IRS Publishes Guidance for Using Pension Funding Relief

The Highway and Transportation Funding Act (HATFA) extends relief provided in the Moving Ahead for Progress in the 21st Century Act (MAP-21)—passed in 2012—which allowed defined benefit plans to discount future benefit payments to a present value using a 25-year average of bond rates rather than a two-year average. MAP-21 created a “corridor” of rates on either side of a 25-year average that were also permissible for pension liability discounting purposes. If the two-year average falls outside this corridor (as is currently the case), a company can use the 25-year average that is closest to the two-year average in the corridor. Under MAP-21, the corridor started narrow and was to gradually expand until 2016. The new bill makes the corridor narrow again.

Under the modifications made by HATFA, for plan years beginning in 2012 through 2017, each segment rate is adjusted so that it is no less than 90% and no more than 110% of the corresponding 25-year average segment rate. For later plan years, this range is scheduled to gradually increase, so that the segment rates for plan years beginning after 2020 are no less than 70% and no more than 130% of the corresponding 25-year average segment rates.

A plan sponsor can elect not to have the modifications to minimum funding requirements apply to any plan year beginning in 2013, either for all purposes or solely for purposes of determining the plan’s adjusted funding target attainment percentage (AFTAP) for that plan year.

IRS Notice 2014-53 sets forth the procedures for elections made under HATFA that relate to a plan year beginning in 2013; sets forth rules regarding elections and designations relating to the minimum funding requirements applicable to the plan for the plan year beginning in 2013; explains reporting requirements if the HATFA segment rates apply to the 2013 plan year; and provides guidance for the application of benefit restrictions and related rules for a plan year beginning after December 31, 2012, and before October 1, 2014.

Notice 2014-53 is here.