The American Rescue Plan Act of 2021, enacted on March 11, is a comprehensive measure touching many sectors of the economy—including the retirement sector. A recent ASEA webcast took a look at some of the provisions of the new law that affect defined benefit plans.
Karen Smith, MSPA, President of Nova 401(k) Associates, discussed the changes the ARPA made to the Code Section 430 rules for DB single-employer minimum funding valuations, including employer elections and interplay with the AFTAP rules under Code Section 436 and other plan document issues.
“Relief has been floating around Washington for a while,” said Smith, and the ARPA was the vehicle by which it happened. Following are some highlights of the discussion.
Smith highlighted interest rates as one especially important area of relief. It has two elements, she said—a wider corridor, and a brand-new floor of 5% on the 25-year average for each segment. The estimates of the first, second and third segments of interest rate relief are “a substantial improvement. This is substantial interest rate relief,” said Smith.
Interest rate relief by default is effective for plan years beginning after Dec. 31, 2019, Smith noted. She added that one may elect to have it not apply to any plan year beginning before Jan. 1, 2022, and one may elect to have it apply only for AFTAP purposes or for both funding and AFTAP purposes.
However, the interest rate relief does not apply to maximum deductible contribution calculations and PBGC premiums, Smith noted.
Regarding elections, Smith said, if a sponsor makes absolutely none of them, then:
- amortization relief is effective for plan years beginning after Dec. 31, 2021 (Jan. 1, 2022 plan years for calendar year plan years), and
- interest rate relief is effective for plan years beginning after Dec. 31, 2019 (Jan. 1, 2020 plan years for calendar year plan years).
And what is necessary for a plan sponsor to make an election? “We don’t actually have formal guidance at this point,” reported Smith, but she added that she expects that guidance to look like MAP-21 and HATFA guidance to the extent ARPA is similar to MAP-21 and HATFA.
For books of business that are made up of micro-plans, it may be easy to determine a path of least resistance that works for 90% or more of one’s plans, said Smith. She adds that generally, micro-plans would not have a reason to adopt amortization relief early. Usually, she said, they are not sensitive to the minimum required contribution, and often have no amortization bases.
For micro-plans’ path of least resistance, said Smith, the election to defer the interest rate relief will come down to a cost-benefit analysis. And for such plans, clients that may require a more detailed analysis may include those that:
- have a funding deficiency in 2019 or later;
- have any type of AFTAP restriction;
- usually make minimum required contribution;
- have amortization bases;
- have frozen their plan or reduced benefits recently; and
- pay PBGC variable premiums.
Available on Demand
The ASEA webcast, “DB Provisions of the American Rescue Plan Act of 2021,” is available on demand. To find out more, click here.
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