The House of Representatives in the early hours of the past weekend approved a nearly $2 trillion COVID-stimulus bill, including a freeze to retirement plan contribution limits.
The Butch Lewis Emergency Pension Plan Relief Act was approved Feb. 27 as part of the mammoth American Rescue Plan Act of 2021 (H.R. 1319) by a (near) party-line vote of 219-212 (Reps. Jared Golden (D-ME) and Kurt Schrader (D-OR) were the only two Democrats to vote no, and no Republicans supported the measure).
As had the version passed out of the House Ways and Means Committee, in addition to bailing out certain multiemployer pension plans and temporarily reducing funding requirements for single-employer pension plans, the legislation would freeze the annual cost-of-living adjustments (COLA) for overall contributions to defined contribution plans and for the maximum annual benefit under a defined benefit plan, effective for calendar years beginning after Dec. 31, 2030.
The freeze also would apply to the limit on the annual compensation of an employee that may be taken into account under a qualified plan. Note that the COLA freeze, however, would not apply to collectively bargained plans.
The specific Internal Revenue Code sections cited in the legislation that would be subject to the freeze include:
- Section 415(c) annual contribution limit for DC plans;
- Section 415(b)(1)(A) annual defined benefit limit; and
- Section 401(a)(17) annual compensation limit.
The House Ways and Means Committee—which first approved the legislation Feb. 11—says that it believes that “such favorable tax treatment should be limited so as not to disproportionately benefit high-income individuals when compared with middle- and low-income individuals.”
Multiemployer Plan Funding Relief
To address the multiemployer plan funding crisis, the legislation would create a “special financial assistance” program under which cash payments—or grants—would be made by the PBGC to financially troubled multiemployer plans (section 9704 of the legislation).
Those grants would come from Treasury’s general fund, rather than from the PBGC’s existing multiemployer revolving fund. Money would be transferred from the general fund to a new fund within the PBGC and then disbursed to plans. The Congressional Budget Office estimates that the grants would total $86 billion.
According to the bill’s analysis, as of 2017, more than 300 plans were classified as in critical status, and more than 100 of those were classified as “critical and declining.” 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.
The PBGC would be required to publish requirements for the grant applications within 120 days of the date of enactment, and applications would have to be submitted by Dec. 31, 2025. During the first two years after enactment, PBGC could give priority to plans with large, expected assistance and plans expected to face insolvency within five years.
The legislation also would increase premium rates for multiemployer plans 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 9701);
- temporary extension of the funding improvement and rehabilitation periods for multiemployer pension plans in critical and endangered status for 2020 or 2021 (section 9702); and
- adjustments to funding standard account rules (section 9703).
Single Employer Plan Funding Relief
The Butch Lewis Act also provides single-employer plan funding relief by extending the amortization period for funding shortfalls and the pension funding stabilization percentages, along with modifying the special rules for minimum funding standards for community newspaper plans.
Extended amortization for single employer plans (section 9705): The legislation would set all previous plan funding shortfalls to zero, thus permitting a “fresh calculation” of plan funding deficiencies. These newly calculated shortfalls and all future funding shortfalls would be paid off over a period of 15 years rather than the current-law period of seven years.
Extension of pension funding stabilization percentages for single employer plans (section 9706): To preserve the stabilizing effects of smoothing, the provision revises the specified percentage ranges for determining whether a segment rate must be adjusted upward or downward. The specified percentage range for a plan year would be determined by reference to the calendar year in which the plan year begins as follows:
- 90% to 110% for 2012 through 2019;
- 95% to 105% for 2020 through 2025;
- 90% to 110% for 2026;
- 85% to 115% for 2027;
- 80% to 120% for 2028;
- 75% to 125% for 2029; and
- 70% to 130% for 2030 or later.
The provision further provides that if the average of the first, second or third segment rate for any 25-year period is less than 5%, such average shall be deemed to be 5%. In addition, for purposes of the additional information that must be provided in a funding notice for an applicable plan year, an applicable plan year includes any plan year that begins after Dec. 31, 2011, and before Jan. 1, 2029. The provision is effective for plan years beginning after Dec. 31, 2019.
Special Rules for Community Newspaper Plans (section 9707): The legislation would also expand the special funding rules enacted under the SECURE Act to certain community newspaper pension plans that did not qualify under the eligibility rules. In general, the legislation allows community newspapers to reduce the amount they contribute to their pension plans by choosing a higher interest rate of 8%, and allow plans to fund their shortfall over a period of 30 years.
What’s Next?
The American Rescue Plan Act will now be sent to the Senate, where it is likely to undergo further changes, including those made by parliamentary rulings—such as the one that ruled a minimum wage increase out of order—as well as those made by Senate amendments.
As we’ve reported before, budget reconciliation legislation is subject to special fast-track procedures for consideration and would need only a simple majority in the Senate to approve the legislation, rather than 60 votes to cut off a filibuster, but the process, as noted above, does come with a number of procedural rules that could ensnare various provisions.
Congressional Democrats are hoping to have the bill wrapped up by mid-March and on its way to President Biden, but there are still several issues that will need to be worked out.
A Ways & Means summary of the pension provisions is here; the legislative text of the American Rescue Plan Act is here; and a Joint Tax Committee description of the pension provisions can be found here.
