Policy Issues Alert! Temporary Funding Relief For Defined Benefit Pension Plans

Saturday, May 1, 2004 - 01:00

On April 10, 2004, President Bush signed into law the Pension Funding Equity Act of 2004 (the "Act"). Of immediate importance, the Act will impact a plan sponsor's minimum required quarterly contributions to defined benefit pension plans which, in the case of calendar year-based plans, are due April 15. We recommend that you consult with your actuary to ascertain the impact that the legislation has on your plan's funding requirements.

The Act temporarily changes the interest rate used for determining a plan's current liability for funding purposes. Previously, the yield on 30-year Treasury bonds (which are no longer issued) was used for this purpose. However, the yield on 30-year Treasury bonds is widely viewed as an artificially low rate and, consequently, created large funding deficits in many pension plans.

The Act replaces that rate for 2004 and 2005 with a rate that must be within 90% to 100% of a weighted average of interest rates, based on long-term investment-grade corporate bonds selected by the Secretary of the Treasury, within certain parameters. Following the enactment of the legislation, the Internal Revenue Service issued Notice 2004-34 to provide guidance on the weighted average interest rate and the resulting permissible range of interest rates.

The Act includes special rules for multiemployer plans and for certain industries, such as the steel and airline industries. In addition, the Act contains a variety of other provisions applicable to defined benefit pension plans that my impact your plan, which we would be happy to discuss with you.

The foregoing first appeared on the Proskauer Rose LLP website and is reprinted here with the firm's permission.