Pension & Benefits News IRS issues guidance on funding rules of single-employer DB plans under CARES Act
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Monday, August 31, 2020

IRS issues guidance on funding rules of single-employer DB plans under CARES Act

By Pension and Benefits Editorial Staff

The IRS has released guidance on special rules relating to the funding of single-employer defined benefit (DB) plans and related benefit limitations under Section 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

Affected funding rules. A single-employer DB plan is subject to minimum required contribution rules under Code Sec. 430. The minimum required contribution for a plan year generally depends on a comparison of the value of plan assets (reduced by any credit balances) with the plan’s funding target. If the value of plan assets is less than the funding target of the plan for the year, then the minimum required contribution for that plan year is the sum of:

  • the target normal cost for the plan year;
  • the shortfall amortization installments for the plan year; and
  • the waiver amortization installments for the plan year.

The minimum required contribution for a plan year must be paid within 8 ½ months after the close of the plan year under Code Sec. 430(j). Payments made on a date other than the valuation date for the plan year must be adjusted for interest accruing for the period from the valuation date to the payment date, at the effective interest rate for the plan for the year. Employers maintaining plans that had a funding shortfall for the preceding plan year (i.e., the value of plan assets, as reduced by credit balances, was less than the funding target for the preceding year) must make quarterly contributions to the plan (April 15, July 15, and October 15 of the plan year, and January 15 of the following year). If the employer fails to pay the full amount of a required quarterly installment, interest is assessed at the plan’s effective interest rate plus five percentage points.

Benefit limits apply to plans that have a funded target attainment percentage for the preceding year below designated thresholds. These plans are deemed to be in “at-risk” status and are subject to increased target liability. The benefit limits on single-employer DB plans are based on the plan’s adjusted funding target attainment percentage (AFTAP) under Code Sec. 436(b). Generally, a plan’s funding target attainment percentage is the ratio of the value of plan assets for the plan year (as reduced by any funding standard carryover balance and prefunding balance) to the funding target for the plan year (determined without regard to the plan’s at-risk status).

CARES Act funding relief. Under Section 3608 of the CARES Act, minimum required contributions to a single-employer retirement plan otherwise due in calendar year 2020 (including any quarterly contributions) are delayed until January 1, 2021. The amount of each such contribution is increased by any interest accruing for the period between the original due date (without regard to the delay) for the contribution and the payment date. The CARES Act also provides that a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years that include calendar year 2020.

Q&A guidance. The IRS has provided guidance in the form of questions and answers (Q&As) regarding Section 3608 of the CARES Act. The IRS states that, to the extent the instructions for Schedule SB (Single-Employer Defined Benefit Plan Actuarial Information) of Form 5500 (Annual Return/Report of Employee Benefit Plan) are inconsistent with this guidance, this guidance supersedes the instructions.

Guidance for extended deadline and interest. The extended contribution due date of January 1, 2021 does not apply to a multiemployer plan, a CSEC plan, a fully-insured plan, or a money purchase pension plan. If the contribution deadline for a plan year is during 2020, a contribution in excess of the amount needed to satisfy the minimum required contribution for the plan year that is made by January 1, 2021 may be designated as a contribution for that plan year.

Any payment made after the original due date for the contribution and by the extended due date must be increased for the period between the original due date and the payment date at the effective interest rate for the plan year that includes the payment date. If the contribution is less than the amount that was due on the original due date for the minimum required contribution, as increased with interest pursuant to the CARES Act, then a portion of the minimum required contribution for that plan year would remain unpaid. The unpaid portion of the minimum required contribution, determined as of the valuation date and based on contributions made on or before January 1, 2021, with the contributions discounted for interest to the valuation date, would give rise to an unpaid minimum required contribution and would be subject to an excise tax. Furthermore, a contribution made after January 1, 2021, to satisfy that unpaid minimum required contribution must be adjusted for interest for the period between the date that the contribution is made and the valuation date at the effective interest rate for the plan year for which the contribution is made (with additional interest as required to reflect any late quarterly installments for the plan year).

The CARES Act specifies that to determine the amount of a quarterly installment due by the extended due date, the amount of that installment is increased from the installment’s original due date to the payment date at the effective interest rate for the plan year that includes the date the quarterly installment is paid. If a plan sponsor does not satisfy a quarterly installment originally due during 2020 by the extended due date, then the unpaid portion of that installment is subject to a higher interest rate for the period during which the installment (or a portion of the installment) remains unpaid when determining the amount of the minimum required contribution that is satisfied by a contribution.

A contribution that is made after the original due date for a plan year but on or before the extended due date is taken into account as of a valuation date for a plan year after the plan year for which the contribution was made. For purposes of determining the value of plan assets, if an employer makes a contribution to the plan after the valuation date for the current plan year and the contribution is for an earlier plan year, then the present value of the contribution determined as of that valuation date is taken into account as an asset of the plan as of the valuation date, provided the contribution is made before a specified deadline. The specified deadline is the deadline for contributions for the plan year immediately preceding the current plan year. However, that deadline is extended by the CARES Act. Furthermore, the interest adjustment rules override the discounting rules that apply generally for this purpose. Note, however, certification of the AFTAP for a plan year must not take into account contributions that are expected to be made after the certification date.

If the plan year is a plan year for which the extended due date for minimum required contributions applies, then the deadline for a plan sponsor’s election to increase a prefunding balance or to use a prefunding balance or a funding standard carryover balance to offset the minimum required contribution for that plan year is extended to January 1, 2021. However, the extended due date does not change the date by which a contribution must be made in order to be deducted for a taxable year. A taxpayer is deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of that taxable year and is made no later than the time prescribed by law for filing the return for that taxable year (including extensions).

Reporting guidance. The IRS states that a plan’s actuary may not report contributions on Schedule SB of Form 5500 that will be made after the actuary signs the Schedule SB. If any contributions are made after the actuary signs the Schedule SB and the Form 5500 for a plan year has been filed but before the extended due date under Section 3608(a) of the CARES Act, then the contributions may be designated as for that prior plan year only if an amended Form 5500 that includes an amended Schedule SB reflecting those contributions is filed.

Furthermore, if a plan sponsor makes a contribution for a plan year (including a quarterly installment) after the original due date for that contribution but on or before the extended due date under Section 3608(a) of the CARES Act, the plan’s actuary must attach to the Schedule SB a schedule supporting the line 19 entry for discounted employer contributions showing the dates and amounts of individual contributions, the year to which the contributions (or portion of the individual contributions) are applied, the effective interest rate or rates that apply to those contributions, the 5 percentage point increase that applies for late quarterly installments, the periods during which each such rate applies, and the interest-adjusted employer contributions for the plan year. This schedule must be attached even if the contributions were made by the due date under § 3608(a) of the CARES Act, according to the IRS.

Guidance for AFTAP election. A plan sponsor may elect to apply the AFTAP for the last plan year ending before January 1, 2020, for a plan year that includes any portion of calendar year 2020. For example, if a plan sponsor makes an election for a plan year that runs from July 1, 2019, to June 30, 2020, then the AFTAP that applies is the certified AFTAP from the plan year that ends on June 30, 2019. In addition, that plan sponsor may separately elect to use that same AFTAP for the plan year that begins on July 1, 2020.

The AFTAP election must be made using the procedures that apply for elections relating to funding balances. Thus, the plan sponsor must provide written notification of the election to the plan’s actuary and the plan administrator. If a plan’s actuary has not certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a certification of the AFTAP. Thus, beginning with the date of the election, the AFTAP for the last plan year ending on or before December 31, 2019, applies for the plan year for which the election is made, rather than any presumed AFTAP.

A plan’s actuary generally is required to certify the plan’s AFTAP for a plan year for which the plan sponsor makes the election. However, if the plan sponsor makes the election for a plan year that begins in 2019 and ends in 2020 and also makes an election for the next plan year, then the actuary is not required to certify the plan’s AFTAP for the plan year that begins in 2019. If the plan’s actuary has certified an AFTAP for a plan year, then the Schedule SB of Form 5500 for that plan year should reflect the certified AFTAP.

If a plan’s actuary certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a subsequent determination of the AFTAP for that plan year. However, the plan sponsor’s election is eligible for deemed immaterial treatment and the election is treated as the recertification on the part of the actuary that is otherwise required for deemed immaterial treatment. Thus, the AFTAP that applies pursuant to the plan sponsor’s election is applied on a prospective basis beginning with the date of the election.

If the AFTAP that applies is pursuant to a plan sponsor’s election, then the restriction on plan amendments and unpredictable contingent event benefits is applied, except that the AFTAP that applies pursuant to the plan sponsor’s election is substituted for the presumed AFTAP. Thus, for example, the AFTAP that applies pursuant to the plan sponsor’s election will be used to calculate a presumed adjusted funding target and an inclusive presumed AFTAP.

The AFTAP that applies pursuant to a plan sponsor’s election for a plan year generally will not apply for purposes of the presumptions used in a subsequent plan year. Instead, the actual AFTAP for the plan year that was certified by the plan’s actuary generally is used for purposes of applying the presumption rules the subsequent plan year.

Source:  IRS Notice 2020-61.

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