Congress sends pension ‘smoothing’ provision to the president August 05, 2014 Share Subscribe RFP Congress agreed on a highway funding bill on July 31 that will raise $6.4 billion by easing short-term pension funding obligations. The president is expected to quickly sign the bill into law to avoid any lapse in federal payments for transportation projects. The legislation will adjust the interest rates used to calculate pension liabilities. Funding obligations are calculated under normal rules using a two-year average of interest rates. The lower the interest rate, the higher the funding obligations — so plan sponsors have faced increased funding obligations with the historically low interest rates over the last several years. Congress responded in 2012 with legislation that adjusts the interest rate up or down if it falls outside of a specified percentage range of the 25-year average rate. The change had the effect of raising the interest rate used to calculate liabilities. The Highway and Transportation Funding Act of 2014 now further narrows the specified range to the following percentages of the 25-year average: 90% to 110% for 2012–2017 85% to 115% for 2018 80% to 120% for 2019 75% to 125% for 2020 70% to 130% for 2021 or later The range for plan years beginning in 2014 had been 80% to 120% and was set to expand to 70% to 130% by 2016. In the current rate environment, this change will raise the interest rate used to calculate pension liabilities and should lead to lower required contributions in the short term, followed by higher contributions in future years. Because contributions are deductible, taxable income should increase in the short term, and the bill is estimated to raise revenue in the 10-year budget window. Next steps The IRS is expected to quickly offer guidance that will provide the segment rates under the new specified ranges, but companies with defined benefit pensions should begin examining their plans to see how the legislation will affect their funding obligations. Contacts Eddie Adkins 202.521.1565 email@example.com Jeffrey Martin 202.521.1526 firstname.lastname@example.org Tax professional standards statement This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.