• Tax Legislation Provides Funding Relief
  • June 11, 2004
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • Sponsors of tax qualified defined benefit pension plans received a last minute reprieve when the President signed into law the Pension Funding Equity Act of 2004 ("Act") on April 10, 2004, just before the April 15th deadline for quarterly contributions to calendar year plans. Under the Act, the 30 year Treasury interest rate for funding purposes is replaced for plan years beginning in 2004 and 2005 with a composite corporate rate. (This same rate is also used for the 2004-2005 plan years for the purposes of PBGC variable rate premiums). For those two years, the interest rate used for purposes of determining a plan's current liability must be within 90 to 100 percent of the four year weighted average of the "rates of interest on amounts invested conservatively in long-term investment grade corporate bonds." However, employers can elect to disregard the interest rate replacement for purposes of determining the maximum deductible contributions to a pension plan. In Notice 2004-34, the IRS indicated that, in determining composite corporate bond rates beginning with January 1997 and ending August 2000, the three indices are (1) the Citigroup High Grade Corporate Index; the Merrill Lynch Corporate AA-AAA Rated 10+ Years, and the Merrill Lynch US Corporate A Rated 15+ Years, and for period beginning September 1, 2000, the indices are the Citigroup High Grade Credit Index, the Merrill Lynch US Corporation AA-AAA Rated 10+ Years; and the Lehman Brothers US A Long Credit. By way of illustration for plan years beginning in January 2004, the corporate bond weighted average interest rate was 6.55 percent, and the permitted range was between 5.89 and 6.55 percent. This composite corporate rate is also used for purposes of determining PBGC variable rate premiums for the 2004 and 2005 plan years.

    Among the other benefits provisions of the law were the following:

    • Defined benefit plans maintained by commercial passenger airlines and steel companies received two years of partial relief from deficit reduction contributions;

    • Transition relief is provided for certain calculations required by Code Section 415. Under existing law, GATT interest rates, if greater than the plan interest rate, must be used to make certain 415 adjustments for non-annuity distributions. The law substitutes a uniform rate of 5.5% for the GATT rate for 2004 and 2005, and adds a 2004 transitional rule that the maximum benefit will not be less than the maximum amount determined using the interest rate in effect on the last day of the preceding plan year;

    • Annual funding notices for multiemployer pension plans are required beginning in 2005;

    • Certain multiemployer plans are permitted to elect temporary relief regarding the deferral of certain charges to the funding standard account;

    • Under existing law, Code Section 420, which allows defined benefit plans to make a qualified transfer of excess plan assets to a retiree health plan within the plan, was scheduled to expire on December 31, 2005. The new law extends the expiration date for eight years to December 31, 2013; and

    • The procedures under which parent companies would be responsible for multiemployer withdrawal liability of spin-off companies where the plan sponsor is alleging the purpose of the transaction was to evade multiemployer withdrawal liability are clarified.