Overview

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) into law. The overall purpose of the bill is to provide relief from the economic impacts of the COVID-19 pandemic. As the fifth round of COVID relief, ARPA is a sprawling bill which impacts many employer-provided benefits, including a large bail-out of multiemployer pension plans, changes to COBRA premium assistance, increased support for ACA premiums, paid sick and family leave credits, dependent care assistance, and section 162(m) changes, among others. This Summary highlights the changes applicable to single employer defined benefit relief. A short overview – plan sponsors will be able to use higher interest rates in valuing liabilities, resulting in lower liabilities, and unfunded past service liabilities will be amortized over 15 years rather than the current 7 years. Full details are as follows:

Corridor Changes for Interest Rate Stabilization

The current law sets a 90% – 110% corridor on the 25-year average discount rate used for funding purposes. This corridor will increase so that the relief from the corridor will phase out over time. ARPA resets the corridor to 95% – 105%, and extends the phase-out, as shown below:
Plan Year Beginning in Current Corridor Range New ARPA Corridor
Before 2020 90% - 110% 90% - 110%
2020 90% - 110% 90% - 110%
2021 85% - 115%
2022 80% - 120%
2023 75% - 125%
2024 70% - 130%
2025
2026 90%-110%
2027 85%-115%
2028 80%-120%
2029 75%-125%
2030 70%-130% 70%-130%
In addition, under ARPA a floor of 5% is placed on all individual segment rates after calculating the 25-year average, and then the stabilization corridor is applied.
 
Plan sponsors can elect to adopt the new discount rate relief retroactively to the 2020 or 2021 plan years.

Extended Amortization of Future Shortfalls

With the Pension Protection Act of 2006 (“PPA”) all funding shortfalls were amortized over 7 years. Under ARPA, effective for plan years beginning in 2022 the amortization periods are permanently extended to 15 years. Furthermore, all plans are provided a “fresh start” – all amortization bases prior to 2022 are set to zero and a new funding shortfall is established and amortized over 15 years. Plan sponsors can elect to adopt the new amortizati on period and fresh start basis retroactively to th e 2019, 2020 or 2021 plan years.

What is NOT affected?

Under ARPA, the discount rate relief only applies to certain aspects of your funding valuation. In particular, the discount rate relief does not impact:

  • Lump sum payments to participants
  • Calculation of maximum deductible contributions
  • PBO and ABO for ASC 715 Accounting
  • PBGC 4010 reporting liabilities

Summary

ARPA extends pension rate relief for plan sponsors and extends the amortization period for shortfalls. However, the true long-term cost of your plan is not changed. ARPA only delays the timing of contributions. In order to analyze the impact of deferring these contributions, projecting the contribution requirements over the next 5-10 years may be prudent for some sponsors.

What action do you need to take?

If the plan sponsor elects to revise the 2019 or 20 20 valuation, there are a number of potential benefits: (1) lower contribution requirements in 2019-2020, (2) increased prefunding balance as of 2021, (3) improve d 2020 AFTAP, and (4) lower quarterly contribution requirements in 2021. Note that lower contributions will generally increase the PBGC Variable Rate Premium due. Also note that further IRS guidance will be needed on so me items – for example, how to handle the 2019 Form 55 00 filing if the 2019 valuation is retroactively am ended.

When deciding whether or not to re-do 2019 or 2020 valuation work, plan sponsors will need to assess t he cost of re-doing prior valuations against the temporary contribution relief and improved 2021 financial results available.

Burke Group recommends that you talk to your actuary and discuss the above issues in depth. We remain ready to assist plan sponsors as they navigate the ARPA relief provisions.

Brian J. Schiedel

Principal – Retirement Plan Consulting

Brian Schiedel is responsible for monitoring daily valuation recordkeeping services, ensuring that transactions meet strict procedural guidelines, and providing compliance and other consulting services for Burke Group’s retirement plan clients. He serves as the direct Relationship Manager for more than 30 retirement plans.

Prior to joining Burke Group, he obtained his bachelor’s degree in management science from the State University of New York at Geneseo. He has also obtained the Qualified 401(k) Administrator (QKA) designation through the American Society of Pension Professionals and Actuaries (ASPPA).