DOL Issues Guidance on Additional Annual Funding Notice Disclosures for Single-Employer Defined Benefit Plans

On March 8, the Department of Labor ("DOL") issued a field assistance bulletin ("FAB 2013-01") to assist administrators of single-employer defined benefit plans in preparing plans' annual funding notices ("AFNs"). Specifically, many plans using the stabilized interest rates under the Moving Ahead for Progress in the 21st Century Act ("MAP-21") will have to disclose the effect of MAP-21 on the funding of the plan. FAB 2013-01 provides guidance regarding this new disclosure requirement.

Background

Single-employer defined benefit pension plans are subject to certain minimum funding requirements under Section 430 of the Internal Revenue Code ("Code") and Section 303 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Code Section 430 and ERISA Section 303 also specify the interest rates generally used to determine the present value of a plan's liabilities. Currently, those interest rates are the segment rates described in Section 303(h)(2)(C) of ERISA. MAP-21 amended ERISA to allow plans to adjust the segment rates as necessary to fall within a specified range, based on a 25-year average of the corresponding segment rates. The ability to use more favorable interest rates provides much-needed funding relief for many plans.

MAP-21 also added a new disclosure requirement requiring that information regarding segment rate stabilization be disclosed in plans' AFNs for plan years from 2012 through 2014. FAB 2013-01 addresses this disclosure requirement and also provides a supplement to the model AFN. Use of the model language – while not mandatory – is sufficient to demonstrate satisfaction of ERISA's AFN content requirements.

Affected Plans

The new MAP-21 disclosure requirement generally applies to single-employer defined benefit plans for plan years that start after December 31, 2011 and before January 1, 2015 if in that plan year:

1. The plan's funding target (calculated using MAP-21 rates) is less than 95% of the funding target determined without regard to MAP-21 rates;
2. The plan's funding shortfall determined without regard to MAP-21 rates is greater than $500,000; and
3. The plan had 50 or more participants on any day in the preceding plan year.

A plan administrator must calculate the funding targets under requirement 1 without regard to a plan's at-risk status. However, under requirement 2 (the funding shortfall test), if a plan is in at-risk status, the plan administrator must include at-risk assumptions in calculating the funding target. The number of participants is determined based on an aggregation rule pursuant to which all single-employer plans maintained by the same employer (or any member of such employer's controlled group) are treated as one plan, but only participants with respect to such employer or member shall be taken into account.

Also, if for the 2012 plan year, a plan elects not to use the MAP-21 segment rates, the plan administrator is not required to include the MAP-21 disclosures in the 2012 AFN. Similarly, if a plan sponsor uses the full corporate bond yield curve without regard to MAP-21 segment rates to determine the minimum required contribution, the plan's AFN for that plan year need not include the MAP-21 disclosures.

Content

If the disclosure is required, the AFN must include a statement that MAP-21 modified the method for determining interest rates used to determine the actuarial value of benefits earned under the plan by providing that a 25-year average of interest rates be taken into account, in addition to a 2-year average. Additionally, the AFN must include a statement that the plan sponsor may contribute less money to the plan as a result of MAP-21 when interest rates are at historical lows. Finally, the AFN must include a table that shows the funding target attainment percentage ("FTAP"), funding shortfall, and minimum required contribution ("MRC") determined with and without regard to MAP-21 segment rates, for the applicable plan year and each of the two preceding plan years. The additional information must be displayed in a prominent manner, and the DOL suggests that it be attached to the front of the AFN.

For the 2012 and 2013 plan year AFNs, plan administrators may list "Not Applicable" in the cells requiring information with MAP-21 rates for plan years beginning before January 1, 2012. A plan is also not required to provide FTAP, funding shortfall and MRC without regard to MAP-21 segment rates for a preceding plan year if the plan was not required to provide a MAP-21 disclosure in its AFN for that plan year. In addition, if a plan used the full corporate bond yield curve without regard to MAP-21 segment rates in a particular year, or it elected to opt out of MAP-21 rules for the plan year beginning in 2012, the AFN does not have to provide the FTAP, funding shortfall, and MRC using MAP-21 disclosures as to that plan year.

Conclusion

A plan's AFN must be distributed  to participants no later than 120 days after the end of a plan year.  Therefore, calendar year plans will be distributing their AFN for 2012 by no later than April 30, 2013. All plans affected by MAP-21 should carefully review FAB 2013-01 and confirm that their AFN reflects the most up-to-date guidance from the DOL.