IRS and PBGC Provide Guidance on CARES Act Relief for Funding of Single Employer Defined Benefit Plans
By Barry Salkin and Livia Quan Aber
One objective of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was to provide relief to sponsors of tax-qualified defined benefit plans. Section 3608 of the CARES Act extends the due date of minimum required contributions otherwise due during the 2020 calendar year, including quarterly installment payments, to January 1, 2021. The amount of the contribution and installments are increased with interest for the period between the initial due date of the contribution or installment and the date of the payment at the effective interest rate for the plan year that includes the payment date. The CARES Act also permits a plan sponsor to elect, for purposes of determining whether the benefit restrictions under Code Section 436 apply, to treat the plan’s prior adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020. The AFTAP percentage under Code Section 436 is significant because it provides limits on benefits and benefit accruals. For example, a plan amendment that would increase liabilities under a plan may not take effect if, after taking that amendment into account, the AFTAP would be less than 80 percent. Code Section 436 provides generally that the plan may not pay certain accelerated forms of benefit, such as single sum distributions, if the plan’s AFTAP is less than 80 percent, and all benefit accruals must cease if the AFTAP is less than 60 percent. Both the IRS and PBGC recently issued guidance relating to the funding relief enacted by the CARES Act.
IRS Notice 2020-61
On August 6, the IRS released Notice 2020-61, a series of questions and answers addressing both of these elements of CARES Act relief.
The guidance confirms that the extended January 1, 2021 deadline for required funding contributions does not affect the deadline for deductibility of contributions, nor Form 5500 reporting requirements, although there are some special rules in that regard. The extended deadline for required contributions also extended the deadline for a plan sponsor to make an election to increase a prefunding balance or to use a prefunding balance or a funding standard carryover balance to offset the required minimum contribution for the plan year.
The guidance also specifies the manner in which the election to use the 2019 AFTAP is made, and confirms that for a non-calendar year plan, the election can be made for the plan year that ends in calendar year 2020, as well as separately for the plan year beginning in calendar year 2020. Notice 2020-61 also addresses a number of technical issues dealing with the plan actuary’s certification of the AFTAP and the interest adjustment for delayed contributions, which the plan sponsor and the applicable investment committee should review.
The guidance indicates that these special provisions do not apply to money purchase pension plans, multiemployer pension plans, fully insured plans, and CSEC (cooperative and small employer charities) plans.
PBGC Covid-19 Q&As
On July 20, 2020, the PBGC posted answers to frequently asked questions about how the CARES Act affects missed contribution reporting requirements and premium filings for single-employer plans. In a series of questions and answers regarding funding relief, the PBGC indicates that if required contributions are made by the extended January 1, 2021 deadline, there will be no need to notify the PBGC of a failure to make a minimum required contribution due in 2020. The PBGC guidance also addresses the manner in which the extended due date for required contributions affects the treatment of contributions receivable for variable rate premium purposes. Additionally, with respect to the collection of termination liability, PBGC will continue to work with plan sponsors, but will consider the plan sponsor’s ability to pay, based upon the particular facts and circumstances. The questions and answers are posted on PBGC’s COVID-19 Resources web page and can be found here.
The Wagner Law Group would be happy to answer questions regarding this recent IRS and PBGC guidance relating to the funding relief enacted by the CARES Act. Please contact one of our benefits attorneys if we can be of assistance.