The Coronavirus Aid, Relief and Economic Security (CARES) Act addressed much-needed immediate pension relief for defined benefit (DB) plans in 2020 by:
Delaying all 2020 funding requirements to Jan. 1, 2021.
Allowing plans to use their 2019 funded status in determining benefit restrictions for plan years which include calendar year 2020.
The Internal Revenue Service (IRS) Notice 2020-61 provides some clarity and guidance on how single-employer DB plans can implement the CARES Act rules. While plan sponsors should be happy to finally receive more direction, the answers could add administrative work and make full adoption of the CARES Act less appealing. Our thoughts below focus on calendar year plans, but the guidance confirms the CARES Act provisions extend to non-calendar year plans as well.
Five key takeaways for delayed funding requirement
THE JAN. 1, 2021, CONTRIBUTION DEADLINE IS FIXED DESPITE THE HOLIDAY. Plan sponsors should consider Dec. 31, 2020, as the deadline for delayed contributions to ensure they satisfy minimum funding requirements and don’t end up subject to penalties or excise taxes. Contributions made on Jan. 4, 2021, would be considered late.
UNDER THE CARES ACT, PLAN SPONSORS DELAYING THEIR CONTRIBUTIONS WILL BE REQUIRED TO CONTRIBUTE AMOUNTS THAT ARE LARGER THAN WHAT THE ORIGINAL CONTRIBUTIONS WOULD HAVE BEEN IF MADE BY THE ORIGINAL DUE DATE. Under the funding rules, contributions must be discounted with the effective interest rate (EIR) to the beginning of the prior plan year in which they are being applied. Contributions under the CARES Act made after their original due dates must first be discounted back to the original due date (using the current year EIR), and then again to the beginning of the prior plan year (using the prior year EIR). The guidance goes into the mechanics of these calculations and provides guidance on the appropriate EIRs to use under non-calendar year plan years.
THE FORM 5500 DEADLINE HAS NOT BEEN EXTENDED AND CONTRIBUTIONS MADE AFTER THE FILING CANNOT BE INCLUDED ON THE SCHEDULE SB. For a calendar year plan where Form 5500 is due by Oct. 15, 2020, the actuary cannot report any contributions made after the date the actuary signed the Schedule SB. If any contributions are made after the actuary signs the Schedule SB and the plan files the Form 5500 but it’s before the extended CARES Act due date, the plan sponsor may designate the contributions for that prior plan year if the plan files an amended Form 5500 reflecting those contributions.
THE PBGC PREMIUM FILING DEADLINE HAS NOT BEEN EXTENDED. The PBGC premium filing for calendar year plans is still due by Oct. 15, 2020. Note that unlike past years, contributions made after Sept. 15, 2020, but before Oct. 15, 2020, can be included in the assets used to determine the PBGC premiums. Plans paying variable rate premiums (VRPs) that are not at the VRP cap should consider making all of their remaining contributions by Oct. 15. This strategy would lower PBGC premiums by approximately 4.5% of the amount contributed 2 ½ months earlier than year-end.
THERE IS NO EXTENSION TO DEDUCT A CONTRIBUTION FOR A TAXABLE YEAR. The extended due date of the CARES Act does not change the date to make a contribution in order to deduct it for a taxable year under § 404 of the Code. Sponsors of calendar year plans can take deductions for contributions made by Oct. 15, 2020, if an extension applies. Contributions made after that, but before the end of 2020, cannot be deducted for the prior year.
Benefit restriction relief
The CARES Act allowed sponsors to use their 2019 AFTAP for 2020, but sponsors may not be completely off the hook to file their 2020 AFTAP. The 2021 AFTAP is still due by April 1, 2021, for calendar year plan years. Plans can usually apply the presumption rules under § 436(h) for a subsequent plan year, but for 2021 there would be no 2020 AFTAP to rely on. A sponsor could still avoid the 2020 AFTAP if they are able to certify the 2021 AFTAP before the April 1 deadline.
Companies should consider if taking full advantage of the extended contribution deadline under the CARES Act outweighs additional administrative work, possible unfavorable tax treatments, and potentially higher PBGC premiums.
If you have questions, please contact your Lockton Retirement Services Team.
Daniel Lennington FSA, FCA, EA, MAAA Director of Defined Benefit Advisory
Investment advisory services offered through Lockton Investment Advisors, LLC, a SEC registered investment advisor.
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