As we advised in Important Benefit Plan Provisions of the American Rescue Plan Act of 2021, in the American Rescue Plan Act of 2021 (ARPA), Congress provided funding relief for single-employer defined benefit pension plans.
The relief provisions may be applied to the 2020 plan year, at the plan sponsor’s election. Calendar year plans generally must file their plan year 2020 Form 5500 and Schedule SB (actuary’s certification) by October 15, 2021. If the plan sponsor has not yet made its ARPA elections for the 2020 plan year, it is important to consider them now.
Summary of ARPA Funding Relief Provisions
ARPA extended the seven-year period for amortizing funding shortfall bases to 15 years. ARPA also extended favorable interest rate corridors and put a five-percent floor under them. These provisions are generally expected to reduce funding requirements under Section 430 of the Internal Revenue Code at a time when many businesses are struggling. They may also affect the Section 436 limits on benefit accruals and payments when a plan’s Adjusted Funding Target Attainment Percentage (AFTAP) is less than 80 percent.
The ARPA provisions generally take effect for plan years beginning in 2022. But a plan sponsor may elect to begin fifteen-year amortization as early as the 2019 plan year. The new interest rate corridors apply to the 2020 plan year unless the sponsor elects against their application.
IRS Guidance on ARPA Elections
On August 2, 2021, IRS issued Notice 2021-48, which provides guidance on how those elections are made and related matters, such as redesignating prior year contributions or using them to establish a prefunding balance, the effect on Section 436 limits, and the effect on excise taxes for funding deficiencies.
As noted, a plan sponsor may elect to implement fifteen-year amortization as early as the 2019 plan year. The 5500 for that year would have been filed on or before October 15, 2020.
If the sponsor elects fifteen-year amortization retroactive to the 2019 plan year, the plan may amend its 2019 Form 5500. But under Notice 2021-48, it suffices for the plan year 2020 Schedule SB to reflect amortization of the 2020 (and, as applicable, the 2019) shortfall base using a fifteen-year amortization schedule. IRS explains:
For example, if an attachment to line 32 of the Schedule SB for the 2020 plan year reflects 14 years remaining in the amortization period for the shortfall amortization base for the 2019 plan year, the plan sponsor will be deemed to have elected to apply § 430(c)(8) beginning with the 2019 plan year. If instead an attachment to line 32 of the Schedule SB for the 2020 plan year reflects only one shortfall amortization base with 15 years remaining in the amortization period, the plan sponsor will be deemed to have elected to apply § 430(c)(8) beginning with the 2020 plan year.
The plan sponsor’s election to have fifteen-year amortization apply to one or more of these years is made by providing written notification of the election to the plan’s enrolled actuary and the plan administrator. The election must be signed and dated by the plan sponsor, and must include:
- The name of the plan;
- The plan number;
- The name of the plan sponsor;
- The plan sponsor’s mailing address;
- The plan sponsor’s employer identification number; and
- The first plan year for which the fifteen-year amortization period will apply.
Interest Rate Corridor
Like the election of fifteen-year amortization, the election with respect to the interest rate corridor would generally be reflected on the 2020 Form 5500/Schedule SB. The Notice states that if line 21a of the Schedule SB for the 2020 plan year reflects the pre-ARPA interest rates, “the plan sponsor is deemed to have elected to apply” those rates “for purposes of both §§ 430 and 436 of the Code for that plan year.” Such an election is irrevocable unless it is revoked by filing an amended form 5500/Schedule SB by December 31, 2021.
Again, the plan sponsor would elect against the new interest rate corridor for plan year 2020 by providing written notification to the actuary and the administrator, signed, dated, and including the same information, plus a seventh item:
- a statement of whether the election not to have the amendments . . . apply is being made for all purposes or solely for purposes of determining the AFTAP under §436 of the Code for the plan year.
Related Issues Addressed by Notice 2021-48
If fifteen-year amortization is elected for plan year 2019, contributions made for that year may exceed the amount required. Such excess contributions may be reflected in the 2020 Schedule SB, or they may be reflected in an amended Form 5500/revised Schedule SB for 2019.
The plan sponsor may elect to apply any excess to increase a prefunding balance. That election, which ordinarily must be done by eight and one-half (8 ½) months after the end of the plan year, is “deemed timely” if it is made by December 31, 2021.
If instead, the sponsor decides to redesignate excess contributions as contributions for a later year, the plan must file an amended Form 5500/Schedule SB for the plan year for which the contributions are redesignated and the year for which they contributions were originally designated.
Notice 2021-48 also addresses several other recordkeeping, corrections, compliance and penalty issues that may be affected by ARPA’s funding relief. Those items include revocation of prior prefunding balance elections, corrections needed to comply with Section 436, reconciling funding relief under ARPA and last year’s CARES Act, and reporting of excises taxes for prior funding deficiencies.
Finally, the Notice addresses ARPA’s effect on hybrid plans that use funding interest rates as the benchmark for interest credits. As with defined benefit plans, such plans may elect against application of the new interest rates for the 2020 plan year. The Notice also provides guidance on interest crediting periods that predate ARPA’s enactment.
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For further information about ARPA’s effect on pension funding, withdrawal liability, health and other welfare benefits, or executive compensation, or for insight on employee benefits legislation on the horizon, please contact your attorney at The Wagner Law Group.