Armanino Blog

Pension Plan Changes Included in Budget Act

by Dan Jones
December 02, 2015

The headlines generated from the Bipartisan Budget Act of 2015 generally focused on how the legislation raises the debt ceiling through 2017, sets federal spending through the 2016 and 2017 fiscal years, and eases strict caps on spending. But, importantly for many employers, the act also includes a number of changes related to defined benefit pension plans.

Increase in single-employer plan flat premium rates
Under previous law, single-employer plans that are covered by the termination insurance program under the Employee Retirement Income Security Act of 1974 (ERISA) must pay the Pension Benefit Guaranty Corporation (PBGC) a flat-rate premium for each individual who’s a participant in the plan during the year. The premium is for the PBGC’s guarantee of basic benefits under Title IV of ERISA.

The flat-rate premium for a plan is equal to the applicable flat premium rate multiplied by the plan’s participant count. The applicable flat-rate premium rate for plan years beginning in 2015 is $57 per participant. It rises to $64 per participant for plans beginning in 2016.

Under the budget act, the single-employer flat-rate premium will be raised to $68 for 2017, $73 for 2018 and $78 for 2019, and then re-indexed for inflation.

Slight increase in single-employer plan variable premiums
In addition to a flat-rate per-participant premium, under pre–budget act law, a single-employer defined benefit plan must pay a variable-rate premium if it has “unfunded vested benefits” as of the close of the preceding plan year. The premium is subject to an annual per-participant cap, and the small-employer cap, for plans with contributing sponsors with an aggregate of 25 or fewer employees.

The variable-rate premium is the “applicable dollar amount” for each $1,000 (or fraction thereof) of the plan’s unfunded vested benefits for the “premium payment year,” divided by the number of participants in the plan as of the close of the preceding plan year. The variable-rate premium, which is indexed for inflation, will equal $30 per $1,000 of underfunding in 2016.

Under the budget act, for plan years beginning after December 31, 2016, the variable rate premium will continue to be indexed for inflation, but will be increased by an additional $2 in 2017, an additional $3 in 2018 and an additional $3 in 2019.

Pension payments pushed back one month beginning in 2025
Under previous law, the flat-rate and variable-rate PBGC premium filing due date is the 15th day of the 10th full calendar month that begins on or after the first day of the “premium payment year.” Thus, for calendar-year plans, the due date is October 15.

Under the budget act, for plan years beginning in 2025, the premium due date will be the 15th day of the ninth calendar month beginning on or after the first day of the premium payment year. Thus, for calendar-year plans, the due date will be September 15.

Mortality table options changed
Private sector defined benefit pension plans generally must use mortality tables prescribed by the U.S. Treasury for purposes of calculating pension liabilities. Plans may, however, apply to the Treasury to use a separate mortality table.

Plans qualify to use a separate table only if:

  • The proposed table reflects the actual experience of the pension plan maintained by the plan sponsor and projected trends in general mortality experience, and
  • There are a sufficient number of plan participants, and the plan was maintained for a sufficient period of time, to have credible information necessary for that purpose.

Under the budget act, for plan years beginning after December 31, 2015, the determination of whether the plan has credible information will be made in accordance with established actuarial credibility theory, which is materially different from the current rules. In addition, the plan may use tables that are adjusted from the Treasury tables if such adjustments are based on a plan’s experience.

Extension of current funding stabilization percentages
Under pre-act law, single-employer defined benefit pension plan liabilities could be valued either by using spot interest rates or by taking into account the interest rates on investment-grade corporate bonds during the prior two years.

Under the Moving Ahead for Progress in the 21st Century Act of 2012 and the Highway and Transportation Funding Act of 2014, interest rates for valuing liabilities in 2012–2017 are deemed not to vary more than 10% from the average interest rates during the prior 25 years. That corridor increases by 5% per year through 2021, at which point it remains permanently at 30%, which has the effect of deferring companies’ deductible required pension contributions.

Under the budget act, for plan years beginning after December 31, 2015, the corridor on interest rates will remain at 10% through 2019. The corridor will increase by 5% per year through 2023, at which point the corridor will remain permanently at 30%.

Time to review your plan
If your organization offers a defined benefit pension plan, you’ll want to be sure that your plan is in compliance with the new rules enacted under the budget act. We can review your plan and explain how the new rules affect it.

December 02, 2015

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Dan Jones - Partner, Tax - San Ramon CA | Armanino
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