The "Moving Ahead for Progress in the 21st Century Act," commonly known as MAP-21, was signed into law in July by President Obama after receiving bipartisan support in Congress. In addition to authorizing highway and transportation funding for various projects over a two-year period and easing interest rates on student loans (see right-hand box), this massive new legislation contains several provisions designed to improve funding of defined benefit retirement plans. Here's a brief summary of the key pension-related changes in MAP-21.

A Reprieve for College Student Loans

In addition to the provisions covered in this article, MAP-21 prevents a scheduled increase in the interest rate on college student loans. It extends the current interest rate of 3.4 percent on such loans for one year, effective July 1, 2012. Without this provision, the interest rate would have doubled to 6.8 percent. It has been estimated that the increase would have caused 7.5 million students to pay an average of $1,000 more on their student loans.

Note: A maximum annual tax deduction of $2,500 may be claimed for student loan interest, but this deduction is phased out for high-income taxpayers.

"Segment Interest Rates:" The funding level for single-employer defined benefit plans is based on several variables, including the interest rates for corporate bonds. Under MAP-21, interest rate assumptions are changed by taking into account the average interest rates for the last 25 years, instead of current short-term rates, which have been lower.  

Previously, an employer sponsoring a plan could calculate future pension obligations by using either the "yield curve" of corporate bonds for the preceding month or three "segment rates" based on average yield curves for the last 24 months. MAP-21 applies only to the segment rate calculations, although an employer using the yield curve calculation can now elect to switch to the segment rate.

Essentially, the segment rate must fall within a specified range of the 25-year average segment rates. For plan years beginning in 2012, the floor is 90 percent, while the ceiling is 110 percent. Both the floor and ceiling is raised by 5 percent annually through 2016. For plan years beginning in 2016, the phase-out range reaches between 70 percent and 130 percent of the 25-year average rate. These changes will reduce required minimum contributions and increase the funding level attainment percentages for many employers.Note: Future required contributions may be higher than they would have been under the current funding rules.

PBGC Premiums: The Pension Benefit Guaranty Corporation (PBGC) protects participants in defined benefit plans in the event that employers fail to meet their obligations. Funding for the PBGC comes in part from premiums paid by the sponsors of defined benefit plans. Here are the specifics:

  • Beginning in 2013, MAP-21 increases the PBGC flat rate premiums for single-employer plans from $35 per participant to $42. It jumps to $49 in 2014 and is indexed for inflation thereafter.
  • Beginning in 2013, the flat rate premium for multi-employer plans increases from $9 per participant to $12 (indexed for inflation thereafter).
  • In 2014, the variable rate premium for underfunded plans also increases from $9 per $1,000 of underfunding to $13 per $1,000. This figure increases to $18 per $1,000 of underfunding in 2015.
  • Finally, MAP-21 establishes a cap on the variable rate premium of $400 per participant in 2013 (indexed for inflation thereafter).

Retiree Health Benefits: Under prior law, certain overfunded plans could use excess assets to fund health insurance benefits for retirees. However, those provisions were scheduled to expire at the end of 2012. MAP-21 extends the availability of using excess asset transfers through 2021. It also adds an option to use excess assets to fund group-term life insurance coverage for retirees.

Early Retirement Penalty: Generally, a 10 percent excise tax penalty applies to distributions from a qualified retirement plan before age 59 1/2, unless a special exception applies. One of the exceptions applies to distributions upon separating from service after age 55. MAP-21 creates a new exception for federal workers who acquire annuities under a phased-in retirement program.

As you can see, this is a complex law. We have only covered the basics and other technical rules apply. Consult with your retirement plan advisers with respect to your organization's situation to see what decisions might have to be made to a retirement plan.

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