IRS Provides Guidance to Multiemployer Plans on Funding Relief Under the American Rescue Plan Act of 2021
The Internal Revenue Service (IRS) issued Notice 2021-57 to provide guidance to sponsors of multiemployer defined benefit pension plans on the elections permitted under sections 9701 and 9702 of the American Rescue Plan Act of 2021 (referred to as “the ARP”).1 Sections 9701 and 9702 generally allow plan sponsors to:
- Elect that the zone status of the plan for a plan year is the same as the zone status for the preceding plan year notwithstanding the actuary’s certification;
- Elect to extend the plan’s funding improvement period, or the plan’s rehabilitation period, as applicable, by 5 years; and
- Spread certain investment losses and other experience losses related to COVID-19 over a period of up to 30 years.
Highlights of Notice 2021-57
Election of Prior Year’s Zone Status
- Plan sponsor may make a “freeze election” for the first plan year (the election year) beginning on or after March 1, 2020, or the next succeeding plan year. For a calendar year plan, that would mean an election for either or both of 2021 or 2022.
- The plan actuary still has to certify the zone status for a plan year.
- If a freeze election is made, the plan’s status for the prior year applies, and the plan must be operated in accordance with the elected status.
- If a freeze election is made and the plan was in endangered status or critical status for the preceding year, the funding improvement plan, rehabilitation plan, or schedules do not have to be updated as otherwise required.
- If a freeze election is made for two years, then the plan’s zone status is the zone status for the plan year immediately preceding the first election year. For example, if a plan has an April 1 to March 31 plan year, then a freeze election for both the plan years beginning April 1, 2020, and April 1, 2021, would mean that the plan’s zone status for both years is the zone status for the plan year beginning April 1, 2019.
- A special notice requirement applies when a plan that would otherwise be in endangered or critical status is neither because of the freeze election.
Election to Extend Funding Improvement or Rehabilitation Period
- Plan must be in endangered or critical status for a plan year beginning in 2020 or 2021.
- Plan sponsor may elect (extension election) to extend the funding improvement period, or rehabilitation period, as applicable, by 5 plan years.
- Eligibility takes into account the freeze election, so, for example, if neither endangered nor critical in 2020 (that is “green” for 2020), but endangered for 2021, a freeze election for 2021 would mean that an extension election could not be made for 2021.
- May make extension election for either the 2020 plan year or the 2021 plan year, but only one extension election may be made.
Timing and Submission of Elections
- Freeze election that changes the zone status for a plan year must be made within 30 days after the plan actuary certifies the status (or, if earlier, 30 days after the due date for the actuary’s certification).
- Freeze election that does not change the zone status for a plan year must be made by the last day of the election year.
- An extension election must be made by the last day of the election year.
- However, a freeze election or an extension election will be treated as timely if made by December 31, 2021.
- A plan sponsor may make an election subject to arbitration.
- Elections have to be submitted to the IRS, either with the certification of zone status, or, if made later, not later than 30 days after the due date of the election.
- A timely submitted request to IRS Employee Plans Compliance Unit (EPCU) to revoke a freeze election or extension election meeting the requirements of Notice 2021-57 will automatically be approved if certain conditions are satisfied. In other circumstances, the IRS may approve a revocation request that is made in accordance with the private letter ruling request procedures, which include the payment of a user fee.
Special 30-Year Amortization Rule and Asset Valuation Method
- The special amortization rule and special asset valuation method under the ARP are similar to those provided by the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010), and similar restrictions on benefit increases apply.
- The use of the special rules is subject to a solvency test.
- The special amortization rule applies to net investment losses incurred in either or both of the first two plan years ending after February 29, 2020. For a calendar year plan, that would be 2020 and 2021. However, these special funding rules are not available in the case of a plan to which special financial assistance is paid under section 4262 of ERISA.
- Experience losses related to COVID-19 can be added to the net investment losses.
- Notice requirements apply.
- Notice 2021-57 points to Notice 2010-83 for guidance on a number of issues including the process for making the decision to use the special amortization and valuation methods, but provides that the decision must be made by the deadline for a freeze or extension election as described above.
Your Cheiron pension consultant can assist you with assessing the impact of the new guidance, the freeze and extension elections, and the special amortization and asset valuation method.
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.
1 See our alert of March 11, 2021, for a description of the provisions of the American Rescue Plan Act of 2021 applicable to multiemployer defined benefit plans.