Single Employer Defined Benefit Plan CARES Act Guidance Issued by IRS

IRS Notice 2020-61 was issued on August 6, 2020, and provides clarification on the relief the CARES Act provided to single employer defined benefit plans. The CARES Act extended the due date of all 2020 calendar year required pension plan contributions to January 1, 2021, and allows the use of the prior year AFTAP certification to avoid benefit restrictions.

Extended Contribution Deadline

Many plan sponsors are considering taking advantage of the extended due date for the 2020 calendar year required contributions. As this option is considered, plan sponsors should be aware of the potential impact on the administration of the plan. IRS Notice 2020-61 has provided additional details regarding the impact to the plan’s administration.

Single Employer Defined Benefit Plan CARES Act Guidance Issued by IRS

Contribution amounts will be increased as a result of the later payment date. The due dates are extended but as required by §430, interest is added at the plan’s effective interest rate until the date the contribution is paid. The CARES Act has waived the additional 5 percentage point penalty for late contributions until the new due date of January 1, 2021. Any contribution made after January 1, 2021 will start to accrue the additional 5 percentage point interest penalty on January 2, 2021 in addition to the effective interest rate.

An amended Form 5500 filing will be required. The only contributions that are allowed to be included in the 5500 filing are those that have already been contributed to the plan as of the filing date, which is October 15th for calendar-year plans. Consequently, if a plan sponsor opts to delay any 2019 contributions, the 5500 contribution will need to be filed omitting those contributions. Once the contributions are made, the 5500 filing will need to be amended in order to avoid any additional penalties that would be triggered on unpaid contribution requirements.

The audit report may need to be updated once the contributions are made in order to match the amended 5500 filing. This should be discussed with the auditor prior to delaying contributions. Some auditors may choose to footnote the audit report either this year or next year in order while other auditors may choose to update the audit report.

The contribution deadline applies to excess contributions in addition to required contributions. For calendar year plans, any contribution made before January 1, 2021 can be applied to the 2019 plan year even if it is made after September 15, 2020. Plan sponsors therefore have additional time to improve the 2020 funded level of the plan. Note, however, as detailed in our earlier article, contributions made after the filing of the PBGC premium payment for 2020 cannot be included to reduce PBGC premiums.

AFTAP certification for 2020 may be lower because any calendar year plan will need an AFTAP certification by September 30, 2020 but such certification can only include contributions made as of the date of certification. Once the contributions are made, the plan can update their certification if it materially changes the funded percentage of the plan. Alternatively, the CARES Act also allows plan sponsors to use their 2019 AFTAP certification for 2020 which is discussed later.

Prefunding Balance elections are also delayed to January 1, 2021. Plan sponsors have until January 1, 2021 to elect to use the Prefunding Balance towards any contribution requirements or to increase the Prefunding Balance with any excess contributions.

Use of Prior AFTAP Certification

A Plan Sponsor may use the prior year AFTAP certification for any plan year occurring in 2020. This will help keep plans from falling into benefit restrictions as a result of a lower 2020 AFTAP certification.

The election can be used for a 2019 plan year if it ends in 2020. Any plan that has a plan year that ends in 2020, can opt to use the prior year’s AFTAP as long as that prior year ends on or before December 31, 2019.  For example, a July 1, 2019 plan year that ends June 30, 2020 can use the July 1, 2018 AFTAP for 2019. The same AFTAP can also then be used for the plan year beginning July 1, 2020.

Plan Sponsors must make the election by notifying their plan actuary and plan administrator in writing. The process to make such an election is similar to the elections made regarding the plan’s credit balances. The certification is deemed to be made on the day the Plan Sponsor makes the election. An attachment should then be included with the applicable Schedule SB indicating such an election has been made.

Election by the Plan Sponsor is a recertification if the actuary had already certified the AFTAP. Therefore the election would be applicable from the date of the election forward. The actuary cannot certify the AFTAP after an election unless the Plan Sponsor revokes their election in writing.

Presumptive AFTAP for the following year is based on the actual AFTAP instead of the plan sponsor’s election. Therefore for any calendar year plan, the 2021 presumed AFTAP as of April 1, 2021 would be the actual 2020 AFTAP less 10% ignoring the participant’s election to use the 2019 AFTAP for 2020.

There are many administrative hurdles that should be considered before choosing to elect any of the options provided in the CARES Act.  However, for plan sponsors that need the relief, these are several strategies you can employ. For more information regarding this notice and its effects on single employer defined benefit plans, contact Amy Gentile in the form below.

Published August 12, 2020

Print this article

Copyright © 2020 by Findley, Inc. All rights reserved.

The CARES Act and its Impact on Retirement Plans

After several days of intense negotiations between Senate leadership and the Executive branch, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”) was passed by the House on Friday, March 27th. The CARES Act will provide $2.2 trillion to fund responses to the economic impacts of the COVID-19 (coronavirus) pandemic.

The CARES Act is a very extensive piece of legislation that is meant to provide emergency assistance to large and small distressed businesses, in order to stabilize the U.S. economy that has been hammered by this pandemic. By now, almost everyone has likely heard about provisions of the Act that provide direct payments of $1,200 to individuals, and those that provide employers whose business is fully or partially suspended as a result of COVID-19, with tax credits intended to allow them to keep paying employees on furlough. This bill covers a lot more of those highly publicized provisions. This article will specifically focus on the provisions that directly impact tax-qualified retirement plans.

The House passes the CARES Act in response to coronavirus turmoil, which has an impact on retirement plans

Coronavirus Related Plan Distributions

The Act provides rules for the optional provision of special coronavirus-related distributions from eligible retirement plans and IRAs that do not exceed $100,000 for any taxable year. Under the Act, the distribution would not be subject to the 10% penalty on distributions to individuals who have not yet reached age 59-1/2. Additionally, the mandatory 20% withholding tax on these distributions would not apply. The following rules apply to these special distributions:

  • Individuals who are eligible for this distribution must be participants (or their spouse or dependents) who are diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control (CDC) or who experiences adverse financial circumstances as a result of being quarantined, laid off, furloughed or who suffer reduced working hours, or who are unable to work because of the lack of child care.
  • A plan can rely on a participant’s certification of their eligibility for the distribution.
  • Amounts distributed can later be repaid to a qualified plan, or an IRA provided it is an account to which a rollover contribution could be made.
  • The repayment of the distribution can be made at any time over the three-year period that begins on the date the distribution was received.
  • The distribution can be spread out for tax purposes ratably over the three taxable years beginning with the taxable year of the distribution to the extent that the distribution is not repaid.
  • These distributions will be treated as satisfying the requirements for hardship distributions from a 401(k) plan.

Plan Loans

The CARES Act increases the maximum dollar amount available for loans from tax-qualified plans from $50,000 to $100,000, and increases the maximum percentage limit for loans from 50% of the present value of a participant’s benefit to 100% of the present value of a participant’s benefit under the plan.

The new due date for any plan loan with a current due date beginning on the date of the enactment of the CARES Act (presumably the date it is signed into law) and ending on December 31, 2020 will be extended for one year, or if later, until the date that is 180 days after the date of the Act’s enactment. For this purpose, the 5-year limit on plan loan repayments is disregarded.

Required Minimum Distributions – The CARES Act provides a one-year delay in required minimum distributions (RMDs) from 401(a), 403(b), 457 plans, as well as from IRAs. At this point, it does not appear that the delay will apply to defined benefit pension plans. This delay applies to RMDs due April 1, 2020, as well as to 2020 RMDs. In addition, the Act permits amounts subject to the RMD rules in 2020 to be rolled over.

Minimum Funding Contributions  – Minimum funding contributions for tax-qualified plans, including quarterly contributions, may be delayed until January 1, 2021 under the CARES Act. However, interest will accrue for the period between the contribution’s original due date and the payment date, at the plan’s effective rate of interest for the plan year in which the payment is made.

Funding Status – The Act also permits a plan sponsor to elect to treat the plan’s 2019 adjusted funding target attainment percentage (AFTAP) (which may subject the plan to certain benefit restrictions if the AFTAP is below 80%) as the AFTAP for the 2020 plan year.

Certain filing dates – The CARES Act allows the Secretary of the Department of Labor to postpone certain filing deadlines for up to one year. The prerequisite is that the Secretary of the Department of Health and Human Services must declare a “public health emergency,” which was already done on January 31, 2020.

Effective date – The revisions and expansions made by the CARES Act, as described above, apply for calendar years beginning after December 31, 2019. Plans would need to be amended to reflect these new rules by the last day of the plan year beginning on or after January 1, 2022. For calendar year plans, the due date is December 31, 2022. For governmental plans, the due date is the last day of the plan year beginning on or after January 1, 2024.

What Plan Sponsors should do

Plan sponsors should review their plans in light of the provisions of the CARES Act, and work with their service providers to execute the appropriate changes that apply for them.  If you have any questions about what the CARES Act entails for you, please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927.

Published March 27, 2020

Print the article

© 2020 Findley. All Rights Reserved.