House Committee Advances Single-Employer Pension Plan Provisions for the New COVID-19 Relief Package

On February 12, 2021, the House Ways and Means Committee approved additions to the new COVID-19 relief package that will most likely be approved by the end of February. It includes key elements related to single-employer plans including 401(k) and defined benefit plans.  

The legislation is being prepared to come up for a House vote on February 26, 2021, followed by a Senate vote. Their goal is to approve the new relief package prior to March 14th, 2021 – before the current federal unemployment benefits expire.

Single-Employer Plan Provisions

1. Section 9705 – Extended amortizations. The legislation modifies shortfall amortizations from the current 7-year period to now 15-years for plan years beginning after December 31, 2019. However, the plan sponsor has the option to elect plan years beginning after December 31, 2018. 
2. Section 9705 – Zeroing out of existing amortization bases. The legislation would zero out any existing amortizations for plan years beginning before December 31, 2019 and again, the sponsor has the option to elect plan years beginning after December 31, 2018. 
3. Section 9706 – Extension of pension funding stabilization percentages. This would extend the phase out adopted in prior pension relief legislation in 2012, 2014, and 2015 which was intended to address historically low interest rates.
   1. The key point is that it would establish a 5.0% floor on the 25-year interest rate averages for the 1st, 2nd, and 3rd segment interest rates. This would further reduce ERISA minimum funding liabilities and require minimum contributions.
4. Section 9708 – Cost of living adjustment freeze.  For plan years beginning after December 31, 2030, the legislation would freeze any cost of living adjustments at the 2030 calendar year level for: 
   1. The compensation limit under IRC § 401(a)(17) would be frozen at the 2030 level (for 2021, the limit is $290,000 for qualified plans) so this would limit the profit-sharing contributions and defined benefit accruals for higher income earners.
   2. The total account addition (excluding catch-up contributions) under IRC § 415(c) would be frozen at the 2030 level (for 2021, this amount is $58,000 or 20% of the $290,000 compensation limit under IRC § 401(a)(17)).
   3. The maximum annual benefit payable from a defined benefit pension plan under IRC § 415(b)(1)(A) would be frozen at the 2030 level (for 2021, this amount is $230,000). 
   4. The COLA freeze feature of the legislation would NOT apply to a plan maintained in relation to a collective bargaining agreement. 

What This Means

Keep in mind that this is only a markup and the legislation has yet to be passed by the House or the Senate as of the date this article is published. Even though it is not yet in effect, it provides guidance as to where the legislation is likely to go so that you can prepare in advance. While the proposed legislation would provide funding relief to single-employer plans, the cost-of-living freeze in 2030 is likely to make smaller qualified retirement plans less attractive to business owners.

Odyssey Advisors seeks to stay up-to-date with pending legislation to keep our clients and partners informed. If you have questions, please reach out to an Odyssey consultant for more information.