There is a lot of spending in the American Rescue Plan Act of 2021 (ARPA), which was signed into law on March 11, 2021. To offset that spending there are also revenue raising provisions, with a major one coming in the form of funding relief for pension plan sponsors (lower contributions equal lower tax deductions equal more money for the IRS). The major pension-related provisions of the Act are:
- shrinking the corridor around the 25-year averages used to determine the mandated interest rates
- placing a floor on the 25-year averages of 5% (before the application of the corridor)
- extending the shortfall amortization period from 7 to 15 years
The mandated interest rates used to calculate the minimum required contribution are based on 25-year averages of 24-month averages of corporate bond rates. The 25-year averages are then subject to a corridor. Under prior law, the corridor for the 2020 plan year was 90% to 110% of the 25-year averages, and was set to expand to 85% to 115% for the 2021 plan year. The ARPA shrinks the corridor to 95% to 105% of the 25-year averages, in effect raising the interest rates used to determine the minimum funding liability. The higher interest rates result in a lower liability.
The combined effect of the higher interest rates and the longer amortization period significantly lowers the minimum required contributions for pension plans. For some plans, the updated minimum required contribution is less than half of the minimum required contribution under the prior law.
ARPA does not impact the calculation of the maximum deductible contribution, the lump sum value of benefits, nor the PBGC premium liability (if applicable). Ultimately, ARPA provides a wider range of contribution options.
The interest rate changes are effective for plan years beginning after December 31, 2019, and the amortization change is effective for plan years beginning after December 31, 2018. ARPA does not require plan sponsors to adopt the changes for valuations already completed.
If you typically contribute more than the minimum required contribution, there is no benefit to revising completed valuations. If you would like to reduce the required contribution amount, you may want to revise a completed valuation. Reach out to your consultant to discuss the implication of ARPA for your pension plan.