New IRS Guidance on Pension Funding Relief Lays Out Options for Plan Sponsors but Requires Careful Attention to Timing
Last June, the enactment of the "Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010" provided pension funding relief for single-employer and multiemployer plans (see our June 28, 2010 Alert on this topic). On November 26, 2010, the IRS released substantive guidance for using the funding relief. Although Notice 2010-83 ("Notice") resolves a number of issues as to how the funding relief applies, its implementation will be challenging because of tight deadlines to complete the steps required to elect relief. For example, calendar year plans must act by the end of March, 2011, or else forever lose the opportunity to gain relief.
Brief Review of Funding Relief for Multiemployer Plans
For multiemployer plans that meet the solvency test, the highlights of the relief are:
- 30-year amortization, as specified, of the net investment losses incurred in either or both of the first two plan years ending after August 31, 2008,
- 10-year smoothing period for the difference between expected and actual returns for either or both of the first two plan years ending after August 31, 2008, and
- 130% of market value upper limit on the actuarial value of plan assets for either or both of the first two plan years ending after August 31, 2008.
A plan can elect to use all or any combination of the three choices. Collectively, the choices are referred to as the funding relief in this Alert.
The solvency test is met only if the plan actuary certifies that the plan is projected to have sufficient assets to pay expected benefits and anticipated expenditures on a timely basis over the amortization period, taking into account the funding relief.
Cheiron Observation: For plans that meet the solvency test, the Notice explained how net investment losses are to be recognized in applying the 30-year amortization of investment losses to plan years following a plan year where the recognition under the asset valuation method is affected by the 120% or 130% corridor. There are two options to choose from: a prospective approach and a retrospective approach. The choice then becomes part of the plan's funding method. It appears that the prospective method has more stability in projecting future costs. Cheiron consultants can explain how the 30-year amortization works, the two loss recognition approaches, and the effect of each on your financial situation.
Restriction on Plan Benefits
In addition to the solvency test, effective June 25, the date of the law's enactment, a plan amendment increasing benefits may not go into effect during either of the two plan years following a year for which relief is elected, unless the plan actuary certifies that:
- the increase is paid for out of additional contributions not allocated to the plan immediately before the election of the relief, and the plan's funded percentage and projected credit balances for the 2 plan years are reasonably expected to be at least as high as such percentages would have been if the benefit increase had not been adopted, or
- the amendment is required as a condition of plan qualification or to comply with other applicable law.
The Notice provides additional guidance on how the restriction on plan amendments applies.
Timing to Elect Relief
The relief is elective. Under the Notice, the deadline to elect relief is the earliest of these three dates:
- the deadline for certification of the plan's zone status under Internal Revenue Code § 432(b)(3) for the first plan year beginning on or after January 1, 2011,
- the actual date the plan's zone status is certified under Internal Revenue Code § 432(b)(3) for the first plan year beginning on or after January 1, 2011, or
- June 30, 2011.
Electing Relief and Possible Re-certification of Status
A decision to use the relief must be made as a formal decision of the plan sponsor (typically the Board of Trustees) using its normal procedures. In order for a plan to use the funding relief, the plan actuary must certify that the plan meets the solvency test. This "solvency certification" must be made before the formal decision to use the relief.
The use of funding relief can affect the zone status of a plan under § 432(b)(3). A plan sponsor is permitted to request that the plan actuary re-determine the plan's zone status under § 432(b)(3) for a plan year taking into account the elected relief. The re-determined status will be treated as the certified status for the entire plan year (including for purposes of the requirement to adopt or update a funding improvement or rehabilitation plan in that plan year) provided that:
- the revised certification of the plan's status for the plan year is made and sent to the plan sponsor and the IRS before the end of the plan year (December 31, 2010, for a calendar year plan),
- the revised certification otherwise satisfies the requirements of § 432(b)(3),
- notice of the revised certification is provided to participants and beneficiaries, the bargaining parties, the PBGC, and the Secretary of Labor within 30 days after the revised certification is made,
- any measures previously taken that would not be permitted under the plan?s revised status under the revised certification (such as restrictions on distributions as described in § 432(f)(2), reductions as described in § 432(e)(8) in benefits that are protected under the anti-cutback rules of § 411(d)(6), and the imposition of employer surcharges under § 432(e)(7)) are reversed, and
- the plan actuary certifies that reversing the measures described in clause (4) would not cause the plan to fail to meet the solvency test.
Cheiron Observation: Given the deadlines for electing relief and for re-determining zone status, the timing of the sequence of events is important. According to the IRS directions on how to perform the solvency test, it is possible that a plan would fail the test in one plan year but pass in another plan year. Cheiron consultants can perform a solvency test and assist you in determining whether an election of relief will make a difference in the plan's status.
Notice of Use of Funding Relief
Once relief is elected, the plan must notify participants, beneficiaries, and the Pension Benefit Guaranty Corporation (PBGC). The notice to participants, beneficiaries, and the PBGC must contain the following:
- the name of the plan, along with the taxpayer identification number and plan number for the plan,
- an explanation of which of the special funding rules apply and the plan year or years for which they apply,
- the effect of the application of the special funding rules (i.e., the amortization of losses beyond the otherwise applicable 15-plan-year period and/or the recognition of losses in the value of plan assets over a period as long as 10 years),
- a general description of the effect of applying the special funding rules, including the fact that applying the special rules will decrease the amount of required minimum contributions that are taken into account in determining the appropriate contribution rates under collective bargaining agreements and may also affect the plan's status under § 432(b) for the current and future plan years,
- a statement that the plan is not permitted to increase benefits during the two plan years immediately following any plan year in which either or both of the special funding rules apply, unless certain conditions are met, and
- the name, address, and telephone number of the plan administrator or other contact person from whom more information may be obtained.
Trustees Need to Act Soon
Trustees will need to decide soon whether to elect funding relief. If there is a possibility of re-determining the plan's zone status for the current plan year, there may be only a short time to act because the plan actuary's solvency determination, the Trustees' formal decision and the plan actuary's re-determination must be made by the end of the plan year. That gives calendar year plans less than 30 days to complete the process if they wish to re-determine the plan's 2010 status. Furthermore, for calendar year plans, the entire period to decide whether to elect relief is about four months because the certification of zone status for 2011 is at the end of March 2011.
If you have any questions about this Alert, please contact your Cheiron consultant.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal or tax advice or services.