The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Minnesota is representative of a common question regarding defined benefit plan funding. The advisor asked:
“What are the defined benefit plan funding stabilization rules and how did the Bipartisan Budget Act of 2015 affect these rules?”
Highlights of Discussion
A law that took effect in 2012, “Moving Ahead for Progress in the 21st Century” (MAP-21), as extended by the Highway and Transportation Funding Act of 2014 (HTFA), modified the method for determining the interest rate used to calculate the actuarial value of benefits earned under defined benefit plans. This interest rate is critical in determining the plan’s funding requirements. The administration felt this move was necessary to help stabilize defined benefit plan funding for sponsors.
Under MAP-21, plan sponsors and actuaries use a 25-year average corporate interest rate to determine the applicable interest rate RANGE available to a plan for funding purposes. The plan’s 24-month average interest rate must fall within the applicable range, or be adjusted upwards or downwards so that it does.
Old Table MAP-21/HTFA Schedule of Ranges
The Budget Act extends the stabilization methodology. As a result, mandatory employer contributions are reduced, meaning lower deductions for sponsors, resulting in higher taxable income being paid to the government. For plan years beginning after December 31, the funding stabilization percentages are extended as follows:
New Budget Act Table
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
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