American Rescue Plan Act (ARPA) – Some Highlights for Pension Plans and 401(k)

Under the American Rescue Plan Act of 2021, Tax Payers will Pick up the Tab for Underfunded Multiemployer Pension Plans for the Next 30 Years

  • The American Rescue Plan Act of 2021 (“ARPA”) is the $1.9 trillion stimulus package signed into law by President Biden on March 11th.  The key provisions are a $300 per week supplement to unemployment benefits, paid emergency leave for 100 million individuals and $1,400 in direct payments to many Americans.

  • Among many other provisions, this law includes an $86 billion bailout of Taft Hartley multiemployer pension plans. In enacting this legislation a major concern of Congress was that the Pension Benefit Guaranty Corporation (the “PBGC”) is the back stop for these plans.

  • The PBGC is a government agency that guarantees payment of benefits under private defined benefit pension plans. There is no comparable insurance for defined contribution plans. When the sponsor of a pension plan goes into bankruptcy, the PBGC assumes responsibility for the plan going forward.

  • The PBGC now pays benefits to almost a million participants covered by 4,800 failed pension plans and is responsible for future payments to another half a million individuals. It is funded by premiums assessed against pension plans.

  • The PBGC’s liabilities far exceed its assets. Its program for Taft Hartley multiemployer plans is in especially bad shape with liabilities for benefits exceeding assets by about $65 billion. This program was on track to run out of cash in 2025 which meant that without legislative action many plan participants would no longer receive their pension payments.

  • Several years ago, Senator Sherrod Brown of Ohio proposed a federal bailout for multiemployer plans known as the Butch Lewis Act. Until now this bill was viewed as having little chance of passage.

  • A version of this bill is included in the ARPA. Underfunded multiemployer plans will receive a cash infusion of federal tax dollars sufficient to keep them solvent through 2051. There is no repayment obligation.

  • The PBGC has 120 days from March 11 to issue guidance with details on the process to apply for assistance

  • To pay for this bailout, the ARPA increases the PBGC fixed-rate premium to $52 per participant in plan years beginning after December 31, 2030.  To put this in historical perspective, in 1974 when ERISA was enacted, the premium was one dollar. This may not represent real increase because PBGC premiums are indexed to inflation, and if current trends continue, the premium will be around $52 in 2031 even without this increase.

ARPA Provides Funding Relief for Underfunded Single Employer Pension Plans

  • Sponsors of defined benefit plans are subject to minimum funding requirements that require these plans to fund benefit liabilities as they accrue. Two provisions in ARPA provide some relief with regard to minimum funding.

  • This relief is only meaningful for pension plans with significant underfunding. It should be noted that this relief permits a postponement of a portion of required contributions but does not reduce the ultimate amount of required funding. Over the long term, postponing a portion of contributions will increase required contributions.

Longer Period to Amortize Funding Shortfalls

  • Sponsors of pension plans that are underfunded because the liability for benefits exceeds plan assets must make additional contributions to cover this underfunding. Under current law, these payments may be amortized (i.e., spread out) over seven years. ARPA extends this amortization period to 15 years, thereby reducing required contributions in the short term. 

Interest Rate Relief Extended and Increased

  • The higher the interest rate assumption used to value pension plan liabilities, the lower the value of those liabilities resulting in a lower minimum required contribution.

  • In 2012, 2014, and again in 2015, to address concerns that historically low interest rates were inflating pension obligations, Congress provided temporary interest rate relief known as “interest rate stabilization.” Interest rate stabilization allows for the use of slightly higher interest rate assumptions thereby lowering the required minimum contribution.

  • The most recent relief provided by interest rate stabilization under 2015 legislation began phasing out this year. The ARPA extends and increases interest rate stabilization.

Senate Removes Freeze on 401(k) Inflation Adjustments from ARPA

  • In a preview of things to come, the House version of the ARPA contained a provision eliminating the automatic inflation adjustments for the annual contribution limits to defined contribution plans.

  • The rationale was to help fund the multiemployer plan bailout and to prevent high income tax payors from benefiting disproportionately from the favorable tax treatment afforded by retirement plans.

  • The Senate removed this provision.

For any further questions, please do not hesitate to contact your Wellspring Financial Partners at (520) 327-1019 or info@wellspringfp.com.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.