As of today, it looks like the much debated H.R. 5021 – Highway and Transportation Funding Act of 2014 is finally on the brink of becoming law. What does this have to do with retirement plans? The expenditures in the highway bill are intended to be funded in part through extra tax revenue generated by allowing sponsors of defined benefit pension plans to make smaller contributions (i.e. – take smaller tax deductions). They’re doing this by revitalizing the funding relief that’s already in place. That funding relief was intended to taper off over the next several years by relaxing the interest rate “corridor” (basically the collar around 25-year historical bond yields within which pension plan funding interest rates are required to fall).
Bottom line: If this bill passes, near-term minimum required pension contributions are going to be substantially lower than they would be otherwise. How much lower will vary from plan to plan. Two additional thoughts about this, though:
- It’s important to remember that, from a macro perspective, legislation like this doesn’t impact the long-term cost of funding the plan; it simply changes the timing of when contributions will be paid. Contributing less now means contributing more later.
- This funding relief is coming at the same time that the PBGC is phasing in formula increases used in determining premiums that plan sponsors pay. In other words, employers will be allowed to contribute less to their plans, but will be penalized more (in the form of PBGC premiums) for any plan underfunding.
To find out how this funding relief will impact your pension plan, contact your Independent Actuaries consultant today!