Funding Shortfall Amortization
The relief bill also dictates that, starting in the 2022 plan year, the amortization period used for funding minimum contributions will be extended to 15 years from the current 7 years. This will allow Sponsors to spread out any funding shortfalls over a longer time horizon and likely reduce a major component of the contribution calculation: Normal cost = administrative expenses + rolling amortization of funding shortfall.
While this permanent change in the amortization period applies universally starting in 2022, Plan Sponsors can elect to enact these changes earlier, if desired, for plan years 2019-2021.
Multiemployer Relief
ARPA also enables multiemployer plans in critical and declining status to apply for a lump sum of money to be used to either make benefit payments for the next 30 years or pay plan expenses. The PBGC will be administering the program, vet requests from Plan Sponsors, select the plans that qualify for assistance and distribute the approved funds as a lump sum to Sponsors. This relief is not a loan as there is no obligation to repay the funds.
There are several stipulations for Plan Sponsors who receive the funds, both in how the funds may be invested as well as how the plans must operate going forward. On the investment side, the distributions may only be invested in investment-grade bonds and other PBGC-approved investments. They must also be segregated from other plan assets, including earnings on the funds, and tracked separately going forward. In terms of operations, the plans receiving assistance cannot prospectively reduce benefits and must continue to pay PBGC premiums. Lastly, plans receiving assistance cannot apply for benefit cutbacks under the Multiemployer Pension Reform Act of 2014 (MPRA).
Considerations For Plan Sponsors
The relief offered by ARPA for single-employer plans, while certainly welcome for many Plan Sponsors, exclusively focuses on minimum funding assistance. For Sponsors with cash flow constraints, this relief will likely reduce any contribution requirements for some time, especially for those plans with larger funding shortfalls. The commensurate decline in contribution funding volatility and the short-term downside protection from low or declining rates may also incentivize these Plan Sponsors to seek a higher risk-seeking allocation. However, for Plan Sponsors focused on balance sheet funded status, potential risk transfer activity, PBGC variable rate premiums and funding thresholds that may trigger benefit restrictions or participant notification requirements, this relief is likely not a catalyst for a change in investment or contribution strategy.
For Plan Sponsors considering a change to investment policy based on this legislation, we would recommend a holistic asset/liability study that would encompass not only the impact to minimum contributions and cash funding, but also the broader, potential financial statement and long-term strategy implications as well.
If you would like more information, please reach out to any of the professionals at
Fiducient Advisors.