate minimum required contributions; without the 5% floor, the effective rates were expected to decrease further given the U.S. Federal Reserve’s stated commitment to keep short-term rates low. The ARPA also narrows the interest rate corridor to 5% above or 5% below the 25-year average corporate bond rate through 2025. Starting with the 2026 plan year, the corridor will begin widening by 5% per year until reaching a range of 30% above or 30% below the 25-year average rate for the 2030 plan year.
These changes immediately increase the interest rates used to calculate the present value of expected future benefits payments, which reduces calculated pension liabilities, lowers the annual cost of benefit accruals for plans that are still accruing benefits and lowers funding requirements. The ARPA’s provisions are effective starting with the 2020 plan year, but plan sponsors can elect to wait until the 2022 plan year to implement the changes.
Extended Amortization of Funding Shortfalls
By extending the amortization period of funding shortfalls from seven years to 15 years starting in 2022, the ARPA allows plans to spread required shortfall payments over a longer period of time, lowering required annual contributions to the plans. This change can be applied retroactively to plan years beginning in 2019. Existing amortizations from prior periods will be zeroed out when the new amortization period takes effect, giving plans a “fresh start.”
Special Financial Assistance for Multiemployer Plans
Before the passage of the ARPA, many multiemployer plans and the federal insurance program run by the agency backstopping those plans were in financial crisis. According to the Pension Benefit Guaranty Corp. (PBGC)’s 2019 Projections Report, 124 of the 1,400 multiemployer plans insured by the agency were on pace to run out of money within 20 years. In addition, the PBGC said its multiemployer program was expected to become bankrupt by fiscal year 2026.
The ARPA provides $86 billion of stimulus and gives the PBGC authority to distribute funds as grants—not loans—to ailing plans that meet one of the following conditions:
- The plan is in critical and declining status in any plan year starting in 2020 through 2022
- The plan has been approved to suspend benefits under the Multiemployer Pension Reform Act of 2014 (MPRA) by March 11, 2021
- The fund is in critical status in any plan year starting in 2020 through 2022, is less than 40% funded and has more retirees than active participants
- The plan became insolvent after December 14, 2014, but is not fully frozen or terminated.
The ARPA also provides other modifications and allows the PBGC to prioritize multiemployer plans that are within five years of failure, have more than $1 billion in unfunded liabilities or previously reduced benefits under the MRPA. The PBGC is required to issue regulations or guidance on these and other requirements within 120 days of the ARPA’s enactment. In addition, the ARPA increased PBGC premiums for multiemployer plans to $52 per participant starting in 2031.
Before Making Changes, Think Strategically About Your Plan
The ARPA provides much-needed assistance to multiemployer plans in financial distress and valuable funding relief to single-employer plans. But while ARPA lowers the minimum requirements for single-employer plan contributions, it is important to remember that contributing above these levels could potentially lower PBGC premiums or help fund a plan that may eventually be terminated. Plan sponsors should review their plan’s unique situation and understand the benefits and drawbacks involved.