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 plans. On December 17, 2010, the IRS released substantive guidance for using the funding relief in Notice 2011-3. Although Notice 2011-3 ("Notice") resolves a number of issues as to how the funding relief applies to single-employer plans, it has a tight deadline for the election of relief. For example, the deadline to elect relief for the 2009 and 2010 calendar plan years is January 31, 2011.

Brief Review of Funding Relief for Single-Employer Plans

For single-employer plans, the funding relief allows the plan sponsor to elect an alternative amortization schedule (instead of the usual 7-year amortization schedule) for a shortfall amortization base established in any one or two of the plan years beginning in 2008, 2009, 2010, and 2011, provided that the due date for the minimum required contribution to the plan for such plan year occurs on or after June 25, 2010. (Thus, relief cannot be elected for any plan year that ends before October 10, 2009.)

The alternative amortization schedule can be either

- a "2 plus 7" year schedule where the payments are "interest only" (as prescribed) for the first two years and then level payments for the remaining seven years, or

- a 15-year level amortization schedule.

The same schedule must be used for both years if the plan sponsor elects relief for two years.

Cheiron Observation: With respect to plans with a calendar year plan year, an alternative amortization schedule will provide relief from the high installment payments that reflect the decrease in plan asset values that occurred during 2008. The resulting losses would be reflected in the shortfall amortization base established for the 2009 plan year, and the installments payable for the 2009-2015 plan years.

Excess Compensation or Shareholder Payments Accelerate Payments

The payments under either of the alternative amortization schedules are accelerated (but not beyond what the payments would have been without the election) for excess compensation or excess shareholder payments. Excess compensation is generally defined as compensation in excess of one million dollars with respect to an employee for any plan year. Excess shareholder payments are generally the excess of the amount of dividends declared and stock redemptions paid during a plan year over the adjusted net income of the plan sponsor for the prior plan year. The rule for determining the "installment acceleration amounts" takes into account compensation or shareholder payments made after February 28, 2010.

Cheiron Observation: If a plan sponsor has, or plans to make, excess compensation or shareholder payments, the election of an alternative amortization schedule may not make sense because of the acceleration of payments.

Time Period to Elect Relief

Notice 2011-3 provides that the use of an alternative amortization schedule for a plan year must be elected by the plan sponsor. The deadline for making an election for a plan year is the latest of

1. the last day of the plan year,

2. 30 days after the valuation date for the plan year for which the election is made, or

3. January 31, 2011.

Cheiron Observation: For plans with a calendar plan year, the deadline for the 2009 and 2010 plan years is therefore January 31, 2011. Plan sponsors will need to act quickly if they desire to elect relief and have not already done so.

Notice Required

The law requires that the plan sponsor give notice of the election of an alternative amortization schedule to plan participants and beneficiaries, and to the Pension Benefit Guaranty Corporation (PBGC). The notice to participants and beneficiaries must be provided by 120 days after the end of the plan year for which an alternative amortization schedule is elected, or by May 2, 2011, if later. The IRS has provided model notices that can be used.

The notice to the PBGC must be provided by the later of 30 days after the date the election was made or January 31, 2011. Notice to the PBGC is to be made by e-mailing a copy of the election made for a plan year by the plan sponsor.

Form of Election

Notice 2011-3 provides that an election to use an alternative amortization schedule that is made on or after January 1, 2011, must be signed and dated by the plan sponsor and must include certain information. An election made earlier than January 1, 2011, is still valid.

Plan Sponsors Need to Act Soon

If plan sponsors have not already done so, the election of an alternative amortization schedule for the 2009 or 2010 calendar plan years must be made by the end of the month. That gives a short time to act. Cheiron consultants can assist with the decision by providing calculations of the impact of the relief, and the effect of any excess compensation or shareholder payments.

Cheiron is an actuarial consulting firm that provides actuarial and general health and welfare consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal or tax advice or services.