On Friday, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962), ending an extensive two-year lobbying effort during which employers and trade groups urged Congress to adopt funding relief for defined benefit pension plans. The Act gives plan sponsors additional time to amortize pension funding shortfalls, which, before the Act, had to be amortized over seven years.

Single-Employer Plans. Employers that sponsor single-employer defined benefit plans can elect to apply either a "2 plus 7" schedule or a 15-year schedule to amortize the "shortfall amortization base," which is the portion of the funding shortfall that is recognized in any one year under the funding rules set forth in ERISA and the Internal Revenue Code. The "2 plus 7" schedule provides for interest-only payments for two years, after which seven-year amortization applies. For example, the shortfall amortization base for 2010 would not begin to be amortized until 2012 (except for interest payments). The 15-year schedule allows plan sponsors to amortize the shortfall amortization base for a given year in level installments over 15 years. 

The relief can be utilized by employers for any two plan years beginning in 2008, 2009, 2010, or 2011, although if the relief is elected for two years, the same schedule must apply for both years. A plan sponsor cannot elect the relief for a plan year if the due date for contributions for such year was before June 25, 2010. 

The relief can be elected for both active and frozen defined benefit plans. The Act requires that plan sponsors who elect this relief provide notice to participants and beneficiaries as well as to the Pension Benefit Guaranty Corporation. 

Cash Flow Rule. If a plan sponsor elects the "2 plus 7" schedule or the 15-year schedule, it must make an additional contribution to the plan equal to the sum of aggregate excess employee compensation over $1 million and the aggregate amount of extraordinary dividends and redemptions. 

            Excess Employee Compensation. If any employee's taxable compensation is over $1 million, the employer must make a contribution to the plan for the year of an amount equal to the excess. If an employer funds its nonqualified deferred compensation plan through a rabbi trust or otherwise, the amount of assets set aside for the employee through the funding arrangement is considered includible compensation for the year, even though it may not be taxable. Only compensation attributable to services rendered after February 28, 2010, is considered in applying this rule. The Act disregards (1) commissions; (2) restricted stock that is granted after February 28, 2010, and has at least a five-year vesting period; and (3) nonqualified deferred compensation, restricted stock, stock options, or stock appreciation rights payable or granted under a written binding contract that was in effect on March 1, 2010.

            Extraordinary Dividends and Redemptions. The employer must make a contribution to the plan for the year of an amount equal to "extraordinary dividends and redemptions" for the year.  Only dividends declared and redemptions occurring after February 28, 2010, are considered; there also are exceptions for intra-controlled group dividends and redemptions that are made on account of the death, disability, or termination of employment of an employee or shareholder.

The cash flow rule applies to all affiliated employers in the same controlled group. The rule applies for three years for plan sponsors who elect the "2 plus 7" schedule and five years for plan sponsors who elect the 15-year schedule. Further guidance on how the cash flow rule will apply in merger and acquisition situations is expected. 

Additional Relief. The Act extends the relief in the Worker, Retiree and Employer Recovery Act of 2008 to allow a plan's 2008 funded status to apply in 2009 and 2010 for purposes of the rule that requires a plan to be frozen if it is under 60 percent funded. Further, plans maintained by one or more tax-exempt section 501(c)(3) organizations are allowed to use credit balances even if the plans are less than 80 percent funded in the prior year. For purposes of this exception, calendar year plans can use their 2008 funded status in 2009 and 2010. 

If you have any questions about this pension funding relief, please contact Brian M. Pinheiro,  at 215.864.8511 or pinheiro@ballardspahr.com; or any member of Ballard Spahr's Employee Benefits and Executive Compensation Group. 

Copyright © 2010 by Ballard Spahr LLP.
(No claim to original U.S. government material.)



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