President signs transportation act with pension-related tax provisions and more
President Obama signed a comprehensive transportation bill on July 6. The Moving Ahead for Progress in the 21st Century Act (MAP-21) (P.L. 112-141) extends highway excise taxes. Other provisions also provide for pension funding stabilization, enhance the ability of employers to transfer excess pension assets to fund retiree health benefits, provide for phased retirement authority for federal employees, and expand the definition of a tobacco manufacturer to include businesses operating roll-your-own cigarette machines.
The Highway Trust Fund is funded by excise taxes on highway motor fuels, a retail sales tax on heavy highway vehicles, a manufacturers' excise tax on heavy vehicle tires, and an annual use tax on heavy vehicles. Except for 4.3 cents per gallon of the Highway Trust Fund fuels tax rates, the remaining taxes were scheduled to expire after June 30, 2012. MAP-21 extends the taxes dedicated to the Highway Trust Fund through September 30, 2016, and for the heavy vehicle use tax, through September 30, 2017.
Employers maintaining defined benefit plans generally are required to make a minimum contribution for each plan year to fund plan benefits. The minimum funding rules for single-employer defined benefit plans specify the interest rates and other actuarial assumptions that must be used in determining the present value of benefits.
The new law stabilizes the interest rate formula by taking into account average interest rates over the most recent 25 years, which are generally higher than the short-term rates which resulted in inflated pension plan liabilities. Under the new law, plan liabilities continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within 10 percent (increasing to 30 percent in 2016 and thereafter) of the average of such segment rates for the 25-year period preceding the current year.
A pension plan may provide medical benefits to retired employees through a separate account that is part of a defined benefit plan. The retiree generally may exclude benefits from his or her gross income. MAP-21 provides for qualified transfers to retiree medical accounts to be made through December 31, 2021. Additionally, MAP-21 allows qualified transfers to be made to fund the purchase of retiree group-term life insurance.
Under phased retirement, a qualified federal employee's work schedule is reduced to a percentage of a full time work schedule and the employee receives a phased retirement annuity. At full-time retirement, the employee receives a composite retirement annuity that also includes the portion of the employee's retirement annuity attributable to the reduced work schedule. MAP-21 provides an exception to the early distribution tax for payments under a phased retirement annuity and a composite retirement annuity.
MAP-21 expands the definition of manufacturer of tobacco products to include any person who for commercial purposes makes available machines capable of making tobacco products for consumer use. This includes making a machine available for consumers to produce tobacco products for personal consumption or use. Under MAP-21, the machine's owner is responsible for federal excise taxes on the tobacco products manufactured using his or her machine. The provision is projected to raise $94 million over 10 years.
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Moving Ahead for Progress in the 21st Century Act (P.L. 112-141)