President Obama has signed a law that relaxes funding requirements for employers maintaining defined benefit pension plans. The law will help companies deal with cash shortfalls caused by the poor economic conditions — and also provide revenue to cover the cost of preventing a decrease in Medicare reimbursement levels.
The pension funding provision doesn’t affect 401k plans or similar defined contribution plans, where your benefit is determined by your account balance. It applies only to defined benefit plans, where your benefit is based on factors such as years of service and compensation levels. Companies maintaining such plans are required to pay money into a trust fund that’s invested and used to pay the benefits. This law allows companies to temporarily reduce their payments into the trust fund.
Companies can choose between two ways to reduce their payments. In one, they pay interest only for two years, and amortize any shortfall over seven years. In the other they amortize a shortfall over fifteen years. This relief is limited, however, for companies that pay more than $1 million in compensation to any of their employees, or provide extraordinary dividends or stock buybacks.
Although it is a relief provision, the relaxed funding rule raises revenue to pay for the Medicare payments because companies making smaller contributions to pension funds will claim smaller deductions and pay more income tax.
Related
Text of law: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PDF)
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