MAP 21 and HAFTA Changes to Pension Rules

In September 2012 the Act known as "Moving Ahead for Progress in the 21st Century" or MAP 21, was enacted into law. The purpose of the law was to provide some relief for pension funding. In the summer of 2014, the Highway and Transportation Funding Act. This extended and modified the MAP21 provisions which were subject to phase out in the original law.

Since the great recession of 2008, pension plans experienced a triple hit. First, plans that had significant exposure to stocks could have experienced a loss of more than 30%. While the market has largely recovered for those who were patient, not all pension fund managers had enough faith to remain in the market and those who did, still had a decline relative to the growth of pension liabilities.

Second, the recession itself had a significant negative effect on business and made it difficult for many businesses to fund at the levels they did previous to the crash.

Third, interest rates on high quality debt declined sharply. How does this affect pension plans? Pension liabilities represent the actuarial value of a stream of payments over time to participants. The rules require that the interest rate used to value the pension liabilities be based on a 2 year average of high quality debt. Interest rates over the last 2 years have been very low. So more assets are theoretically needed to fund the stream of payments over time.

MAP 21, starting in 2012, allows the use of rates based on (but not exactly equal to) a 25 year average. The average of interest rates over the past 25 years has been significantly higher than over the last 2 years. This means pension liabilities and therefore, funding for the pension is also lower under the new rules. It also means benefit accrual and payout restrictions that might have applied in the absence of MAP 21 and HAFTA, might not apply.

Prior to MAP 21 there had been some minor relief for pension funding for plans that had a shortfall (liabilities exceed assets). While MAP 21 reduces contributions for all plans, the greatest effect will be for plans that are underfunded.

The MAP 21 relief is a 2 edged sword. It perpetuates underfunded pensions in the hope that over time companies will recover, pension assets will grow, and interest rates will rise. The relief phases down (but not necessarily out) after 2016.HAFTA extends MAP 21 funding relief for another 5 years so that the phase out of the MAP 21 rates does not start until 2017, rather than 2013.

MAP 21 also increases premiums assessed against pension plans by the Pension Benefit Guaranty Corporation (PBGC). The PBGC for pension benefits is like the FDIC for bank accounts. Pension plans which are covered by the PBGC (there are exceptions on which pension plans are covered) must pay a premium every year to help the PBGC cover the payments it must make to distressed plans that terminate without enough assets to pay benefits. Like the FDIC, not all benefits are guaranteed in a covered plan. The premium in 2012 was $35 per participant. This increases to $49 per participant in 2014. In addition to the fixed dollar premium, there is a variable premium equal to a percentage of the unfunded liabilities of the plan (liabilities minus assets). For 2012 this extra premium was 0.9% of unfunded benefits. It phases up to 1.8% benefits in 2015. Again, this is a 2 edged sword. The increase helps keep the PBGC solvent, but also puts additional pressure on underfunded plans that then terminate, in part because of increased costs.

Keep in mind the lower funding requirements of MAP 21 and HAFTA do not mean actual plan liabilities are lower. If a defined benefit plan chooses to pay a lump sum, it must still use the rates prescribed in Code Section 417(e)(3), regardless of these relief provisions. And a terminating plan must have enough assets (in a standard PBGC termination) to purchase annuity commitments from an insurance company.