COVID-19 has undoubtedly brought challenges to individuals and businesses alike, as countries all over the world grapple with sickness, death, lockdowns, business closures, financial instability, and loss. In March, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, providing aid and financial relief for individuals and businesses, including funding relief for sponsors of single-employer defined benefit pension plans. This relief came in the form of a delayed funding deadline and flexibility in determining a plan’s adjusted funding target attainment percentage (“AFTAP”) for a plan year that includes 2020.
On August 6, the Internal Revenue Service (“IRS”) provided additional guidance on the application of the CARES Act funding relief in IRS Notice 2020-61. The key provisions of the CARES Act and supplemental guidance are discussed below.
Delay of Minimum Funding Deadline
Under the funding rules of Internal Revenue Code (“Code”) § 430, sponsors of qualified defined benefit pension plans must typically make any minimum required contribution for a plan year within 8 ½ months after the end of the plan year. For calendar year plans, this means the required contribution must be made each year by September 15. The CARES Act extended the funding deadline for any contributions otherwise due in 2020, including quarterly contributions necessary due to a shortfall for the prior plan year, to January 1, 2021. Since this is a national holiday, the contributions are effectively due by December 31, 2020. Any delayed contributions must be adjusted for interest for the time period between the original deadline and the payment date. See CARES Act § 3608(a).
In Notice 2020-61, the IRS clarifies that this adjustment is calculated using the effective interest rate of the plan year in which the payment is made. Thus, for a calendar year plan year, a payment made on December 31, 202,0 for the 2019 plan year must be increased for the period between the original due date of September 15, 2020, to December 31, 2020, based upon the effective interest rate for the 2020 plan year. If the effective interest rate has not been determined as of the time the payment is made, then the interest adjustment is made using the highest of the three segment rates for the plan year, in accordance with the rules described in Treasury Regulation § 1.436-1(f)(2)(i)(A).
The IRS further clarifies that the extended funding deadline also applies to contributions exceeding the minimum required contributions. Thus, a plan sponsor of a calendar-year plan that contributes more than the 2019 required minimum contribution by January 1, 2021, can designate the excess as a contribution for the 2019 plan year rather than the 2020 plan year. Additionally, a sponsor has until January 1, 2021, to elect to increase a prefunding balance or to use a prefunding balance or a funding-standard carryover balance to offset the minimum required contribution.
Although the funding deadline has been extended, the deadline for filing Form 5500 has not. Accordingly, a plan sponsor may be making the minimum contribution after the Form 5500 is filed. A plan’s actuary is not permitted to report contributions that have not yet been made on Schedule SB to the Form 5500, which means plan sponsors wishing to make contributions after the Form 5500 extended deadline must file an amended Form 5500 with an amended Schedule SB reflecting the additional contributions after they have been made. The actuary must also attach a schedule for Line 19 of the Schedule SB, showing the dates and amounts of individual contributions, the year to which the contributions are applied, the effective interest rate that applies to the contributions, including any potential 5% increase for late quarterly contributions, and the interest-adjusted contributions for the plan year.
Plan sponsors should keep in mind that while the funding deadline has been extended, to be deductible under Code § 404(a) for the 2019 tax year, the contributions must be made by the extended due date of the plan sponsor’s 2019 tax return (October 15, 2020, for a C corporation with a calendar-year tax year). Otherwise, while the contributions may be credited to the 2019 plan year, they would not be deductible until 2020.
Code § 436 generally prohibits the effectiveness of an amendment increasing liabilities if it would cause a plan’s AFTAP to fall below 80% and prohibits a plan from paying certain accelerated forms of benefit, such as a lump sum distribution, if the AFTAP is less than 80%. Additionally, it prohibits payment for unpredictable contingent event benefits and freezes benefit accruals if a plan’s AFTAP falls below 60%.
Pursuant to the CARES Act, for purposes of determining whether these funding-based restrictions apply, a plan sponsor may elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020. See CARES Act § 3608(b). This means that a calendar year plan may elect to use the plan’s 2019 AFTAP for the plan year ending December 31, 2020, while a plan with a plan year ending June 30 could elect to use the plan’s AFTAP for the plan year ending June 30, 2019 for the plan year ending June 30, 2020, and the plan year ending June 30, 2021.
To make an election to use the prior year’s AFTAP, the plan sponsor must provide written notification to the plan’s actuary and the plan administrator. To the extent the plan sponsor made an election using a different procedure, the election will be valid so long as the plan sponsor provides written notification by September 30, 2019.
If the plan’s actuary has not certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the sponsor’s election is treated as the AFTAP certification rather than any presumed AFTAP determined under Treasury Regulation § 1.436-1(h).
Although the sponsor’s election is treated as the AFTAP for purposes of benefit restrictions, the plan’s actuary must generally still certify the plan’s AFTAP for the plan year because it is relevant for the next plan year. However, if the plan sponsor makes an AFTAP election for a plan year that begins in 2019 and ends in 2020, and also makes an election for the following plan year, then the actuary is not required to certify the plan’s AFTAP for the plan year beginning in 2019.
If a plan’s actuary certifies the AFTAP for a plan year before the plan sponsor makes an AFTAP election, then the election is treated as a subsequent determination of the AFTAP for that plan year. If the actuary certifies the AFTAP after the plan sponsor has made an AFTAP election, then the certified AFTAP does not apply unless the plan sponsor revokes the election for the plan year.