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IRS has finally issued guidance on two key defined benefit (DB) plan provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act (Pub. L. No. 116-136). Notice 2020-61 somewhat belatedly answers several burning questions about the extended due date for minimum required contributions and benefit restrictions, but sponsors may not be entirely happy with the answers.
The CARES Act gives DB sponsors until Jan. 1, 2021, to make any minimum required contributions ordinarily due during the 2020 calendar year. This deferral opportunity applies to quarterly contributions and any year-end contributions for the prior plan year that would have been due in 2020. Interest will accrue on any delayed contributions from the original due date to the date paid. Only plans subject to Section 430 of the Internal Revenue Code get the delay; multiemployer, cooperative and small-employer charity (CSEC), money purchase and 412(e)(3) annuity plans aren’t eligible. The statutory language is brief and lacks detail, giving rise to many practical questions for sponsors deciding whether to take advantage of the delay.
Notice 2020-61 addresses many of the outstanding implementation issues, but makes few concessions for other deadlines that coordinate with the contribution due date. As a result, sponsors may find that taking full advantage of the extended due date offers little benefit while creating additional administrative burdens.
The statute’s extended deadline for 2020 contributions is Jan. 1, 2021. Because Jan. 1 is a federal holiday, depositing and documenting contributions on that day may be impossible for most employers. Sponsors and industry groups have urged IRS to apply the rule that extends some deadlines that fall on a weekend or holiday to the next business day. However, the notice is clear that the deadline remains Jan. 1. (This answer is consistent with the agency’s general position on contribution due dates, and IRS may not feel it has the authority to override the statute in this instance.)
A recent Senate relief package — the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act, which consists of eight separate bills — would extend the due date to Monday, Jan. 4, 2021. Prospects for that package are dim, although the deadline change could make its way into compromise legislation currently under negotiation.
Absent a legislative change, the contribution deadline for all practical purposes is Thursday, Dec. 31, 2020.
The notice explains how to calculate interest on delayed contributions, confirming that sponsors must use the effective interest rate (EIR) for the plan year in which the contribution is made, rather than the plan year to which the contribution is attributed. This could present a problem for sponsors making a contribution early in the plan year, since they likely won’t yet know the appropriate EIR. For instance, a sponsor with an Oct. 1 plan year making a contribution on Dec. 31 may not yet have calculated the 2020 EIR. A calendar-year sponsor that manages to make a contribution on Jan. 1, 2021, likewise won’t yet know the 2021 EIR.
When this rate is not known by the contribution date, the notice explains that sponsors should calculate interest using the highest of the three segment rates for the plan year. However, sponsors presumably could use a different rate as long as it is higher than the actual EIR (for instance, the 2019 EIR is likely to be higher than the 2020 EIR). If the actual EIR ends up lower than the rate used to calculate the interest, the sponsor can create prefunding balance with the resulting excess contribution. If the actual EIR is higher than the rate used to calculate interest, the plan sponsor will have missed a year-end required contribution and will face an excise tax, so sponsors will likely want to be cautious in this regard.
Single-employer DB plan sponsors report contributions on Schedule SB of Form 5500. Schedule SB can include only contributions made by the date that form is filed — as late as the 15th day of the 10th month after plan year-end (Oct. 15 for a calendar-year plan). Sponsors were hoping for an extension of this deadline so the filing could reflect delayed contributions. However, Notice 2020-61 is clear that the 5500 filing due date is not extended.
This means that sponsors choosing to delay contributions until after the Form 5500 is filed will have to show an unpaid minimum required contribution on the Schedule SB. After making that contribution, sponsors will file an amended return reporting the contribution, including a special attachment ordinarily required only when contributions are paid after their due date.
The PBGC premium filing, which has the same Oct. 15 deadline for a calendar-year plan, also reflects only contributions made by the time the form is filed. If IRS had extended the Form 5500 due date past Oct. 15 under disaster relief provisions, the PBGC due date would have been automatically extended. But absent a Form 5500 extension or separate action by PBGC, the PBGC filing due date remains Oct. 15, so contributions must be made by that date to be reflected in the premium filing. PBGC Q&As published in late July confirm that sponsors may not submit amended filings to reflect additional contributions made after the original filing’s due date.
The variable-rate premium (VRP) is generally based on a plan’s assets and liabilities, including contributions for a prior plan year made before the PBGC filing date. Sponsors that aren’t subject to either of the two VRP caps will therefore have to choose whether delaying the contribution past Oct. 15 is worth paying the additional premium (4.5% in 2020 — a hefty penalty for a 2-1/2 month delay).
The extended contribution due date will still help sponsors with their PBGC filings in two ways:
A company may generally deduct retirement plan contributions in the tax year when the contributions are made. But Code Section 404(a) lets a company deduct contributions for a prior tax year, as long as they are made by the deadline for filing the corporate tax return for that prior year and are made on account of that year. Temporary regulations issued in 2017 extend the corporate filing tax deadline to Oct. 15 (for calendar tax years), but this extension doesn’t help when the tax year and plan year coincide, since the deadline for making contributions on account of the prior year is a month earlier.
The CARES Act contribution due-date extension means that calendar-year sponsors can now take 2019 deductions for contributions made as late as Oct. 15, 2020. Some sponsors were hoping to deduct contributions made by Jan. 1, 2021, but the notice specifically denies a further extension for deduction purposes.
The notice confirms that the deadline for making elections to increase the plan’s prefunding balance is extended to Jan. 1, 2021. This means sponsors making contributions in excess of the minimum can use them to create prefunding balance, even if they are paid after the ordinary due date.
The deadline for making elections to apply credit balance to the minimum required contribution is also extended to Jan. 1. The extension includes standing credit balance elections to satisfy year-end contributions. Informal IRS guidance in the 2011 Enrolled Actuaries Gray Book, Q&A-5, suggests that Schedule SB can reflect future standing elections, as long as the necessary credit balance exists on the date the form is signed. Nonetheless, cautious sponsors that rely on standing elections to satisfy minimum required contributions may want to make a specific use election before filing the SB to avoid any subsequent review or audit questions about anticipating a future election on the filing.
Other credit balance election deadlines are unchanged. For instance, a sponsor with an Oct. 1 plan year that used credit balance to pay the Jan. 15, 2020, quarterly contribution only has until Sept. 30 to revoke that election.
When determining whether Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, the CARES Act lets sponsors choose to use the adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. Notice 2020-61 clarifies many implementation details about these lookback elections.
Many sponsors and DB practitioners had assumed that an election to use the lookback AFTAP for 2020 would obviate the need for a 2020 AFTAP. But in the notice, IRS explains that the reliance on the lookback AFTAP applies only for 2020; the presumption rules that will apply in 2021 before the actuary certifies the 2021 AFTAP will still require a certified 2020 AFTAP.
The notice also points out that existing IRS regulations provide that if benefit restrictions aren’t in effect at the end of the plan year, they won’t go into effect during the first three months of the next plan year. So many plan sponsors won’t need their 2020 AFTAP certification in place until the first day of the fourth month of the plan year (April 1 for calendar-year plans) — and may not need one at all if the 2021 AFTAP is certified before that time. The special three-month moratorium on benefit restrictions does not apply if the plan is amended to improve benefits or needs to pay an unpredictable contingent-event benefit (UCEB) before then.
The notice says that plan sponsors choosing to use the lookback AFTAP must follow the procedures for making credit balance elections. Sponsors will have to notify the plan administrator and enrolled actuary in writing, specifying the details of the election. Although the notice doesn’t set a deadline, the election presumably must be made by the ordinary 10th-month AFTAP deadline. Earlier elections that that didn’t satisfy the requirements won’t be treated as invalid, as long as the sponsor makes a compliant election by Sept. 30 (regardless of plan year).
Noncalendar-year plans have two plan years in the 2020 calendar year: the plan year that ends in 2020 and the plan year that begins the next day. The notice clarifies that sponsors of these plans may make independent elections for each of the two plan years. For example, a sponsor of a Sept. 1 plan might choose to use the 2018 AFTAP (that is, the AFTAP for the Sept. 1, 2018, to Oct. 31, 2019, plan year) only for the plan year beginning Sept. 1, 2020, rather than using the lookback AFTAP for both the 2019 and 2020 plan years. Some sponsors and practitioners had previously been concerned that the lookback election would be binding for both plan years.
As noted, IRS expects that most plans will need certified AFTAPs for 2020, even if the sponsor chooses to use the lookback AFTAP. The way the two AFTAPs interact depends on when the lookback election is made:
Section 436 restricts underfunded plans from improving benefits or paying UCEBs unless the plan’s AFTAP is at least 80% after the amendment or at least 60% after paying the UCEBs. The statute states that the lookback AFTAP may be used for benefit restriction purposes, but doesn’t specify whether that reliance should follow the rules for when a presumed AFTAP is in place, which requires using updated assets and an implied liability value.
The notice clarifies that these determinations must follow the presumption rules. Therefore, the plan must use updated assets as of the beginning of the plan year to determine whether an amendment can take effect. For instance, a plan with an AFTAP of 82% and assets of $10 million would have implied liabilities of about $12.2 million ($10 million/82%). If the amendment would increase liabilities by $425,000, the implied liabilities would rise to $12.625 million and the plan’s AFTAP would be 79.2% (10/12.625). In this case, the amendment could only take effect if the sponsor made an additional contribution of $100,000 to bring the assets to $10.1 million, producing an AFTAP of 80% (10.1/12.625).
Notice 2020-61 is silent on liquidity requirements of Section 430(j)(4), under which plans with insufficient liquid assets to cover three years of benefit payments must make additional contributions. The additional contribution requirements arise at every quarterly payment due date. Because no quarterly contributions are due in 2020, the liquidity requirements apparently don’t apply this year. But the liquidity requirements will apply on Jan. 1, 2021, the extended due date for 2020 quarterlies. Additional guidance from IRS before that date would be helpful.
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