Congress has passed a highway funding bill that will be financed partly through provisions designed to lower the pension-plan contributions that plan-sponsoring companies are required to make.
Lower contributions would mean greater taxable income for the companies, notes a Compliance Week article about the bill. Still, some plan sponsors may welcome the news, as the lower contributions are likely to outweigh the higher taxes.
The Highway and Transportation Funding Act, which is expected to be signed by President Obama, delays a scheduled phase-down of the existing formula for calculating required minimum contributions. The formula uses current interest rates to estimate future plan liabilities, and since interest rates have stayed at historically low levels since 2008, plan sponsors have suffered funding shortfalls.
With low interest rates, “the principal will earn less over time, so contributions need to be higher to meet the expected future liability,” Anne Waidmann, director of human resources at PricewaterhouseCoopers, told Compliance Week.
An earlier transportation bill signed into law in June 2012, called Moving Ahead for Progress in the 21st Century (MAP-21), offered pension-funding relief by, in part, allowing plan-sponsoring companies a bigger window of time in which to view interest rates. The move safeguarded them to a degree from interest-rate volatility that could dramatically alter their required pension contributions from year to year.
Map-21 provided for that window to narrow over time, meaning that required contributions were again increasing. But the new transportation funding bill delays that phase-down, deferring it over a five-year period.
The bill doesn’t, though, help companies decide what level of contribution is smart or sound. “There are a lot of employers who probably won’t want to take advantage of this reduced minimum contribution,” Waidmann told Compliance Week. “It just kicks the pension funding can down the road, so they may have to put more in later. The provisions might provide a new reason for companies to review their pension funding strategies and consider alternatives as well.”
Photo: Flickr user windsordi, CC BY-SA 2.0.