Proposed Extension of Interest Rate Stabilization Percentages for Single Employer Plans

Proposed Extension of Interest Rate Stabilization Percentages for Single Employer Plans

INSIGHTi
Proposed Extension of Interest Rate
Stabilization Percentages for Single Employer
Plans
August 31, 2021
Participants in defined benefit (DB) pension plans typical y receive monthly payments from the plans
when they retire. Employers that sponsor these plans set aside an amount each year to fund the benefits
that wil be paid. The benefit obligations are a plan liability spread out over many years in the future.
Pension Plan Benefit Calculations
A DB plan’s future benefits are spread out many years in the future and are calculated and reported as
present values (also cal ed current values) through a process cal ed discounting. Discounting requires the
use of a specified interest rate and uses a formula to express benefits that are expected to be paid in a
particular year in the future as a present value. Discounting is the inverse of compounding, which projects
how much a dollar amount wil be worth at a point in the future given a specified interest rate.
The formula for calculating a present value is:

The present value of a dollar amount is inversely related to both the interest rate (also cal ed the discount
rate) used to determine the present value of future cash flows and the number of years in the future used
in the calculation. As the interest rate rises, the present value of future benefit obligations decreases, and
DB pension plan sponsors’ contributions decrease while maintaining plan funding. When pension plan
contributions decrease, employers’ taxable income increases, which results in increased revenue for the
U.S. Treasury.
Under current law, this present value formula uses three separate interest rates, referred to as segment
rates, which are calculated as the average of the corporate bond yields within each segment for the
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preceding 24 months. The first segment is for benefits payable within five years, the second segment is
for benefits payable after five to 20 years, and the third segment is for benefits payable after 20 years.
In 2012, in order to mitigate increasing employer DB contributions resulting from low interest rates, the
Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141) created a mechanism, cal ed
a funding corridor, to determine the minimum and maximum pension plan interest rates as a percentage
below and above the 25-year average of historical corporate bond yields. The resulting increase in U.S.
Treasury revenue was used as a budgetary offset for MAP-21.
Figure 1 shows the funding corridor. If the 24-month segment interest rate is higher than the maximum
(point 1), it is adjusted downward to the maximum. If the segment rate is within the corridor (point 2), the
rate is not adjusted. If the 24-month segment interest rate is below the minimum percentage of the funding
corridor (point 3), the interest rate is adjusted upward to the minimum.
The funding corridor was original y scheduled to widen in 2013, which would have resulted in lower
floors and higher ceilings. Since MAP-21, subsequent legislation has extended the years in which the
funding corridor widens, most recently in the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2).
Section 80602 of H.R. 3684, the Infrastructure Investment and Jobs Act, as passed by the Senate on
August 10, 2021, would delay the widening of the interest rate corridor until 2031, as shown in Figure 1.
Figure 1. Hypothetical Application of Interest Stabilization Provision, as Found in MAP-21,
HTF, BBA, ARPA, and Proposed in H.R. 3684

Source: Congressional Research Service.
Notes: MAP-21 = Moving Ahead for Progress in the 21st Century Act (P.L. 112-141); HTF = Highway and Transportation
Funding Act of 2014 (P.L. 113-159); BBA = Bipartisan Budget Act of 2015 (P.L. 114-74); ARPA = American Rescue Plan Act
of 2021 (P.L. 117-2). The segment rates are calculated as the average of the corporate bond yields within the segment for
the preceding 24 months. The three segment rates are calculated as the average of the corporate bond yields for the
preceding 24 months with maturities of (1) less than five years, (2) five to 20 years, and (3) more than 20 years,
respectively.
In Figure 1, the orange line shows the 25-year average of corporate bond yields within a segment. The
gold, green, and blue lines indicate the minimum and maximum rates around the 25-year average under
MAP-21 and two extensions—the Highway and Transportation Funding Act of 2014 (P.L. 113-159) and
the Bipartisan Budget Act of 2015 (P.L. 114-74). The red lines indicate the minimum and maximum rates

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around the 25-year averages under current law as outlined in ARPA. ARPA also set a floor of 5% for the
25-year average of corporate bond yields. The dark teal lines indicate the maximum and minimum rates
around the 25-year average as proposed in H.R. 3684. The funding corridor would remain at the current
floor of 95% and the current ceiling of 105% through 2030. In 2031, the corridor would begin widening.
Interest rates are currently—and likely wil be for the foreseeable future—below the 5% floor (thus
adjusted upward to the floor). A widening corridor results in a progressively lower floor for the adjusted
interest rate, which increases the present value of future benefit obligations and causes required plan
contributions to increase.
Delaying the widening of the corridor means that the present value of future benefit obligations does not
increase until a later specified date, and companies do not have to increase their required plan
contributions until that point. Lower plan contributions increase companies’ taxable income, which results
in increased Treasury revenue. JCT estimated that this provision would result in a net increase of $2.9
bil ion for the U.S. Treasury. For more information on the funding corridor, see CRS Report R46366,
Single-Employer Defined Benefit Pension Plans: Funding Relief and Modifications to Funding Rules.

Author Information

John J. Topoleski
Elizabeth A. Myers
Specialist in Income Security
Analyst in Income Security

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