The mandated interest rates used to calculate the minimum required contribution are defined by law. They are referred to in many ways. We will call these the minimum funding segment rates for simplicity.
The minimum funding segment rates for the 2024 plan year are based on 25-year averages of corporate bond rates determined as of September 2023. These 25-year averages are subject to a 5% floor. If they are lower than 5%, they get bumped up to 5% for this purpose. Higher interest rates lead to lower liabilities and thus a lower minimum required contribution.
The 24-month average of corporate bond rates (non-stabilized segment rates used for maximum deductible purposes) determined as of September 2023 are subject to a corridor. Under the American Rescue Plan Act of 2021 (ARPA), the corridor is 95% to 105% of the 25-year averages. If the non-stabilized segment rates land within the corridor, they will be the minimum funding segment rates. If not, the minimum funding segment rates will be the lower or higher end of the corridor.
For the 2024 plan year, the non-stabilized segment rates all landed below the corridor, and thus, the lower end of the corridor are the minimum funding segment rates for the 2024 plan year. Below is a summary of applicable interest rates for the 2024 minimum funding segment rates:
25-year averages (1st, 2nd, 3rd segment rate respectively): 3.33%, 5.13%, 5.88%
Non-stabilized interest rates (1st, 2nd, 3rd segment rate respectively): 3.62%, 4.46%, 4.52%
Corridor rates (1st, 2nd, 3rd segment rate respectively): 4.75% to 5.25%, 4.87% to 5.39%, 5.59% to 6.17%
Minimum funding interest rates (1st, 2nd, 3rd segment rate respectively): 4.75%, 4.87%, 5.59%
The minimum funding segment rates for the 2023 plan year were slightly lower. The effect is higher liability and higher minimum required contributions for pension plans. For some plans, this effect may be less noticeable depending on how much has been contributed to the plan and how well their assets are growing.
If you are a plan sponsor wondering how this impacts your plan, or you would like to start your own pension plan, reach out to an IAI consultant.