U.S. Legislated Interest Rates

U.S. qualified mode

The Legislated Interest Rates topic, accessible if one or more benchmark bond yields have been projected in the Capital Market Simulation referenced in this set of Stochastic Assumptions, determines the statutory interest rate assumptions for target liability and current liability calculations at all future forecast valuation dates, i.e., all valuation dates after the baseline Valuation Date. The statutory interest rate assumptions for target liability and current liability calculations as of the baseline valuation date are specified under the Valuation Assumptions command. For guidance, see Internal Revenue Code Sections 412, 430, 431, related regulations and any other relevant IRS pronouncements.

If, for a single-employer plan, you have checked the Process PBGC Variable Premium Liability box of the PBGC Variable Premium Liability topic of Valuation Assumptions, the Legislated Interest Rates dialog box can also affect the assumed interest rate(s) for computing the PBGC variable rate premium liability for valuations performed at forecast valuation dates (see the discussion of the applicable law, below, for details). For guidance, see the applicable PBGC regulations and instructions for PBGC premium payment forms. The statutory interest rate assumptions for PBGC variable rate premium liability calculations as of the baseline valuation date are specified under the Valuation Assumptions command.

The Applicable law parameter determines which future valuation interest rates will be modeled in the Stochastic Forecast (e.g., current liability for a “Pre-PPA” forecast but not for a “PPA” forecast). The available law choices are:

Multiemployer	for multiemployer plans (as defined under ERISA)
PPA	for single-employer plans (as defined under ERISA), to apply PPA only
Pre-PPA	for single-employer plans, to apply the law as in effect prior to PPA only
Pre-PPA and PPA	for single-employer plan forecasts, to apply both the law as in effect prior to PPA and PPA law, with the transition occurring at the applicable effective date indicated in the Asset & Funding Policy.

Note: Your choice of applicable law for this set of Stochastic Assumptions must be consistent with the law selection of the Asset & Funding Policy and the Valuation Assumptions set for each Core Projection to be included in the Stochastic Forecast referencing this set of Stochastic Assumptions.

For the “PPA” law selection, only the corporate bond benchmark yield may be used. Its parameterization is discussed below.

Under the “PPA” law selection, you may vary Future PPA interest rates based on either (1) the Full corporate bond yield curve or (2) by applying a Parallel shift based on changes in the corporate bond benchmark yield. Note that if you use the full yield curve, all interest sensitivity fractions (except the fractions for lump sum factors and optional payment form conversion factors) entered under the Valuation Assumption Sensitivities topic of the Projection Assumptions must be zero.

When ProVal is instructed to do a parallel shift, it takes the valuation assumption yield curve and moves it up or down in a parallel fashion based on the difference between the Corporate Bond Benchmark Yield for Year 0 (entered under the Benchmark Yields topic) and the corporate bond benchmark yield produced by the capital market simulator (CMS) for each trial and forecast year. (This option generally is used to move a duration-based variable interest assumption in a parallel fashion but may also be used to move a constant valuation interest assumption up and down by the same amount.)
Full corporate bond yield curve may be selected only when an explicit corporate yield curve structure type of CMS is specified or when a custom simulator with a corporate yield curve is specified. In those cases, PPA interest rates are based on the full corporate bond yield curve produced by the CMS for each trial and forecast year.

For a forecast in the U.S. qualified mode under PPA law, ProVal will first determine whether the forecasted interest rates should be segment rates or a full yield curve, based upon the structure of the interest rates entered in the Valuation Assumptions.

If segment rates are used, ProVal will determine each segment by taking an arithmetic average of rates in the full corporate bond yield curve at the durations contained in the segment. As specified in IRS Notice 2007-81, interest rates for durations in excess of 60 will be ignored for purposes of the average. ProVal will average rates at integer durations only, excluding half year durations that the IRS uses (for the simple reason that ProVal’s capital market simulator simulates yields only at integer durations). Thus the first segment will be the average of durations 1 through 5, the second segment will be the average of durations 6 through 20 and the last segment will be the average of durations 21 through 60.

Per IRC Section 430(h)(2)(D)(i), the “corporate bond yield curve” above is a 24-month historical average of yield curves. ProVal will use the trapezoidal rule (one quarter of year t-2 rate, plus one half of year t-1 rate, plus one quarter of year t rate) to approximate the 24-month average.

Thus ProVal will determine the segment rates in each year as follows:

At time 0, when the 24-month average is being calculated for purposes of determining the forecasted PPA max tax interest rate assumption, or for purposes of determining the forecasted PPA funding interest rate assumption when MAP-21 rate stabilization does not apply, ProVal uses the segment rates that the user input under the Valuation Assumptions command. These rates presumably reflect a 24-month average of historical corporate bond yield curves and possibly a look back.
At time 1, the CMS produces a yield curve. ProVal averages rates from the yield curve to produce preliminary segment rates at time 1. The final PPA segment rates at time 1 will use one quarter of the preliminary segment rates at time 1 plus three quarters of the segment rates at time 0.
At time 2, the CMS produces a yield curve. ProVal averages rates from the yield curve to produce preliminary segment rates at time 2. The final PPA segment rates at time 2 will use one quarter of the preliminary segment rates at time 2 plus half of the preliminary segment rates at time 1 plus one quarter of the segment rates at time 0.
At time 3, the CMS produces a yield curve. ProVal averages rates from the yield curve to produce preliminary segment rates at time 3. The final PPA segment rates at time 3 will use one quarter of the preliminary segment rates at time 3 plus half of the preliminary segment rates at time 2 plus one quarter of the preliminary segment rates at time 1. At this point (and for all future forecast years) the phase out of the valuation assumption is complete and only CMS-produced yield curves enter into our PPA segment rates.

If a full yield curve is used, the full corporate bond yield curve from the CMS will be used directly. 24-month averaging and look-back periods do not apply, per IRC 430(h)(2)(D)(ii) and 1.430(h)(2)-1(e)(2), respectively.

Under the “PPA” law selection, when forecasting to the full yield curve, additional parameters may be applied When segment rates are used. Check Reflect MAP-21 stabilized rates beginning in to calculate stabilized PPA funding rates and select the first year to which stabilization is applied, either 2012 or 2013. Check the Reflect HATFA corridors beginning in box to reflect the Highway and Transportation Funding Act of 2014 and select either 2013 or 2014 as the first plan year to apply the HATFA corridors. Also check the Reflect Bipartisan Budget Act of 2015 corridors to reflect the corridors specified in the law beginning with the 2018 plan year. To switch from using segment rates to using the full yield curve during the forecast, check the Switch to spot rates in year box and enter the year to switch from segment rates to the full yield curve.

When segment rates are used and MAP-21 stabilization is applied, ProVal will compute the 25-year average required to determine PPA funding interest rates. Click the Historical Rates button and then click the View Historical Rates button to see the annual averages available within ProVal for use in a 25 year average. For each calendar year listed, the rates displayed are the average of the 24-month average segment rates published for the 12 months in the one year period ending on September 30th of that year. ProVal will use historical rates for all years ending on September 30th prior to the (baseline) Valuation Date in the 25 year average. The corresponding (annual average) rates for the year ending each September 30th following the Valuation Date cannot be known as of the Valuation Date and thus will be generated by the capital market simulator.

When segment rates are used and MAP-21 stabilization is applied, you may enter Overrides to ProVal’s historical annual averages of 24-month segment rates in the spreadsheet found under the Historical Rates button (if Historical Rates are entered for years ending September 30th after the Valuation Date, they will be ignored).

If the selected forecast option is to apply a parallel shift, MAP-21 stabilization is not an available option and then the MAP-21 stabilization check box, the HATFA checkbox and the Historical Rates button are inaccessible. Note: to obtain accurate forecast results for a U.S. qualified plan valuation performed reflecting MAP-21 and HATFA, if the valuation interest assumption is segment rates it is advisable to forecast to a full corporate yield curve rather than using a parallel shift.

For years for which PPA does not apply and for multiemployer plans, modeling of current liability is required. You must select an option for the Current liability rate relative to corridor parameter, to indicate where in the allowable range the RPA current liability rates should be set (and perhaps where OBRA rates should be set, depending on what law prior to PPA applies – see the discussion below). Note, however, that this parameter will be inaccessible under a “Pre-PPA and PPA” law selection if the underlying Capital Market Simulation does not simulate corporate bond yields, because, under this law type, ProVal presumes that PFEA ’04 law applies (and thus ProVal needs simulated corporate bond yields to vary current liability interest rates at all future valuation dates in the forecast period, including the period before the PPA funding rules take effect). If you have not simulated corporate bond yields, the baseline valuation date current liability interest rate will be used at all future valuation dates and for all sensitivities. The available current liability options are:

Funding Rate within Range, which selects the rate specified under the Actuarial Liability Interest Rate topic, but constrained to stay within the permissible range for the current liability interest rate (the lower and upper limits of the permissible range depend on the applicable law chosen);
Minimum Rate, which selects the lower limit of the permissible range, that is, 90% of the 4/3/2/1 weighted average of the rates of interest on 30-year Treasury securities or corporate bonds (whichever applies, according to your applicable law selection – see the discussion in the following paragraphs) for the 4-year period ending on the last day of the preceding plan year; and
Maximum Rate, which selects the upper limit of the permissible range for RPA current liability calculations, that is, 105% or 120% (see the discussion in the following paragraphs) of the 4/3/2/1 weighted average of the rates of interest on 30-year Treasury bonds or 100% of the 4/3/2/1 weighted average of the rates of interest on corporate bonds (whichever applies, according to your applicable law selection – again, see the discussion in the following paragraph).

For the “Pre-PPA” law selection, the Determine RPA and PBGC rates based on parameter indicates which set of prior funding rules you wish to apply.

JCWAA ’02 law:

If you select 120% / 100% for 2002 and 2003, then for plan years beginning in 2002 or 2003 only, the upper limit on the RPA current liability interest rate is raised from 105% to120% of the 4/3/2/1 weighted average of the 30-year Treasury bond rates and the PBGC variable premium liability required interest rate is raised from 85% to 100% of the annual yield for 30-year Treasury bonds. For plan years beginning on or after January 1, 2004, JCWAA provided for reversion of the RPA upper limit to 105% of the weighted average of bond rates and for reversion of the PBGC required interest rate to 85% of the 30-year bond annual yield. Therefore ProVal “sunsets” JCWAA for plan years beginning on or after January 1, 2004 and uses the pre-JCWAA RPA upper limit (105% of the weighted average) and the pre-JCWAA PBGC required interest rate (85% of the yield).
If you select 120% / 100% for all years after 2001, then for all plan years beginning on or after January 1, 2002, the upper limit on the RPA current liability interest rate is raised from 105% to 120% of the 4/3/2/1 weighted average of the 30-year Treasury bond rates and the PBGC variable premium liability required interest rate is raised from 85% to 100% of the 30-year Treasury bond annual yield for the month prior to the (forecast) valuation date. That is, ProVal never “sunsets” JCWAA; instead, JCWAA is extended hypothetically for an indefinite period of time.

PFEA ’04 law (accessible only if you have simulated corporate bond yields in your Capital Market Simulation):

If you select Corporate Bond index for 2004 and 2005, then for plan years beginning in 2004 or 2005 only, the permissible range of RPA current liability interest rates is the corridor defined by 90% and 100% of the 4/3/2/1 weighted average of corporate bond rates and the PBGC variable premium liability required interest rate is 85% of the corporate bond annual yield for the month prior to the (forecast) valuation date. For plan years beginning on or after January 1, 2006, PFEA provided for reversion of the RPA upper limit to 105% of the weighted average Treasury bond rates and for reversion of the PBGC required interest rate to 85% of the Treasury bond annual yield. Therefore ProVal “sunsets” PFEA for plan years beginning on or after January 1, 2006 and uses the pre-PFEA Treasury bond basis and range (90 to 105% of the weighted average), rather than the corporate bond basis and range (90 to 100% of the weighted average), and uses the pre-PFEA PBGC required interest rate (85% of the Treasury bond yield).
If you select Corporate Bond index for all years after 2003, then for all plan years beginning on or after January 1, 2004, the permissible range of RPA current liability interest rates is the corridor defined by 90% and 100% of the 4/3/2/1 weighted average of corporate bond rates and the PBGC variable premium liability required interest rate is 85% of the corporate bond annual yield for the month prior to the (forecast) valuation date. That is, ProVal never “sunsets” PFEA; instead, PFEA is extended hypothetically for an indefinite period of time.
Check the Use prior law for maximum tax deduction box to calculate the maximum tax deduction, for the period that you have indicated that PFEA ’04 applies, using the JCWAA minimum current liability rate basis of 90% of the 4/3/2/1 weighted average of 30-year Treasury bond rates.

For the “Multiemployer” law selection, the Determine Current Liability rate based on parameter indicates which permissible range to use to limit current liability rates in future years:

90% / 105% of Treasury Bond index – For all plan years except those beginning in 2002 or 2003, the current liability rate range is 90% to 105% of the weighted average of the prior month's Treasury bond index. For plan years beginning in 2002 and 2003, a temporary increase in the maximum permissible RPA'94 current liability interest rate is in effect, whereby the maximum RPA rate is changed from 105% to 120% of the weighted average interest rate.
90% / 100% of Corporate Bond index – For plan years beginning in 2004 and later years, the current liability rate range is 90% to 100% of the weighted average of the prior month's corporate bond index. This option is accessible only if you have simulated corporate bond yields in your Capital Market Simulation.
90% / 100% of Corporate Bond index through 2007 – For plan years beginning in 2004 through 2007, the current liability rate range is 90% to 100% of the weighted average of the prior month's corporate bond index. For plan years beginning after 2007, the current liability rate range is 90% to 105% of the weighted average of the prior month's Treasury bond index. This option is accessible only if you have simulated corporate bond yields in your Capital Market Simulation.

For the “PPA” and “Pre-PPA and PPA” law selections, if the PPA interest rates are determined by applying a parallel shift to the spot curve, the Year 0 Corporate Bond Benchmark Yield must be specified under the Benchmark Yields topic. This is the valuation assumption benchmark yield associated with the baseline valuation date. In all future years of the forecast, the spot curve and/or segment rates will be assumed to shift following changes in the benchmark yield, as compared to the previous year. For example, if a simulated corporate bond benchmark yield one year after the baseline valuation date (year 1) is 6.2% and the value entered for the Year 0 Corporate Bond Benchmark Yield is 0.055 (5.5%), then all spot and segment rates used in the first forecast valuation, performed at year 1, would be 0.7% higher than those used in the baseline valuation. Note: this parameter is inaccessible if the selected Capital Market Simulation has not simulated corporate bond yields.

Calculation of weighted average rates (Treasury and corporate)

ProVal produces the 4/3/2/1 bond rate weighted average for each forecast year on the assumption that the plan year begins on January 1. Consequently, ProVal averages simulated rates and/or known historical rates of the 4 calendar years prior to the year of the valuation date (either baseline valuation date or a forecast valuation date). If your plan year does not coincide with a calendar year and you believe that the difference is material, click the Historical Rates button to access the Historical Rates dialog box, in which you can override the historical data used to produce weighted averages in the first 4 forecast years for Treasury and corporate bonds.

To replace average rates of 4 calendar years with average rates of the 4-year period ending on a valuation date other than January 1, enter the Year of each plan year beginning date for which you wish to override historical rates. In the same row, enter the Prior 12-Month Compound Rate of interest on the 30 Year Treasury and/or Corporate Bond bases for the one-year period ending on that plan year beginning date. For example, consider a plan year beginning February 1, 2001. For the prior 12 months, the (current month) interest rate on 30-year Treasury bonds was published as follows:

Month	Year	Rate
January	2001
December	2000
November	2000	0.0578
October	2000	0.0580
September	2000	0.0583
August	2000	0.0572
July	2000	0.0585
June	2000	0.0593
May	2000	0.0615
April	2000	0.0585
March	2000
February	2000

As of February 1, 2001, the prior 12-month compound interest rate for Treasury bonds is calculated as

and entered on the 2001 Year line.

Enter the interest rate as a number between zero and 1 (not as a percentage). If more than 6 decimal places is entered, ProVal will use the specified precision in calculations but round the parameter value to 6 decimal places for display purposes.

To view (and print, if you wish) a list of ProVal’s historical 30-year U.S. Treasury bond and corporate bond rate data, click the View Historical Rates button. The list contains the prior 12-month compound rate as of January 1 of each year (i.e., compounding the previous year’s January through December monthly rates), starting with 1988 for Treasury bonds and starting with 2001 for corporate bonds. The list ends with 2018 for corporate bonds.