PPA Tidbits

On the ABA Joint Committee on Employee Benefits teleconference last Thursday, Bill Bortz from Treasury cleared up some issues that have been creating uncertainty under the newly-enacted Pension Protection Act of 2006:

• Bill said the restrictions on funding executive benefits when the defined benefit plan is underfunded won't be effective until the funding rules become effective in 2008 or later. The restrictions resulting from the employer's bankruptcy, however, are effective immediately.
• On faster vesting for cash balance plans, he confirmed it only applies to the cash balance portion of the plan, not to traditional benefits that are grandfathered or benefits for participants in the plan that only have traditional benefits.
• On how the 2-year averaging works for calculating the funding interest rate under the new rules, he said it was a simple average not a weighted average as under current law.

I've attempted to summarize the new funding rules and related benefits restrictions in one page. Certainly not all you'll need by 2008 when these rules become effective, but hopefully enough to get you started. BNA has established a Pension Protection Act Center with materials from a number of sources to help you come to grips with the new Act.

Nell Hennessy
nell.hennessy@fiduciarycounselors.com
202-558-5141

Comments

[judy mazo]

While Bill Bortz's comments at the JCEB teleconference were, indeed, enlightening -- as were his observations on the hybrid-plan issues, which Sheila Cherry covered in her story in yesterday's BNA Pension & Benefits Daily. But I feel a moral if not fiduciary obligation to point out that Bill was speaking only for himself and was not expressing Treasury policy.

[Nell Hennessy]

Frank,
You are correct that "target normal cost" under the new single-employer funding rules includes both the value of the new benefits earned for that year and increases in previously earned benefits resulting from salary increase. (The definition is in new Code § 430(b), added by § 112 of the PPA.) Under the ERISA funding methods, normal cost varied depending on the method used. The ERISA funding methods will be replaced by the single method laid out in the PPA for single-employer plans and "target normal cost" doesn't apply to multiemployer plans, which will be the only plans using the current funding methods, so the methods shouldn't need to be adjusted.

[FRANK CUMMINGS]

Nell -
The funding chart you have posted defines a number of terms, but I don't see a definition of "target normal cost" - a key term you use repeatedly. I think it means the value of the benefits earned in a particular year, including increases in salary that increase benefits earned in prior years. Am I right? If so, then would customary actuarial methods need to be adjusted to back-out these items before they are added back in?
Frank