On March 8, 2013, the U.S. Department of Labor (DOL) issued Field Assistance Bulletin No. 2013-01 (FAB 2013-01), which provides guidance on the new annual funding notice (AFN) requirements for single-employer defined benefit plans under the Moving Ahead for Progress in the 21st Century Act (MAP-21). Plan administrators of single-employer defined benefit plans that meet certain requirements must disclose the effect of MAP-21 on the plan’s funding and the plan sponsor’s minimum required contribution to the plan. The new guidance sets forth technical questions and answers, and includes a model supplement to the model annual funding notice that may be used to comply with the new disclosure requirements. Because calendar year plans must provide the required disclosures by April 30, 2013, plan sponsors should ensure their plans’ annual funding notices incorporate the most recent guidance from the DOL.
Single-employer defined benefit plans are subject to minimum funding requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. These provisions specify the interest rates used to determine the present value of plan liabilities. Prior to the passage of MAP-21, such interest rates were based upon two-year averages of the yields on certain investment grade bonds. As interest rates dropped to historic lows over the past several years, the present value of plans’ liabilities increased, such that plan sponsors were required to contribute more money to meet their minimum funding obligations. MAP-21 amended ERISA to provide interest rate stabilization by adjusting the required interest rates as necessary to fall within a specified range, based on a 25-year average.
MAP-21 also amended ERISA to require that plan administrators of certain single-employer defined benefit plans provide notice of the impact of the interest rate stabilization on the plan’s funding status. Such information must be included in affected plans’ AFNs for plan years that begin in 2012, 2013 and 2014. Plan administrators must distribute AFNs to participants, beneficiaries, labor unions representing such participants and beneficiaries, and, if applicable, the Pension Benefit Guaranty Corporation (PBGC) no later than 120 days after the end of a plan year (April 30 for calendar year plans).
The new MAP-21 AFN disclosure requirements apply to single-employer defined benefit plans subject to the protection of employee benefit rights and plan termination insurance requirements of Titles I and IV of ERISA for each “applicable plan year” that starts after December 31, 2011, and before January 1, 2015. An “applicable plan year” is a plan year in which:
- The plan’s funding target calculated using the MAP-21 rates is less than 95 percent of the funding target determined without regard to MAP-21 rates, each of which is to be calculated without regard to the plan’s at-risk status
- The plan’s funding shortfall determined without regard to MAP-21 rates is greater than $500,000 (taking into account at-risk assumptions, if the plan is at-risk)
- The plan (and any other single-employer defined benefit plans maintained by the plan sponsor and its controlled group members) had 50 or more participants on any day in the preceding plan year
FAB 2013-01 provides additional guidance on how the funding target, funding shortfall, and number of participants should be calculated.
If a plan elected not to use the MAP-21 rates for any purpose for the plan year beginning in 2012, the plan administrator is not required to include the MAP-21 disclosures in the AFN with respect to such plan year. Similarly, if a plan elected to use the full corporate bond yield curve to determine the plan sponsor’s minimum required contribution, the plan’s AFN for that plan year need not include the MAP-21 disclosures. Special rules apply to PBGC settlement plans and plans of eligible cooperatives and eligible charities.
The AFN for an affected plan must include a statement that “MAP-21 modified the method for determining interest rates used to calculate the actuarial value of benefits earned under the plan, providing for a 25-year average of interest rates to be taken into account in addition to a 2-year average.” The plan administrator may choose to include the effective interest rates that result from these averages to the extent they are necessary or helpful to understanding the required MAP-21 disclosures and do not have the effect of misleading or misinforming participants. The AFN also must include a statement that the plan sponsor may contribute less money to the plan as a result of MAP-21 when interest rates are at historic lows.
In addition, the AFN of an affected plan generally must provide a table illustrating the funding target attainment percentage, funding shortfall and minimum required contribution, each determined with and without regard to MAP-21 rates, for the applicable plan year and each of the two preceding plan years. However, such values determined “with regard to MAP-21” may not need to be included in the table if, for example, MAP-21 was not effective for a prior plan year or was not used by the affected plan in a plan year.
Model AFN Supplement
FAB 2013-01 provides a model supplement to the model AFN incorporating the content requirements described above. Although not required, use of the model supplement satisfies the AFN content requirements under ERISA. If such a separate supplement is used, it should be attached to the AFN in a prominent manner, such as to the first page of the AFN.
Good Faith Compliance
Pending further guidance, the DOL will treat compliance with FAB 2013-01 as good faith compliance with the AFN disclosure requirements under ERISA. If a plan’s AFN was distributed prior to the issuance of FAB 2013-01, the DOL will treat the plan administrator as complying with the AFN disclosure requirements under ERISA if he or she acted in accordance with a good faith, reasonable interpretation of the law.
As the deadline for furnishing an AFN for the 2012 plan year approaches (April 30, 2013, for calendar year plans), plan administrators should carefully review FAB 2013-01 and confirm that the plan’s AFN reflects the most recent guidance from the DOL.