ARPA Includes Key Funding Relief Provisions

Nate WuthrichBlog, Retirement

Last week saw the American Rescue Plan Act of 2021 (ARPA) signed into law. In addition to providing additional COVID-related stimulus through direct payments and extended unemployment benefits, the law has funding relief provisions for single-employer pension plans. The law most notably impacts two areas:

  1. Shortfall Amortizations
    The period for shortfall amortizations is permanently extended from 7 to 15 years, effective for plan years beginning in 2022. To implement this change, past bases are reduced to zero (i.e., 2022 is fresh start for the shortfall amortization). Sponsors have the option to elect adopting this provision as early as the 2019 plan year.
  2. Interest Rates
    • The interest rate stabilization corridor is decreased to 5% for plans years 2020 through 2025 (previously 10%). The corridor will expand again starting in 2026, reaching the ultimate in 2030.
    • A 5% minimum will apply to any segment rate in the 25-year average.
Plan YearCorridor (Prior)
202010% (90% – 110%)
202115% (85% – 115%)
202220% (80% – 120%)
202325% (75% – 125%)
202430% (70% – 130%)
Plan YearCorridor (ARPA)
2020 – 20255% (95% – 105%)
202610% (90% – 110%)
202715% (85% – 115%)
202820% (80% – 120%)
202925% (75% – 125%)
203030% (70% – 130%)

These provisions are effective for the 2020 plan year, but the plan sponsor can elect to defer until the 2022 plan year.  The election can apply for just benefit restriction purposes (i.e., for calculating the adjusted funding target attainment percentage, “AFTAP”) or for both valuation and benefit restriction purposes.

We will have to wait for guidance from the IRS regarding the impact the revised valuation results will have on elections made based on the original valuation results.  For example, if a plan sponsor elected to waive a portion of the prefunding balance to maintain an 80% AFTAP, ARPA does not address whether or not that election can be revoked, and a new election made based on the revised valuation.

The new law will certainly result in lower minimum funding requirements in the next several years.  However, since the interest rate relief does not impact the rates used for PBGC variable rate premium purposes, the lower contributions could lead to higher PBGC premiums.

Feel free to reach out to your Foster & Foster consultant with any questions you may have.