Retirement Policy Update – November 2021

In this update we review (1) the (further) extension of interest rate stabilization for ERISA defined benefit plan minimum funding rules under recently enacted infrastructure legislation, (2) how the proposed corporate alternative minimum tax under the Build Back Better Act could affect DB sponsors with pension income, (3) and the Retirement Improvement and Savings Enhancement Act (RISE) recently voted out of the House Education and Labor Committee.

Infrastructure legislation extends DB funding interest rate stabilization period

On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA). The new legislation (among many other things) extends 25-year average interest rate stabilization relief under ERISA’s DB plan minimum funding rules another five years. (This extension is on top of the extension adopted in March 2021 as part of the American Rescue Plan Act of 2021 (ARPA).)

The following table summarizes the new relief.

Interest rate stabilization under IIJA        

As we discussed in our article Plan funding strategy after ARPA, this further increase in the already generous ARPA DB funding relief will significantly reduce ERISA minimum funding requirements and limit the application of funding-related benefit restrictions. As a result, sponsors that are at the variable-rate premium (VRP) “headcount cap,” and thus can reduce VRPs simply by reducing participant headcount, will have more headroom to make such reductions, before minimum funding rules or benefit restrictions apply. Sponsors not at the headcount cap, and not fully-funded on a PBGC basis, generally must choose between making contributions to reduce VRPs or deferring contributions and paying VRPs.

Proposed corporate AMT and pension income

The current version of the Build Back Better Act (BBBA) – budget reconciliation legislation being considered by Congress – includes, as a major revenue raiser, a new corporate alternative minimum tax (AMT) on “adjusted financial statement income” (AFSI) for corporations with three-year average annual AFSI in excess of $1 billion. 

Some employers sponsor DB plans that generate significant corporate financial statement “pension income” – significant enough to affect whether any AMT would be due under the proposal and how much that AMT would be.

Elements of pension income/expense: By way of review, here are the basic components of financial statement pension income under applicable (Financial Accounting Standards Board (FASB)) rules:

Pension income (expense) is the net of: (1) “service cost” (the cost of the current year’s benefit accruals, if any); (2) interest on plan liabilities, at the plan’s (assumed) interest rate; (3) amortization of unfunded liabilities (generally as a result of plan amendments); (4) the expected return on plan assets; and (5) amortization of net gains/losses.

Gains and losses would include, e.g., those generated by any difference between the expected and the actual return on plan assets and by any change in the plan’s interest rate assumption.

With respect to these gains/losses, most plans apply standard generally accepted accounting principles (GAAP) treatment, under which the net of gains/losses is amortized over a period (e.g., the average remaining service of active plan participants). Some plans/sponsors have, however, adopted “mark-to-market” accounting, under which these gains/losses would be recognized immediately.

Example: To make all of this a little less abstract, consider a frozen plan (with no service cost), with liabilities more or less equal plan assets (on a market basis), that uses a 3.5% plan interest rate, a 5.5% expected return on plan assets, and has no unamortized gains or losses. The 2% spread between expected return on assets and interest cost would generate pension income. Under conditions such as we are experiencing in 2021, with very strong stock market performance and increasing interest rates (and thus decreasing liability valuations), the plan would have a (probably significant) net experience gain that would (immediately under mark-to-market plans, over time for non-mtm plans) also generate pension income. Provided the sponsor met the $1 billion dollar AFSI threshold, under the proposed corporate AMT all of this pension income would potentially be taxed at 15%.

Two additional features of this AMT system to note. While the affected corporation will owe AMT on pension income, it won’t actually have any more money it can use to pay the taxes – all of that money is in the plan. And, contributions would not be treated as an expense and therefore would not reduce the AMT – functionally, they would not be “deductible.”

Enactment of this proposal will trigger significant changes in plan finance for some sponsors. If this proposal passes, DB plan sponsors will want to review plan contribution policy, portfolio strategy, and long-term plans (e.g., “glide path” and exit strategy).

RISE legislation approved by House Education and Labor Committee

On November 10, 2021, the House Education and Labor Committee approved, on a bipartisan vote, the Retirement Improvement and Savings Enhancement Act (RISE). The bill is another contribution, along with SECURE 2.0 and Portman Cardin, to the 2021 bipartisan retirement policy reform effort. RISE is shorter, simpler, and less comprehensive than the latter two legislative initiatives.

Summarizing, RISE would:

Create a “Retirement Savings Lost and Found.” The RISE proposal is a simpler version of the RSLF proposal included in SECURE 2.0. It would create a database of plans and allow participants to search it for plans/sponsors/administrators with which they may have been connected. Plans would be required to provide name and address information for the plan and plan administrator, and information about name/address changes, the termination of the plan, or any plan merger or consolidation.

Increase the cashout limit from (currently) not in excess of $5,000 to not in excess of $7,000.

Allow a 403(b) plan to be organized as a multiple employer plan (a MEP) or “pooled employer plan.”

Allow “small immediate financial incentives” for 401(k) contributions or salary reduction contributions under a 403(b) plan.

Instruct DOL to modify regulations to allow the use of blended benchmarks for certain plan investment disclosures.

Clarify that the named fiduciary of a Pooled Employer Plan is responsible for collecting contributions and implementing written collection procedures.

Instruct DOL to review its 1995 pension risk transfer interpretive bulletin.

Instruct the agencies to review reporting and disclosure regulations for pension plans and report on how they can be improved/simplified.

Provide for simplified annual disclosure for “unenrolled” DC plan participants.

Provide new rules for the recovery (or non-recovery) and rollover of plan overpayments.

Reduce the 401(k) plan service requirement for “long-term part-time employees” from 3 to 2 years.

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We will continue to follow these issues.