The Pension Protection Act of 2006 required faster funding of
defined benefit plans, generally funding shortfalls over 7 years.
These new requirements began to phase in just as asset values
plunged and employers became strapped for cash in the recession.
Employer groups have been pressing Congress to provide relief since
the new rules became effective.
Canadian companies with U.S. subsidiaries need to know that the
Act does not look only at compensation and shareholder payments of
the U.S. entities, but also at all affiliated entities –
generally, the parent and all subsidiaries, which are at least 80%
owned. For example, taxable compensation paid to U.S. citizens
outside the U.S. may trigger additional contribution requirements
in the Act.
Pension Relief Choices
A plan sponsor may elect to pay interest only on the shortfall
amortization base for two years, and then amortize the principal
over the succeeding 7 year period; or
A plan sponsor may elect to extend the 7 year amortization
period to 15 years.
The funding relief is available for one or two plan years
beginning in 2008 through 2011. The plan sponsor must notify
participants and the Pension Benefit Guaranty Corporation of its
irrevocable election to use this relief.
Cash Flow Adjustment for Excess Executive Compensation
The Act imposes a "cash flow" rule that requires an
additional matching contribution equal to taxable "excess
compensation" over $1 million attributable to service after
February 28, 2010 plus amounts used to fund a rabbi trust after
that date. There is no limit on the number of executives whose
compensation must be counted, but only compensation that is subject
to U.S. taxation is counted. However, non-qualified deferred
compensation, restricted stock, stock options and stock
appreciation rights paid or granted under a binding written
contract in effect on March 1, 2010 and new restricted stock awards
that vest over at least 5 years are excluded.
Cash Flow Adjustment for Dividends and Redemptions
Extraordinary dividends and certain stock redemptions after
February 28, 2010 are also required to be matched, but dividends
within a controlled group and redemptions by an employee benefit
plan or on account of death or termination of employment of an
employee or shareholder are disregarded.
The cash flow adjustments apply for 3 years (for 2/7 relief) or
5 years (if 15 year relief is selected). Plan sponsors considering
this relief should evaluate the extent to which their compensation
practices will limit or be limited by it. For example, they may
wish to grant future equity awards in the form of restricted stock
subject to a 5 year vesting schedule so that it will not count in
the compensation calculation. Benefit advisers will also need to
coordinate with the corporate lawyers to make sure that corporate
action does not inadvertently require significant matching
contributions to the pension plan that could completely eliminate
any pension funding relief.
Carol Buckmann has practised in the employee
benefits field for over 25 years, advising clients on all aspects
of employee benefits and retirement plans, including questions
relating to 401(k), defined benefit and employee stock ownership
plans, welfare plans, fiduciary responsibility, prohibited
transactions and plan asset issues arising in investment fund
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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