NU Online News Service, April 16, 2004, 5:31 p.m. EDT – U.S. employers can use a composite corporate bond rate of 5.44% when computing defined benefit pension plan contributions for March.[@@]
Tony Montanaro, an employee plans expert at the Internal Revenue Service, gives that figure in IRS Notice 2004-34. The IRS issued the notice to tell employers and their pension advisors how to use the new Pension Funding Equity Act.
President Bush signed H.R. 3108, the bill that created the act, Saturday. One section of the act lowers funding costs for sponsors of defined benefit pension plans by temporarily replacing the very low 30-year Treasury bond rate with a high-quality corporate bond rate index.
Overall interest rates are much lower now than they were between 1970 and 2000. Because 30-year bonds are popular and the federal government stopped issuing them 2 years ago, yields on 30-year bonds are even lower than rates on other types of government bonds.
The average 30-year Treasury bond yield was 4.66% in March, according to ValuBond Securities Inc., Atlanta.
When the official pension contribution benchmark rate falls, the amount of interest that employers can assume plan assets will earn over the course of employees’ careers falls. Employers must contribute more to pension plans to meet federal plan funding requirements.
Congress and Bush rushed to enact H.R. 3108 so that employers could use the new, lower official rate to cut first-quarter plan contributions. The contributions were due Thursday.
The IRS is using an average of figures from 3 high-grade bond indices to come up with the monthly composite corporate bond rate, Montanaro writes in the IRS notice.
The indices are the Citigroup High Grade Credit Index, which covers bonds with durations of at least 10 years that have ratings of AA or higher; the Merrill Lynch U.S. Corporates AA-AAA Rated 10+ Years index; and the Lehman Brothers U.S. A Long Credit index.
The monthly composite corporate bond rate affects employer pension contributions by affecting a 4-year weighted moving average of the composite corporate bond rate. When calculating pension contribution obligations, employers can use any rate between 90% and 100% of the corporate weighted average interest rate, Montanaro writes.
For March, the permissible range is 5.81% to 6.45%.
The IRS wants to hear from the public about the new official rate, Montanaro writes.
“Comments are requested regarding the appropriateness of the indices that are used in the determination of this rate, whether other indices would be more appropriate for this purpose, and the appropriateness of the weight given to each index,” Montanaro writes.
The IRS has posted a copy of Notice 2004-34 at http://www.irs.gov/pub/irs-drop/n-04-34.pdf