IRS Issues Guidance on Funding Relief for Single-Employer Defined Benefit Plans Under the CARES Act
The Internal Revenue Service (IRS) issued Notice 2020-61 to provide guidance on the provisions of § 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) regarding funding relief for single-employer defined benefit pension plans. In our prior alert, we described the CARES Act funding relief and pointed out some uncertainties and issues. This alert describes the new guidance, which addresses the questions that we raised, and also describes some information posted by the Pension Benefit Guaranty Corporation (PBGC) on the impact of the calculation of premiums under Title IV of ERISA.
In general, single-employer defined benefit pension plans are subject to the minimum funding requirements of the Internal Revenue Code (Code) and the Employee Retirement Income Security of 1974 (ERISA), as amended. The calculation of the minimum required contribution for a plan year is determined under Code section 430 and ERISA section 303. These sections require that contributions for a plan year be made to the plan not later than 8½ months after the end of the plan year. In addition, plans that were underfunded in the prior year have quarterly contributions due in advance of the 8½ month period.
Single-employer defined benefit pension plans are also generally subject to the benefit restriction provisions of Code section 436 and ERISA section 206(g). The benefit restriction provisions are based on the plans’ adjusted funding target attainment percentage (AFTAP) for the plan year as certified by the plan’s enrolled actuary (or the presumed AFTAP prior to the actuary’s certification).
The CARES Act provides that the due date for any minimum required contribution that would ordinarily be due in 2020 (including required quarterly contributions) is extended to January 1, 2021. The CARES Act also allows plan sponsors to elect to use the AFTAP from the last plan year ending before January 1, 2020 for any plan year that includes calendar year 2020, thus potentially avoiding the consequences of a decline in the financial markets during 2020.
Under ERISA, the PBGC collects both flat rate and variable rate premiums for single-employer plans. In general, the variable rate premium is based upon the amount of unfunded vested benefits as of the beginning of the plan year. The discounted value of contributions for the prior plan year that are timely made may be included in the assets for purposes of determining the unfunded vested benefits in calculating the variable rate premium.
Prior to the issuance of Notice 2020-61, the PBGC released some frequently asked questions (FAQs) on the impact of the funding relief in the CARES Act on premiums. The PBGC FAQs are available at this link.
Notice 2020-61 provides guidance in question and answer format with respect to how interest is determined for payments using the extended due date, and the election to use the prior year’s AFTAP. The Q’s and A’s contained detailed guidance for determining the interest on contributions (including required quarterly contributions) that are made after the original due date but on or before the extended due date of January 1, 2021.
In general, with respect to the extended due date for contributions the Q’s & A’s provide that:
- Interest on a contribution that is made after the original due date in 2020 is computed using the plan’s effective interest rate for the plan year for which the contribution is made for the period between the valuation date for the plan year and the original due date, and then using the interest rate for the plan year in which the contribution is made for the period from the original due date to the date paid.
- There are no special rules for reporting contributions on the Schedule SB that are made after the due date of the Form 5500, and the actuary may not include contributions that are to be made after he or she signs the Schedule SB. To include such contributions, an amended Form 5500 including an amended Schedule SB must be filed, including a detailed schedule showing the amount, dates, and determination of interest on the payments.
- The extended due date does not change the timing rules for deduction of employer contributions. Thus, to be included in the 2019 year’s tax return, contributions on account of 2019 must be made by the due date for filing that year’s return (including extensions), which typically is October 15, 2020, for an employer with a calendar tax year.
CHEIRON OBSERVATION: Notice 2020-61 answers the questions that we had concerning the impact of the CARES Act. The details with respect to the interest adjustments for contributions made after the original due date but made through January 1, 2021, will be taken into account by the plan’s enrolled actuary in determining how much will be needed for a contribution made after the original due date.
For a calendar plan year making a deferred contribution on January 1, 2021, interest accrues at the 2021 plan year effective interest rate for the period from the original due date to the date paid. However, since the 2021 plan year, effective interest rate would not be known at the time this payment is made, Notice 2020-61 requires that the interest adjustment must be made using the highest of the three segment rates for the 2021 plan year. Because the 2021 effective interest rate for the plan year will be less than that highest rate, the excess interest paid is recharacterized as an employer contribution taken into account under § 430 for the current plan year.
For the Form 5500 filing due in 2020, because there is no special extension for filing the Schedule SB on account of the CARES Act, the first Schedule SB may show an unpaid minimum required contribution and a later amended Schedule SB will then show there is no unpaid minimum required contribution for the year.
With respect to the ability to elect to use the prior year’s AFTAP, the Q’s & A’s clarify that:
- The election to use the prior year’s AFTAP also applies for plans with non-calendar plan years.
- An election to use the prior year’s AFTAP must be made by the plan sponsor via a written notification to the plan administrator and the plan’s actuary.
- If the plan sponsor had made an election to use the prior year’s AFTAP by a different procedure (that is not by the required written notification), then the plan sponsor must provide the written notice to the plan actuary and the plan administrator by September 30, 2020, or the election will be considered to be invalid.
- An election to use the prior year’s AFTAP may be revoked by using the same procedures as used for the election, however, the revocation will not be eligible for “deemed immaterial” treatment, which can impact the plan’s qualification.
CHEIRON OBSERVATION: In general, a plan with a calendar plan year will have no particular need for an election to use the prior year’s AFTAP as the market downturn in the spring did not affect the beginning of the year value of the plan’s assets. If, however, the plan sponsor plans to make the minimum required contribution for 2019 later than September 30 and the inclusion of the contribution in the assets would be needed to avoid benefit restrictions, then the plan sponsor may desire to make the election.
For a calendar year plan, the PBGC FAQs clarify that, under the PBGC’s regulations, contributions made after the October 15, 2020, due date cannot be counted for purposes of calculating the variable rate premium due on that date even though the contributions are made by the extended due date of January 1, 2021.
CHEIRON OBSERVATION: Accordingly, plan sponsors of a calendar year plan may want to make their contributions for 2019 earlier than otherwise required because it could lower the amount of the variable rate premiums.
We suggest that you contact your Cheiron consultant for more information as to the potential impact on your plan.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.