As summer passed into its final months, the Senate passed the Infrastructure Investment and Jobs Act (the “Act”). While the Act’s $1 trillion in allocations tackles a large number of issues, it contains specific provisions covering pension interest rates and the employee retention tax credit. The White House stated that “[t]he bipartisan Infrastructure Investment and Jobs Act will grow the economy, enhance our competitiveness, create good jobs, and make our economy more sustainable, resilient, and just.”
Soothing Pension Interest Rates
In 2012, Congress allowed 25-year pension interest rate smoothing to address problems caused by low-interest rates. Examples of problems include inflated pension funding obligations, diverted corporate assets (reducing business income and jobs), and reduced federal income tax revenue.
The new provision addressing pension interest rates, if passed, would apply to plan years beginning after December 31, 2021. The Act would include an ERISA provision that is parallel to the Code Sec. 430 minimum funding rules for single-employer plans.
Previously, smoothed interest rates would have started to phase out in 2021, but the American Rescue Plan Act of 2021 (ARPA) extended interest rate smoothing through 2029. Under ARPA, the applicable minimum and maximum percentages are 95% and 105% for plan years beginning in 2020 through 2025, with a wider window for later years.
The Act would further extend interest rate smoothing an additional five years, to 2034. Under the Act, the applicable minimum and maximum percentages are 95% and 105% for plan years beginning in 2020 through 2030, with a wider corridor for later plan years.
When interest rates are in decline, pension smoothing may allow plan sponsors to use higher interest rates for purposes related to pension funding. This helps lower plan sponsors’ funding obligations and increase tax revenues. Higher interest rates produce lower present values of expected future pension payments. This results in smaller tax-deductible minimum required contributions.
The Retention Tax Credit
Under pre-Act law, eligible employers can claim the employee retention tax credit for wages paid before January 1, 2022, against applicable employment taxes. For each calendar quarter in 2021, the amount of the credit is 70% of the qualified wages, up to $10,000 for each employee.
The Act, as proposed, would provide that the employee retention tax credit would apply to wages paid by an eligible employer after June 30, 2021, and before October 1, 2021. In the case of a recovery startup business, the credit would apply to wages paid after June 30, 2021, and before January 1, 2022. These provisions would apply to calendar quarters beginning after September 30, 2021.
For a recovery startup business, after the $10,000 limitation on qualified wages used to compute the credit is applied, the amount of the employee retention tax credit can’t exceed $50,000 for any calendar quarter. Thus, for the fourth quarter of 2021, a recovery startup business would be the only eligible employer able to meet the requirements to claim the employee retention tax credit. Other eligible employers are unable to claim the employee retention tax credit for wages paid after September 30, 2021.
In the definition of a recovery startup business, the Act would remove the requirement that a recovery startup business cannot be subject to a suspension under a government order or have experienced a significant decline in gross receipts for the calendar quarter. Thus, for the fourth quarter of 2021, a recovery startup business would be an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 (item (2) above).
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