New Law Increases PBGC Premium Contributions by Trust Funds
On July 6, 2012, President Obama signed into law H.R. 4348, an Omnibus Highway Transportation bill that contains several provisions relating to single-employer pension funding. Two provisions of this law will dramatically impact pension funding: (1) it allows employers to reduce their contributions to under-funded defined benefit pensions; and (2) it increases premiums to be paid by multiemployer plans and single employer plans to the Pension Benefit Guaranty Corporation (PBGC). Additionally, the law makes it easier to transfer assets from over-funded pension plans to retiree health or life insurance plans, and creates an office within the PBGC to act as an advocate for pensioners.
Under the Internal Revenue Code, ERISA, and the Pension Protection Act, pension plans must meet certain minimum funding requirements. As of June 30, 2012, pension plans nationwide were approximately 75% funded. Pension plans’ contribution obligations toward the unfunded liabilities are calculated based on the interest rates charged by the Federal Reserve. When those interest rates are low, as they have been for the past few years, pension plans are deemed to have larger liabilities. The new law allows employers to calculate their payments using an average of interest rates from the past 25 years, instead of the past two years. As a result of this new calculation, plans will appear to have smaller unfunded liabilities, and employers will pay less towards closing their plans’ funding gaps. Through 2012, employer are expected to contribute $40 to $50 billion less towards pension plans based on these revised calculations.
The new law also increases the amount that must be paid to the PBGC, the government agency that insures pension plans. For multiemployer plans, the premiums will increase to $12.00 per participant beginning in 2013 (up from $9.00 per participant), and will be adjusted for inflation going forward. Premiums have been increased across the board, but the increases are most significant for under-funded plans. This provision is intended to encourage fuller funding of pension plans, to avoid paying increased PBGC premiums.
For more information about this new law or other pension funding questions, contact your trust fund counsel.
By Daniel S. Brome