Most Recent COVID Relief Act Includes Pension Plan Changes

By March 22, 2021No Comments

There were several significant changes in pension law included in the American Rescue Plan Act of 2021 (ARPA), which became law March 11th.  ARPA is the latest COVID-pandemic-related law, which received much press, but the pension changes were “under the radar”.

The law impacts “employer-sponsored” (i.e., “single employer”) Defined Benefit Plans, including Cash Balance Plans (“DB Plans”).  The ARPA significantly changes the calculation of the annual funding requirements.  The objective is to lower the amount of required funding for DB Plans for the rest of this decade, the effect of which will be to reduce Federal Tax deductions and increase Federal Tax revenues to “pay for” other parts of the ARPA.

The changes are highly technical.  This article provides a high-level explanation and, if you maintain a DB Plan, alerts you to some decisions and formal written elections that may need to be made.

First, there are various interest rates that the law requires be used for actuarial calculations for DB Plans.  The actuarial calculations determine how well funded the DB Plan is and is expected to be in the future, relative to the benefits that need to be paid in the future, and the calculations determine the minimum amount and recommended amount of contributions “today” to ensure projected plan assets are sufficient for expected future Plan obligations.

Since 2012, the interest rates used for actuarial calculations – which for the last decade have been lower than historical interest rates – have been adjusted by artificially “boosting” the actual interest rates.  In simple terms, higher interest rates mean lower funding numbers.  The goal, following the financial crisis of 2008-2009, was to lessen the funding burdens regarding DB Plans while the economy recovered.  The use of these artificially higher interest rates was scheduled to end in the next few years.

ARPA now requires further use of inflated interest rates and modified interest rate methodologies through the end of the decade.  These changes are effective for plan years beginning on or after January 1, 2020 – yes, the changes apply to actuarial valuations that recently may have been completed for the 2020 and 2021 Plan Years.  However, employers may elect to not have the ARPA changes apply until the 2022 Plan Year.  In practical terms, an employer that wants to maximize the potential tax deductions for contributions made in 2021 for the 2020 Plan Year and made in 2022 for the 2021 Plan Year – especially if Federal Tax rates increase in 2021 – probably does not need to make an election.  However, for an employer that wants to minimize the required contributions beginning with the 2020 Plan Year, the retroactive modification of actuarial valuations probably is a must-do.

The second significant ARPA change involves how the actuarial calculations take into account “shortfalls” in actual investment performance compared to expected investment performance.  Previously, the shortfall for a year has been made-up by factoring in extra contributions spread-out (i.e., amortized) over a 7-year period.  Now, the amortization occurs over a 15-year period.  Also, the remainder of the shortfall amortization schedules for the past 7 years are aggregated into one “bucket” and subject to the extended 15-year period.  This shortfall amortization change is in effect for the Plan Year beginning in 2022, although an employer may elect to retroactively implement the change beginning with the 2019, 2020 or 2021 Plan Year.  Again, if the employer wants to maximize the potential tax deductions for contributions, the employer would not choose to apply the new amortization period until the 2022 Plan Year.  However, for an employer that wants to minimize required contributions beginning with the 2019 Plan Year, an election to retroactively change the shortfall amortization method and revise actuarial valuations probably is a must-do.

For ACSI’s DB Plan clients with plans that favor the business owners, for whom the tax deduction is an important feature of the DB Plan, these changes are not expected to have a material impact.

However, for ACSI’s large DB Plan clients, for whom the pandemic may be crushing company finances and/or cashflow, implementing these changes as soon as possible – including a retroactive election and updated actuarial calculations for prior Plan Years – may be a must-do.

Please note that for DB Plans subject to the PBGC premium requirements, lesser contributions may increase PBGC premiums.

ACSI will be contacting each of our DB Plan clients, one-on-one, to address the ARPA changes.  If you want to contact us, please do so at or or or call 716-691-2181.

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