Potential Funding Relief Coming for Pension Plan Sponsors

by | May 19, 2020 | Defined Benefit, Industry Updates

On Friday, May 15th the U.S. House of Representatives passed the “Health and Economic Recovery Omnibus Emergency Solutions Act” or the “HEROES Act” to provide a fourth round of economic relief in response to the coronavirus pandemic.  The legislation covers a wide range of issues including significant contribution relief for single employer pension plans.  While the current version of the bill does not have bipartisan support, it nonetheless offers plan sponsors a preview of the relief that may make its way into law in the not too distant future.

The bill contains retirement plan provisions for multiemployer plans, single employer plans, individual taxpayers, and clarifications on certain relief provided in the CARES Act.  Below is a high-level summary of the single employer provisions of the HEROES Act:

  • All shortfall amortization bases and corresponding shortfall amortization installments for all plan years beginning before January 1, 2020 would be reduced to zero.
  • All new shortfall bases would be amortized over 15 years rather than the seven years prescribed under the current law. Notably, this change would apply for 2020 and future years.  There is currently no mention of this provision “expiring” and later reverting back to a seven-year amortization period.
  • The 25-year average interest rate corridor for minimum funding would initially narrow to 5% from the current 10% (which is currently set to expand in 2021). The 5% corridor would remain in place through 2025 and would widen starting in 2026 through 2030. 

 

The effect of this interest rate corridor is to stabilize and prop up the prescribed interest rates used in minimum funding valuations at a time when rates are at all-time lows.  This in turn lowers the funding target liability and minimum required contributions that must be made to the plan.  This is similar to relief that was passed as part of MAP-21, HATFA, and BBA15, except that the initial corridor is even smaller than those previous rounds of legislation.

Each of these provisions work to stabilize and lower the minimum required contributions for single employer plan sponsors.  If the bill becomes law, employers would see immediate contribution relief that would continue into future years.

The significant hurdle now for the HEROES Act is clearing the Senate and President.  A lack of bipartisan support will likely prevent the bill from moving forward as it currently stands.  However, lawmakers on both sides of the aisle have expressed the need for another round of economic stimulus and it’s likely that retirement plan relief will remain on the table.  River and Mercantile will continue to monitor the situation and provide updates when available. 

If you have questions on how these provisions would impact your plan, please contact us below.

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