Guest Article

(From the September 18, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PPA Requires Plan Sponsors to Use Same Interest Rate to Calculate Minimum and Maximum Contributions in 2006 and 2007

Although the Pension Protection Act ("PPA") of 2006 [P.L. 109-280] permits plan sponsors to continue using the composite long-term corporate bond rate (instead of the 30-year Treasury rate) to calculate their liabilities for minimum funding purposes in 2006 and 2007, it eliminates the rule that allowed sponsors to use a lower interest rate to calculate their maximum deductible contributions in 2004 and 2005.

Background

In 2004, Congress enacted the Pension Funding Equity Act ("PFEA") [P.L. 108-218] to provide temporary funding relief for pension plan sponsors. Specifically, the PFEA permitted plan sponsors to use 90 to 100 percent (the "permitted range") of the four-year weighted average composite long-term corporate bond rate to determine their plans' current liabilities for purposes of the IRC § 412(c)(7)(E) minimum full funding limitation and the IRC § 412(l) deficit reduction contribution rules.

However, the PFEA also permitted plan sponsors to use either the four-year weighted average composite long-term corporate bond rate or the four-year weighted average 30-year Treasury rate to calculate their plans' current liabilities pursuant to the IRC § 404 maximum deductible contribution requirements. Congress allowed plan sponsors to use different interest rates because, according to the PFEA conference agreement, it wanted to ensure the deduction limit did not change so that plan sponsors would not be "penalized for fully funding their plans."

Different Rule for 2006 and 2007

As noted, the PPA permits plan sponsors to continue using the composite long-term corporate bond rate for calculating minimum funding requirements for 2006 and 2007 plan years. But the PPA repeals IRC § 404(a)(1)(F), which authorized the interest rate dichotomy for 2004 and 2005 plan years. As a result, plan sponsors will use the composite long-term corporate bond rate to calculate both their minimum required and their maximum deductible contributions for 2006 and 2007 plan years.

The maximum deductible contribution limit for 2006 and 2007 plan years is 150 percent of the plan's current liability.

New Maximum Deductible Contribution Limit for 2008 and Beyond

Beginning in 2008, the PPA's new funding requirements for single-employer defined benefit plans will become effective. At that time the maximum deductible contribution will be calculated using the following formula:

The "Cushion" will be 50 percent of the plan's funding target plus the amount by which the funding target would increase if future compensation increases were taken into account.

A special rule will apply for sponsors of plans that are not "at-risk". The maximum deductible contribution limit for these plan sponsors will not be less than the sum of the plan's funding target and target normal cost, both calculated using the special at-risk assumptions.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2006, Deloitte.