The $1.9 trillion American Rescue Plan Act signed by President Biden contains the most important changes in single employer pension funding relief rules since the introduction of the Pension Protection Act in 2006.

What is changing?

The new rules enforce two key changes in how minimum required contributions (MRCs) are calculated.

Read also Retirees who pay the most in taxes make only $36,000 a year on average, study finds

Firstly, the Act extends and enhances the Interest Rate Stabilization mechanisms brought in over the last decade (specifically, Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012, the Highway and Transportation Funding Act (HAFTA in 2014) and the Bipartisan Budget Act (BBA) in 2015).

Read also Canada’s Largest Federal Pension Plan Divests From US Private Prisons

These measures allow a plan to discount its liabilities using rates based on a 25-year average of interest rates instead of more current ‘marked to market’ rates. This stabilization mechanism is further enhanced under the Act by introducing a 5% floor on the 25-year rate averages.

Read also Mercer commits to net zero by 2050 in UK, Europe and Asia

Taken together, these measures will have the effect of increasing the assessed funded status of plans for MRC calculation purposes, initially, by ~30-40%, depending on a plan’s current funded status, relative to more marked-to-market measures.

Similar to the previous relief measures, the new rules will apply a corridor to the 25-year smoothed rates (subject to the floor), starting at +/-5% for the next several years, moving to +/-10% in 2026 and subsequently increasing by 5% each year until reaching  +/-30% in 2030. As a result, the relief measures are scheduled to wear away at a much slower pace than previous legislation.

Secondly, the Act also extends the Shortfall Amortization Period for MRC purposes from seven years to 15 years, thus lowering yearly MRCs where applicable. Additionally, this extended amortization period can be applied retrospectively as prior year shortfall amortization calculations can be reset to zero.

Read more @Benefits Pro