The American Rescue Plan Act of 2021 (“ARPA”), enacted on March 11, 2021, provides two important funding relief measures for defined benefit single employer pension plans, as described below.
ARPA Extended Amortization
Dried. ARPA 9705 is titled “Extended Amortization for Single Employer Plans.” This provision makes significant changes related to the minimum required contribution of a fund as determined by the “deficit amortization bases” and the “deficit amortization quotas.” ARPA allows repayment bases and repayment installments to be reduced to zero, which is often referred to as “a fresh start.” In addition, the payback period is extended from a 7-year plan period to a 15-year plan period.
Section 9705 applies to single employer plan years beginning after December 31, 2021 or, at the plan sponsor’s discretion, plan years ending December 31, 2018, 2019, or 2020.
The intent of this section is to alleviate financial stress in single employer pension plans that may be struggling with large unfunded liabilities.
Stabilization of the ARPA interest rate
When interest rates drop, as they have in recent years, the amount of money a plan sponsor needs to contribute to an underfunded plan increases.
Dried. ARPA 9706 is entitled “Extension of pension fund stabilization percentages for single employer plans.” While this provision is technical, it basically provides for adjustments to a “runner” related to the 25-year averages of certain corporate bond yields. In this section of the ARPA, various adjustments are made to interest rates to establish a minimum of 5% on the 25-year average rates, allow a five-year deferral in an interest calculation that would have been unfavorable without the ARPA adjustment, and a initial interest rate reduction. broker of interest.
As a background, this “softening” of interest rates used by sponsors of private sector single-employer plans under the Employee Retirement Income Security Act of 1974 (ERISA) was initially based on a 2 year period. It was expanded to a 25-year historical average by the Advances for Progress in the 21st Century Act (MAP-21) of 2012. However, in today’s low interest rate environment, a 25-year average rate may be unfavorable when calculating financing obligations.
PBGC Annual Report on Single Employer Plans
On a separate but related issue, Pension Benefit Guaranty Corporation (“PBGC”) released its Annual Report for fiscal year 2020 in late December 2020. The Single Employer Insurance Program maintained by PBGC continued to improve during the 2020 period, with a 10.5 percent return on investments and a positive net position of $ 15.5 billion. However, the Single Employer Program has a $ 176 billion exposure raised by weak corporate plan sponsors that may require future assistance from PBGC.
According to the PBGC, the Pension Plan Program protects more than 23 million workers and retirees in some 23,200 pension plans.
Despite the overall favorable position of the Single Employer Insurance Program, the PBGC took steps in 2020 to protect thousands of plan participants who were exposed to bankruptcy proceedings filed by the plan sponsors listed below.
• PG&E is the California utility company that filed for bankruptcy to protect itself from claims related to widespread wildfires. The PG&E pension plan had more than 53,150 plan participants.
• FirstEnergy Solutions Corp. is an Akron-based coal and nuclear power generation company with more than 41,600 pension plan participants.
• Neiman Marcus (more than 10,600 participants).
• Windstream Holdings, an Arkansas telecommunications and software company with more than 8,800 participants.
• McDermott International, Inc. (more than 4,850 participants).
• American Commercial Lines (more than 4,050 participants).
Many of the companies listed above were subsequently able to emerge from bankruptcy after reorganizing their pensions and other debt obligations.
Overall, PBGC assumed financial responsibility for 69 additional pension plans in fiscal year 2020. These plans collectively cover nearly 57,000 current and future retirees.
