New Rules on Underfunded Pension Plans Call for Corporate Action Now

Given the proposed regulations the U.S. Treasury released last week related to the Pension Protection Act’s restrictions on the benefits provided by underfunded pension plans, companies might want to check immediately on their plan’s level of funding for this year, according to a retirement plan expert at Aon Consulting.

The year-old pension law put new limits on underfunded plans’ ability to pay lump sums, increase benefits or even accrue benefits for participants. And for the first time, the PPA requires companies to get a certification from their actuaries as to their level of funding.

Marge Martin, a vice president with Aon Consulting, said the proposed regulations give companies that are at least 90 percent funded for 2007 an extra six months in 2008 to obtain that certification.

If plans operate on a calendar-year basis, the new regulations give them until April 1 to get the certification, Martin said. “And if you’re at 90 percent [funding], you’re good for another six months, until October 1.”

The 90 percent funding measure is based on a plan’s January 1 numbers, using calculations based on the old pension laws.

Martin noted that September 15 is the last opportunity to make contributions for the 2006 year. Companies that find themselves short of that 90 percent level may want to make an additional 2006 contribution to achieve the 90 percent target, she said.

“It may save you from rushing to get a 2008 certification for April 1,” she said. “It will give you until at least that October 1 date.”

The PPA stipulates that pension plans that are less than 60 percent funded cannot pay lump sums to retiring workers, while those that are more than 60 percent funded but less than 80 percent funded can pay retiring workers a lump sum equal to only half their benefit. Plans that are in bankruptcy cannot pay lump sums unless they are 100 percent funded, a provision that Martin said is of particular concern.

Plans that are less than 60 percent funded must also stop accruing benefits for participants and are not allowed to pay shutdown benefits.

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.