IRS Issues Interest Rate Guidance for Defined Benefit Pension Plans

On November 18, 2021, the IRS released Notice 2021-62, which updates interest rates for defined benefit pension plan minimum funding purposes. Specifically, the notice provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates and the 24-month average segment rates applicable to single-employer defined benefit pension plans. Additionally, the notice provides the 30-year Treasury weighted average rate used by multiemployer plans to determine current liability.

With respect to single-employer defined benefit pension plans, the Internal Revenue Code specifies the minimum funding requirements and interest rates that must be used to determine a plan’s target normal cost and funding target. The target normal cost is the present value of benefits earned (or expected to be earned) during the year. The funding target is the present value of benefits accrued on the first day of the plan year.

For this purpose, the present value is normally determined using three 24-month average corporate bond interest rates (known as “segment rates”), each of which is used to discount benefits payable during specified periods. These segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins. Alternatively, a plan can elect to use the monthly corporate bond yield curve in place of the segment rates.

The notice includes a table (Table 2021-10) with the monthly corporate bond yield curve based upon October 2021 data. It specifies the spot first, second, and third segment rates for the month of October 2021 as, respectively, 0.87, 2.74 and 3.16.

According to the notice, the 24-month average corporate bond segment rates applicable for November 2021 (without adjustment for the 25-year average segment rate limits) for the first, second and third segments are, respectively, 0.96, 2.64 and 3.32.

The notice further explains that the American Rescue Plan Act of 2021 (ARPA) provided interest rate relief by changing the 25-year average segment rates and the applicable minimum and maximum percentages used to adjust the 24-month average segment rates. The following are the adjusted 24-month average segment rates taking into account the ARPA amendments:

However, the ARPA permitted a plan sponsor to elect not to have these changes apply to any plan year beginning before January 1, 2022. For a plan year for which such an election applies, the adjusted 24-month average segment rates are as follows:

With respect to minimum funding requirements for multiemployer plans, the notice provides the interest rate for calculating the plan’s current liability. This interest rate must be no more than five percent above and no more than 10 percent below the weighted average interest rates on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. The notice provides that for plan years beginning in November 2021, the 30-year Treasury weighted average rate was 2.16%, which results in a permissible interest rate range of 1.94% to 2.26% to calculate a plan’s current liability.

Sponsors of defined benefit plans should be aware of the guidance and may want to consult with their counsel or actuaries for further information.

Notice 2021-61 »