The Demise of Defined Benefit Plans for Private Employers
Kathryn J. Kennedy
John Marshall Law School
October 13, 2008
Tax Notes, Vol. 121, No. 2, 2008
This is the third report in a trilogy, which began in 2005, in which the author examines the change in pension rules set forth in both ERISA and the Internal Revenue Code, applicable to defined benefit plans maintained by private employers. The original title was in the hope that Congress would revisit ERISA's and the code's pension funding rules in order to restore the viability of single-employer defined benefit pension plans. Unfortunately the new rules promulgated by the Pension Protection Act of 2006 (PPA '06) do not foster the growth of existing or new defined benefit pension plans, except for those of small employers.
In this third report, the author analyzes the new minimum pension funding rules and the new restricted benefit rules (which also affect a defined benefit plan's qualification status) enacted by PPA '06, effective beginning in 2008. As noted in a recent report by the Government Accountability Office, many employers are responding to these rules by freezing benefit accruals for existing and/or new entrants under the plan. Coupled with these new rules, the Financial Accounting Standards Board has introduced a new accounting reporting requirement that will have important financial effects for plan sponsors of underfunded single-employer defined benefit plans. Attorneys and actuaries alike are responding to these challenges by offering a variety of strategies for plan sponsors. These requirements and the responding strategies have been summarized at the end of this article.
JEL Classification: M41, M44, J26
Date posted: October 12, 2008