Summary of Defined Benefit Funding Relief for Single Employer Pension Plan Sponsors

As defined benefit plan sponsors continue to try to determine the long-term financial impact of recent market volatility, some funding relief has arrived. On June 25, 2010, President Obama signed the "Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962)" into law thus providing pension plan sponsors with some funding relief. Below are details around the two aspects of the new law that will most significantly impact single employer pension plan sponsors:

1. Amortization Extensions

This provision allows plan sponsors to elect relief for up to two of the four plan years from 2008 to 2011. A plan sponsor may select either of the following schedules in place of the current seven year amortization: 

1. A “2 plus 7” schedule which would delay amortization of the losses for two years. Interest on those losses would still have to be paid in the first two years and then sponsors would use a seven year amortization; or

2. An election of a 15-year amortization in level amounts.

Regardless of the amortization period chosen, the plan’s funding obligation for a plan year would increase if “excessive” employee compensation or shareholder dividend or stock redemption payments are made. “Excessive” compensation is looked at on a control group basis and is defined as paying any individual employee over $1 million in annual compensation (excluding commission). Excessive payments also include “extraordinary” dividends in excess of the plan sponsor’s net income for the preceding plan year. The restriction period is determined based on the type of relief selected by the plan sponsor.

2. Relaxing Some Limitations Imposed on Plans Under 60% Funded

Under the Pension Protection Act of 2006(PPA), pension plans that are under 60% funded are sanctioned with significant benefit restrictions including the freezing of accruals for participants. This provision in the new law is an extension of the relief provided in the Worker, Retiree, and Employer Recovery Act (WRERA) passed in December 2008. The new law provides additional time that a plan may use the Adjusted Funding Target Attainment Percentage (AFTAP) for an earlier year (e.g., 2008 for calendar year plans) if it is over 60% in that year. This benefits a plan sponsor in that they can delay a potential freezing of the plan’s accruals by using the plan’s earlier funded status. Relief is also provided to allow benefit payments in the form of a social security leveling payment which would have otherwise been restricted.


For more information please email seiresearch@seic.com. This information is for educational purposes only. Not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information. Information provided by SEI Investments Management Corp., a wholly owned subsidiary of SEI Investments Company. ©SEI 2010