|August 25, 2014|
Previously published on August 15, 2014
Last Friday, the President signed the Highway and Transportation Funding Act of 2014 (“HATFA”) into law. HATFA extends the interest rate smoothing provisions applicable to defined benefit pension plans that were originally found in the Moving Ahead for Progress in the 21st Century Act of 2012 (“MAP 21”). HATFA requires non-governmental sponsors of single- and multiple-employer defined benefit pension plans to take immediate action.
Defined benefit plan sponsors must estimate their plans’ funding liabilities each year. Funding liabilities are calculated by discounting the value of future benefit payments by an assumed interest rate, or “discount rate.” The higher a discount rate, the less a plan sponsor must contribute in a given year to meet its funding obligations.
MAP-21 gave plan sponsors the ability to use a higher discount rate. This reduced plan sponsors’ funding liability, which meant they could contribute less money to their plans. HATFA prolongs the ability of plan sponsors to use a higher discount rate. It also retroactively modifies the discount rate for the 2013 plan year.
HATFA’s interest rate provisions apply automatically. A plan sponsor may affirmatively opt out of the law with respect to the 2013 plan year. Beginning in 2014, however, all defined benefit plan sponsors must adhere to HATFA’s interest rate provisions.
Because HATFA stipulates a higher discount rate in 2013, most plan sponsors will benefit from the resulting reduced contribution requirements. Not all plan sponsors will want to disrupt 2013 plan operations, however, and may wish to defer HATFA’s application until 2014. Accordingly, single- and multiple-employer defined benefit plan sponsors will need to:
- Decide whether to opt-out of HATFA in 2013. For calendar year plans, this decision needs to be made prior to September 15, 2014 (the due date to make a final contribution to satisfy 2013 minimum funding requirements) so that revised minimum contributions may be timely calculated.
- Opting out of HATFA may allow plan sponsors to avoid corrections to plan operations. If a plan’s 2013 actuarial report is already complete, opting out may also avoid revisions to funding calculations and Forms 5500 and related Schedules.
- For those plan sponsors that do not opt-out of HATFA (and should guidance permit), consider the advantages of applying excess minimum required contributions made under MAP-21’s discount rate to minimum required contributions in 2014.
- Revise actuarial valuations already issued for 2014.
- Describe the effect of HATFA to plan participants in the plan’s annual funding notice. (We expect the DOL will issue a new model annual funding notice for this purpose.)
We anticipate IRS guidance on the mechanics of opting out of HATFA and applying excess contributions in 2013 to future required minimum contributions.