Defined benefit plan sponsors can now use higher interest rates to value their pension funding liabilities, thanks to the Bipartisan Budget Act of 2015 (BBA). The BBA also increases premiums to the Pension Benefit Guaranty Corporation (PBGC) and changes the rules for pension plans’ deviation from the Treasury mortality tables.
Funding obligations were historically calculated using a two-year average of interest rates. The lower the interest rate, the higher the funding obligations, so current low interest rates would generally require higher contributions and therefore greater corporate deductions and less revenue to the government. Recent legislation has temporarily required interest rates to fall within 90% and 110% of the 25-year average of interest rates. If the rate falls outside this range, it’s adjusted to fall within the range. This has raised the rate to 90% of the 25-year average, resulting in lower required contributions.
As the following table shows, the BBA now extends the narrower specified ranges of rates through 2023.
PBGC premium rates for single-employer pension plans increased beginning in 2016, as the following table shows, and the payment due date has accelerated by one month for plan years beginning in 2025. The variable rate per participant cap ($500 per participant) for single-employer plans is unchanged, as is the flat rate for multi-employer plans.
Defined benefit pension plans must generally use Treasury mortality tables to calculate pension liabilities unless the plan can propose an alternative table that reflects the actual experience of the plan and projected trends, and the plan has credible information needed for this purpose. Under the new legislation, whether a plan has credible information is based on actuarial credibility theory, and the plan can use adjustments to IRS prescribed tables if the adjustments are based on the plan’s experience.
Plan sponsors should use the new legislation to assess future funding liabilities and PBGC premiums, and evaluate whether the legislative changes allow for a plan specific mortality table to be used.
Tax professional standards statement
This content 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 topics presented herein, we encourage you to contact us or an independent tax professional to discuss their 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 content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content 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.