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Keep tabs on how changes affect defined benefit plans

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Tax Hot Topics: Keep tabs on how changes affect defined benefit plansDefined 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.

Background
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.

What changed
As the following table shows, the BBA now extends the narrower specified ranges of rates through 2023.

Compensation and Benefits Bulletin interest rate range

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.

Compensation and Benefits Bulletin PBGC premiums

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. 

Next steps
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.

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