On March 11, President Joe Biden signed the American Rescue Plan Act. This $1.9 trillion coronavirus relief bill includes provisions for much-needed aid for single employer and multiemployer defined benefit plans.
For single employer DB plans, the total value of all participants’ accrued benefits as of the beginning of the year is known as the plan’s “funding target.” The value of the increase in the funding target from the beginning of the year to the end of the year is the “target normal cost.” The excess of the funding target over the total amount of the plan’s assets is considered a “funding shortfall.”
To ease the burden of funding shortfalls for single employer DB plans, plan sponsors were permitted to amortize (spread) contributions needed to make up for these shortfalls over seven years. The American Rescue Plan Act allows plan sponsors to extend this period to 15 years. Since the required contribution a plan sponsor must make equals the target normal cost plus the shortfall amortization, this bill is expected to bring welcome assistance to plan sponsors suffering financial hardship due to the pandemic.
In addition, the Act allows single employer DB plans to use higher interest rate assumptions in calculating the future value of current contributions, which also reduces the required contribution amount for plan sponsors.
Finally, the Act offers “special financial assistance” in the form of direct payments to severely underfunded multiemployer pension plans in danger of insolvency. Section 9704 of the Act will establish a fund within the Pension Benefit Guarantee Corporation and appropriate amounts as necessary. The special financial assistance would not have to be repaid. The assistance is designed to cover the funding target through the last day of the plan year ending in 2051.
Each multiemployer plan may apply for assistance through Dec. 31, 2025 if it meets one of the following conditions:
- was in critical and declining status in any plan year from 2020 through 2022;
- had an application to suspend benefits under the Multiemployer Pension Reform Act of 2014 (MPRA was enacted as part of Public Law 113-235) approved prior to the enactment of the Butch Lewis Emergency Pension Plan Relief Act of 2021;
- was in critical status in any plan year from 2020 through 2022 and had a modified funded percentage of less than 40% (calculated as the current value of plan assets divided by the present value of plan liabilities, using a specified interest rate) and the percentage of active to inactive participants in the plan was less than 40%; or
- became insolvent after Dec. 14, 2014, and was not terminated by the date of enactment.
We will assess and advise accordingly as more information becomes available. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (800) 388-1963.