Legislation before the House Ways & Means Committee plans to help pay for a multiemployer plan bailout by utilizing a budget “gimmick” that would freeze retirement plan contribution limits—though not for collectively bargained plans.
More specifically, the Butch Lewis Emergency Pension Plan Relief Act of 2021, included as subtitle H of a nine-part package that the committee plans to mark up this week, would impose a cost-of-living freeze on:
- the Code Section 415(c) annual contribution limit for defined contribution plans;
- the Section 415(b)(1)(A) annual defined benefit limit; and
- the Section 401(a)(17) annual compensation limit.
This appears to be designed to fill a budget hole in the 10-year scoring window—and as such would freeze these limits starting in calendar year 2030.[i] Ironically, it’s scored to lose money in the years leading up to the effective date, apparently anticipating that individuals will be inclined to increase contributions before the limits are imposed.
Moreover—and particularly ironic in view of the role it is expected to play in helping pay for funding relief for multiemployer plans—the freeze to the cost-of-living adjustments would not apply to collectively bargained plans.
Multiemployer Plan Relief
Special financial assistance program (section 9705): To address the multiemployer plan funding crisis, the legislation would create a special financial assistance program under which cash payments would be made by the PBGC to financially troubled multiemployer plans, according to a summary of the legislation. The PBGC would be provided with the amounts necessary to provide such payments through a general Treasury transfer.
Eligible multiemployer pension plans would include plans in critical and declining status and plans with significant underfunding with more retirees than active workers in any plan year beginning in 2020 through 2022. Plans that have suspended benefits and certain plans that have already become insolvent would also be eligible. Applications for special financial assistance under the program must be submitted no later than Dec. 31, 2025.
In addition, the legislation would increase the PBGC multiemployer plans premium rate to $52 per participant starting in calendar year 2031, with the premium rate indexed for inflation.
Other multiemployer plan relief provisions include:
- temporary delay of designation of multiemployer plans as in endangered, critical or critical and declining status (section 9702);
- temporary extension of the funding improvement and rehabilitation periods for multiemployer pension plans in critical and endangered status for 2020 or 2021 (section 9703); and
- adjustments to funding standard account rules (section 9704)
Single Employer Relief
Extended amortization for single employer plans (section 9706): Declaring that the current law requirement to amortize funding shortfalls over seven years is no longer appropriate, the bill directs that all shortfall amortization bases for plan year 2019 or 2020 (at the election of the plan sponsor) and all shortfall amortization installments determined with respect to such bases would be reduced to zero.
For all plan years beginning after Dec. 31, 2019, all shortfalls would be amortized over 15 years, rather than seven years. Plan sponsors also may elect to apply this provision for the 2019 plan year.
Extension of pension funding stabilization percentages for single employer plans (section 9707: To preserve the stabilizing effects of smoothing:
- The 10% interest rate corridor would be reduced to 5%, effective in 2020.
- The phase-out of the 5% corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30% in 2030, where it would stay.
- A 5% floor would be put on the 25-year interest rate averages.
This provision is effective for plan years beginning after Dec. 31, 2019.
The legislation also includes a modification of special rules for minimum funding standards for community newspaper plans.
House Ways & Means Committee Chairman Richard Neal (D-MA) announced that the committee will begin consideration of the nine legislative proposals under the budget reconciliation instructions this week, beginning Feb. 10 through Feb. 12.
With the Democrats attempting to move this legislation through the budget reconciliation process, they would need only a simple majority in the Senate to approve the legislation, rather than 60 votes to cut off a filibuster.
That said, freezing cost of living adjustments (COLA) on retirement plan savings—essentially capping retirement plan savings—is an ironic way to solve a pension funding crisis, and one that has proven problematic in the past. “Going after limits was something we have been fighting against for decades and we finally fixed the prior damage Congress caused in EGTRRA and PPA,” noted Brian Graff, CEO of the American Retirement Association. “The American Retirement Association is strongly opposed to this and will be fighting to get it removed.”
[i] For 2021, the Section 415(c) annual contribution limit is $58,000, the Section 415(b)(1)(A) annual DB limit is $230,000, and the Section 401(a)(17) annual compensation limit is $290,000.