Extended amortization may be elected for the 2009 and/or 2010 plan years. Special rules are provided for non-calendar year plans.

Maintenance of effort

Extended amortization comes "with strings attached:"

If a sponsor elects 2 + 7 amortization for 2009 or 2010, then it must comply with the "active plan" requirement (described below) through the following year. If the sponsor fails to maintain an active plan, the minimum required contribution for the plan year is increased by all amounts by which the minimum required contribution for the current year and any prior year has been reduced, plus interest. However, this “make-up” contribution would be limited to the amount necessary to fully fund the plan; so, for instance, if the market rebounds and, notwithstanding delayed funding, the plan is fully funded, no contribution would be required.

If a sponsor elects 15-year amortization for any year, then it must comply with the "active plan" requirement for the seven subsequent plan years. If the sponsor fails to maintain an active plan in any year during that period, the remaining shortfall amortization base must be amortized over seven years.

To satisfy the "active plan" requirement the sponsor has three options:

DB option. Maintain its DB plan with either: (1) the formula in effect on July 1, 2009 (or the formula in effect prior to any pre-July 1, 2009 freeze) or (2) a formula with a target normal cost of at least 3% of total compensation,

DC option. If its DB plan was frozen before July 1, 2009, provide a minimum 3% allocation under a defined contribution plan, or

NQ option. Freeze benefits for key employees under, and impose PPA-like benefit restrictions on, any nonqualified plan

It is worth noting that the maintenance of effort requirements may not be particularly onerous, including the penalty for terminating the maintenance. For example, under the “2+7” option, failure to maintain just means reduced relief contributions have to be made up. Under the 15-year option, you effectively just recommence a seven-year amortization. Further, the maintenance periods have been reduced in half from Pomeroy’s earlier draft version of this legislation.

Fair market value corridor expanded to 120% for 2009 and 2010

Under the Pension Protection Act of 2006 (PPA), plan asset values may be smoothed over two years. There is, however, a limit to how much smoothing a sponsor may use: "smoothed" assets cannot exceed 110% percent of fair market value. This is usually called the 110% "asset smoothing corridor." Simple example: A plan has smoothed assets of $100 and fair market value assets of $80. This plan may not use, in the numerator of its funding percentage, a number larger than $88. The bill would expand the asset smoothing corridor, for 2009 and 2010, to 120%. So, in our example, the sponsor could use a smoothed asset value no larger than $96.

Extend WRERA accrual freeze relief

PPA requires, generally, that plans that are less than 60% funded must freeze benefit accruals. The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) provided relief for 2009 from this rule, allowing plans to use the beginning-of-2008 funded ratio for this purpose. The bill generally would extend this relief, allowing the 2008 funded ratio to be used for 2010 as well.

Waiver of restriction on use of credit balance

Generally (and oversimplifying a lot), a sponsor may not use credit balances to satisfy funding obligations if its funding ratio is below 80% for the prior year. The bill would allow sponsors to use the beginning-of-2008 funded ratio for this purpose for 2010 and 2011. This proposal would allow some sponsors with credit balances more flexibility with respect to the timing of contributions. For a complete discussion of the use of credit balances under PPA, see our article Credit balances and contribution timing under PPA.

Other provisions

In addition to the foregoing, the bill includes:

A clarification of treatment of administrative expenses – the bill provides that normal cost includes "plan-related administrative expenses," clarifying that investment expenses are not charged to normal cost.

A revision of ERISA section 4010 rules – the bill would revise ERISA section 4010 rules to require a 4010 filing by plans that are less than 90% funded (PPA’s current requirement is 80%). Under the bill, however, funding would be determined without reducing assets by the value of any credit balances. The bill also includes language toughening the 4010 confidentiality rules. We provide a detailed discussion of current 4010 reporting rules in our article PBGC finalizes rules for 4010 reporting. It is worth noting the earlier draft version of this bill was substantially different on this issue and would have required filing when a plan has aggregate unfunded vested benefits of more than $100 million (disregarding plans that are at least 90% funded).

A delay of the effective date of PPA benefit restriction rules for collectively bargained plans until 2012. This extension would not apply to plan amendments made pursuant to a collective bargaining agreement ratified after the date of introduction of the bill.

Relief for level income options – the bill in effect exempts Social Security level income options from restrictions on accelerated payments.

A reversal of PPA amendments increasing PBGC priority in bankruptcy.

A special limit on "ad hoc amendments" – oversimplifying somewhat, the bill would prohibit the adoption of early retirement window arrangements under which benefits are payable in a lump sum unless the plan, after taking into account the additional benefits, is at least 120% funded. Alternatively, the sponsor could fund the full cost of the additional benefits. If such an amendment does take effect, generally all benefits under the plan would be required to be 100% vested. Collectively bargained plans would be excluded from this new restriction.

Revise PBGC reportable event rules applicable to a reduction in the number of active participants in a plan.

Funding relief and maintenance of effort rules are provided for plans subject to pre-PPA deficit reduction contribution rules (delayed-effective date plans).

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There is general support in Congress for "doing something" to provide DB funding relief. The big questions are whether (1) Congress will have time this year to do something about the issue, and (2) what other proposals (e.g., 401(k) fee disclosure or investment advice) will be included in any final bill. We will continue to follow this issue.