MAP-21: New Funding Rules for Single-Employer Defined Benefit Plans
Recent legislation and guidance provides funding relief for single-employer defined benefit plans.
- The Moving Ahead for Progress in the 21st Century Act (MAP-21) changes the segment rates used for certain calculations to reflect average segment rates for the 25-year period ending on September 30 of the prior plan year.
- Notice 2012-55 contains the 25-year average segment rates for the period ending September 30, 2011.
- Notice 2012-61 clarifies how the 25-year average segment rates affect certain plan calculations.
How does MAP-21 provide funding relief for DB plans?
MAP-21 changes the segment interest rates used to determine the minimum funding requirements for single employer plans to take into account a 25-year average of the segment interest rates. Because interest rates are currently at historical lows, limiting the rates based on the 25-year average tends to increase the interest rates, and therefore lower the minimum funding requirements.
Under MAP-21, the segment rates for a plan year are adjusted so that they are no less than a minimum percentage (floor) and no more than a maximum percentage (cap) of the average segment rates for the 25-year period ending on September 30 of the prior plan year. The range of allowable rates expands over the next few years as shown in the table below, phasing out the impact of the 25-year average.
|Range of Allowable Segment Rates
as a Percentage of the 25-year Average
|For plan years
|2016 or later||70%||130%|
Adjusted segment rates for plan years beginning in 2012 (MAP-21 rates) were published in Notice 2012-55. As shown in the table below, all three segment rates for January 2012 are higher than the rates that would have otherwise been required prior to MAP-21:
|Segment rate||January 2012
Unadjusted segment rates
|MAP-21 rates for
plan year beginning in 2012
Do the MAP-21 rates affect benefit restrictions under Internal Revenue Code Section 436?
Yes, using the MAP-21 rates may increase the plan’s adjusted funding target percentage (AFTAP) and potentially remove funding-based benefit restrictions on the plan (for example, the restriction on paying lump sum benefits).
Are the MAP-21 rates used for all plan calculations?
No, MAP-21 specifies that the unadjusted segment rates must still be used for certain purposes. These include determining:
- lump sum payments to participants,
- PBGC premiums,
- deductible limits on pension contributions,
- the amount available for qualified transfers to retiree medical accounts, and
- whether a plan must report to the PBGC under ERISA Section 4010.
When are the MAP-21 segment rates effective?
The MAP-21 segment rates are generally used for plan years beginning in 2012 and later. However, plans may elect to delay applying MAP-21 until the 2013 plan year. In addition, Congress recognized that some plan sponsors may wish to take advantage of funding relief for 2012, but do not want to disrupt 2012 plan operations under IRC Section 436. Therefore, a plan sponsor may elect to defer applying MAP-21 rates until 2013 for IRC Section 436 benefit restrictions while using the MAP-21 rates for 2012 for other purposes.
If a plan’s AFTAP for the 2012 plan year was already certified by September 30, 2012, using the unadjusted segment rates, and the sponsor wishes to reflect the MAP-21 rates for the 2012 plan year for IRC Section 436 purposes, a sponsor may either apply any change in benefit restrictions using the MAP-21 rates prospectively (effective no later than October 1, 2012), or retroactively, as if the AFTAP was originally certified using the MAP-21 rates. If the sponsor applies this change prospectively, the AFTAP must be recertified to reflect the MAP-21 rates by December 31, 2012. Please see Notice 2012-61 for additional details.
Does MAP-21 give any relief to plans that are valued using the full yield curve?
No, MAP-21 does not give any direct relief to plans that are funded using the full yield curve instead of the segment interest rates, but it does give plan sponsors a one-time opportunity to opt out of the yield curve without IRS approval, and begin using the segment interest rates instead. This opportunity is only available for the first plan year that MAP-21 applies to a plan (2012 or 2013, depending on the plan sponsor’s elections).
If a plan sponsor opts out of using the full yield curve for funding purposes, it must use the segment interest rates for all purposes, even for calculations that can’t reflect MAP-21.
How does MAP-21 affect interest credited under cash balance plans?
The Pension Protection Act of 2006 limits the interest rate credited to a cash balance account to a rate no higher than a market rate of return. Final regulations issued in October 2010 (T.D. 9505) provide that any of the three segment interest rates would be considered acceptable under these rules.
However, these regulations were issued before MAP-21 was enacted, and the IRS has not yet determined whether the MAP-21 segment rates would be acceptable as an interest crediting rate. Until final hybrid plan regulations regarding allowable interest crediting rates are issued, if a cash balance plan credits interest using a segment rate, the plan sponsor may use a reasonable interpretation as to whether the plan’s terms mean the segment rate should be the unadjusted segment rate or the MAP-21 segment rate.
Notice 2012-61 also provides that final hybrid plan regulations regarding allowable interest crediting rates will not be effective before January 1, 2014.
What elections must be made by the plan sponsor?
MAP-21 and Notice 2012-61 provide a number of choices for the plan sponsor. A plan sponsor must make an election by the earlier of the actual filing date or filing deadline (including extensions) for the 2012 Form 5500 if the sponsor wishes to:
- defer the application of MAP-21 until the plan year beginning in 2013,
- retroactively apply a 2012 AFTAP certification based on MAP-21 when applying IRC Section 436 benefit restrictions, or
- change certain contribution elections.
In addition, a plan sponsor must make an election by the last day of the 2012 plan year in order to change certain funding balance elections. Elections to opt out of using the full yield curve without requiring IRS approval are due by July 5, 2013.
Please see Notice 2012-61 for additional information.
- MAP-21: Changes to Segment Rates Phone Forum (Sept. 27, 2012) handout
- PBGC Technical Update 12-1: Effect of MAP-21 on PBGC Premiums
- PBGC Technical Update 12-2: Effect of MAP-21 on 4010 Reporting
- T.D. 9505 – final hybrid plan regulations (October 2010)
- REG-132554-08 – proposed regulations for hybrid plans (October 2010)