The Perfect Storm

Plan Funding Requirements Applicable to ERISA Disability Benefit Plans Under the Internal Revenue Code and ERISA

Both ERISA and the Internal Revenue Code (“IRC”) require plan sponsors to make an annual Minimum Required Contribution (“MRC”) to DB pension plans that is designed to ensure the plan has the ability to pay its promised future benefits. To determine the amount to be contributed, plan sponsors are required to calculate the plan’s funding target, which is the yearly costs of what it is currently obligated to pay to retirees, plus any additional costs resulting from the unpaid costs that were not paid in previous years.

The MRC calculation is thus linked to the plan’s liabilities and is adjusted based on fluctuations in interest rates. Lower interest rates will result in the assets in the Plan growing more slowly, and because future liabilities are set based on the number of pension beneficiaries, their accrued benefits, and their life expectancy, the result may be an underfunded plan that cannot meet its future obligations. To offset the slower growth associated with lower interest rates, the MRC calculation in such a situation would require a higher contribution to help the Plan meet those future benefit payments to plan participants.

Conversely, when interest rates are high, the expected growth of plan assets means that a plan appears more funded when compared to its long-term obligations, and the MRC calculation from that comparison results in a lower minimum payment by a plan sponsor for that year.  Strong markets and the resulting high interest rates in the 1990s inflated plan assets for pension plans, which in turn reduced the required MRCs for employers. With the downturn of the market in the 2000s, not only were the value of the plans’ assets reduced, but interest rates used to calculate funding requirements also plummeted. Thus, many plans became underfunded or less securely funded essentially overnight.

The PPA made changes to the ERISA funding calculations and specified interest rates to be used in determining the present value of a plan’s normal cost and funding target. After the PPA, the present value is calculated using three segment rates, each of which applies to benefit payments that are expected to be due within certain time periods: less than five years, 5-15 years, and over 15 years.  

Further fueling the perfect storm, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) changed the rates used for calculating certain funding requirements by adding in an additional interest rate designed to smooth the fluctuations in interest rates through the use of a longer time period of average interest rates instead of the 24-month period used to determine the corporate bond yield curve-based segment rates. More importantly, though, because the present value determined using these smoothed rates is the basis of the funding target of the plan, which in turn is used in determining the MRC for a given year, the artificially inflated segment rates ultimately reduce the MRC. A repeatedly and artificially reduced MRC results in a plan whose funding status is slowly getting worse year after year. MAP-21, by allowing plan sponsors to calculate funding requirements based on skewed interest rates, thereby temporarily inflating their funded status and reducing their MRC each year, has deferred the eventual increased funding required to bring a plan’s funded status up to par when the MAP-21 segment rates eventually expire.

The PBGC: Premiums and a Failing Pension Insurance Program

When enacted, ERISA also created the PBGC, which is a government agency chaired by the Secretary of Labor and whose Board includes the Secretaries of Commerce and the Treasury. The PBGC was established “to protect the pensions of participants and beneficiaries covered by private-sector defined benefit (DB) plans.”  It currently protects the retirement incomes of nearly 37 million American workers, retirees, and their families in private-sector DB pension plans.

The PBGC acts as a pension insurance policy, funded by premiums from plan sponsors, which it uses to provide reduced benefits to plan participants who could otherwise receive nothing when plan sponsors cannot meet their obligations to their pension plans. Nationwide, in 2017, the PBGC paid approximately $5.6 billion to more than 868,196 retirees that were participants in terminated, single-employer plans. An additional 504,687 Americans are active participants in some of those same terminated plans and will receive their pensions from the PBGC, rather than their former plan, once they are eligible to retire.

If you have a Pension claim, do not handle the claim without an attorney. These pensions are increasingly failing due to employers failing to properly fund their pension plans. Handling these claims requires very specialized knowledge of the various governing federal statutes. Our experience in handling these claims includes representing more than 100,000 pensioners in courthouses across the country.