July 2, 2012 (Indianapolis) – Both houses of Congress have reached an agreement and have passed the Surface Transportation Extension Act of 2012 (H.R. 4348), commonly known as the Highway Bill. The bill is expected to be signed by the President. The bill includes provisions intended to stabilize pension funding and increase the Pension Benefit Guaranty Corporation (PBGC) premiums.
Beginning in 2012, for purposes of the minimum funding rules, the segment interest rates would have to be within a corridor of the average of the segment rates for the 25-year period preceding the current year. The corridor is 10% in 2012 and increases by 5% per year until reaching 30% in 2015. This corridor will then be used for all future years. With interest rates at historic lows, this change will increase the effective valuation interest rates and will result in increasing the plan’s funded status and decreasing the minimum required contributions for at least the next couple of years. No change is being made in the calculation of the maximum deductible contribution. Plan Sponsors can delay these provisions, keeping the tighter restrictions in place for 2012.
Sponsors of plans with a large unfunded target liability (over $500,000) will be required to disclose funded status and minimum contributions on a modified and unmodified basis if their funding target is more than 5% lower using the modified basis.
If your 2012 valuation has already been completed, it may be to your advantage to revalue your obligations and contributions using these new rules.
PBGC Premium Increases
The premiums that must be paid to the PBGC will increase starting in 2013. The flat rate premium will increase from $35 in 2012 to $42 in 2013 and $49 in 2014, and indexed for the following years. The variable rate premium of $9 per $1,000 of unfunded liabilities will be indexed for 2013, then increase to $13 per $1,000 in 2014 and to $18 per $1,000 in 2015. Finally, the maximum variable premium will be $400 per participant starting in 2013, with indexing thereafter.
If you have any questions regarding the effect the Highway Bill could have on your plan, please contact your Nyhart consultant.