Looking for the silver lining in the clouds hanging over 2020? Through the CARES Act, defined benefit pension plan sponsors have a unique opportunity for significant savings in Pension Benefit Guaranty Corporation (PBGC) premiums. For plan sponsors who pay a PBGC variable premium based on their defined benefit pension plan’s unfunded liability, there are two options for premium savings – for those who have continued to make quarterly payments for the 2020 plan year, and for plan sponsors who expect to delay all 2020 contributions until December 31, 2020.
Savings for Continuing Quarterly Contributions
Plan sponsors who have continued their 2020 plan year contributions will earn PBGC premium savings by reassigning the 2020 quarterly contributions to the 2019 plan year. Typically, this reassignment is not permitted unless there is an acceleration of the final 2019 contribution (due September 15, 2020 (calendar year)) to the first quarterly due date of 2020 (April 15, 2020 (calendar year)).
The CARES (Coronavirus Aid, Relief, and Economic Security) Act states that 2020 quarterly contribution funding deadlines for defined benefit pension plans have been extended to December 31, 2020. As a result, once the final 2019 plan year contribution is made, the 2020 quarterly contributions can be reassigned to the 2019 plan year. The savings to the variable rate premium is approximately 4.3 percent of the amount of contributions reassigned to the 2019 plan year.1
Savings through Delaying 2020 Contributions
A PBGC premium savings option also is available for plan sponsors who have planned to delay all 2020 contributions until December 31, 2020. Similar to above, the PBGC premium is still due October 15, 2020 (for calendar year plans). However, an amended filing can be prepared to receive a refund after the contributions are made by December 31, 2020.
The savings to the variable rate premium, in this case, would be about 4.3 percent of the amount of contributions reassigned to the 2019 plan year.
Choose a Strategy and Save
For example, assume that a plan sponsor has three required 2020 quarterly payments of $250,000. Implementing one of the strategies could bring nearly $32,000 in PBGC premium savings. There is some administrative work required to take advantage of these opportunities, but it’s not overwhelming and likely worth the effort.
The calculation to determine the amount of actual contributions and credit balance elections is complex and differs for each plan. To learn more about how your company’s defined benefit pension plan’s variable PBGC premium could be affected by either of these strategies, contact Larry Scherer in the form below.
Note: This article refers to dates for a calendar plan year, but the strategies also apply to non-calendar plan years.
1 Although the PBGC variable premium rate for 2020 is 4.5 percent of the unfunded pension plan’s liability, the premium saving is approximately 4.3 percent due to interest discounting of contributions.
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.
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.
On July 20th, the PBGC published an update for how to calculate PBGC premium payments for pension plan sponsors that are taking advantage of the delayed contribution due dates afforded by the CARES Act. Further, it provides relief from unneeded filings. Employers that are taking advantage of the delayed due dates should read on.
The PBGC changed the deadline for reflecting 2020 contributions on the PBGC form and now contributions made as late as December 31, 2020 can be counted toward the 2020 premium. The plan sponsor would complete the PBGC premium filing on October 15 as usual not reflecting the contributions and then amend both the Form 5500 and PBGC forms in early 2021 reflecting the 2020 contributions. You can find out more in our updated article, Quarterly Contributions: To Delay or Not to Delay. PBGC Premium Savings Either Way
Of important note, contributions can only be included as assets for PBGC variable premium calculations if the contribution is made by the date of the filing. So an employer looking to make their premium payment on the last day possible, October 15th for calendar-year plans, can only include 2019 receivable contributions up to that date, even though some 2019 contributions may still be made after that date. Furthermore, the PBGC will not accept an amended filing by an employer looking for a premium credit once those delayed contributions are made.
The PBGC clarified for employers that as long as they make their required contributions by the adjusted due date, no late contribution notice requirements are triggered. If contributions are not made by the revised dates, the usual reporting requirements will then apply.
Further miscellaneous provisions related to distress termination and early warning program inquiries are also included but will only apply to a limited number of pension plans. The full Q&A style release can be found here.
For more information about adjusted due dates, late contribution guidelines, or pension plan changes, please contact Matt Klein in the form below.
As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, payments made between March 27 and December 31, 2020, toward employee’s student loan debt may be eligible for a tax benefit. Employees can exclude up to $5,250 from their gross income, so long as the payments are for the retirement of student debt. This section (Section 2206) of the CARES Act amends IRC Section 127 (IRC 127) by adding a special rule in the form of Section 127(c) (1) (B).
Prior to CARES, IRC 127 allowed for tuition paid for an employee’s current education (up to $5,250) to be excluded from gross income. Under IRC 127, because the benefit is not income to the employee, the employer is not paying payroll taxes while assisting their employees in paying off their debt. The CARES Act provides a temporary window through the end of 2020 to apply the tax benefit for prior education student loan principal and interest. Payments may be made to employees or directly to the employee’s lender.
Employees with student loans have been able to claim a deduction for interest paid up to $2,500. The CARES Act prevents employees from claiming this deduction and the $5,250 exclusion from their gross income. In a sense, they cannot “double dip”.
Employers who offer an educational assistance program as prescribed through IRC 127 must have the following elements:
Be set forth in writing
Not be discriminatory in terms of eligibility
Adhere to restrictions on the eligibility of principals who own at least 5% of the company
Not be offered as a replacement to other remuneration (i.e. allocation of salary), and
Be communicated to employees sufficiently
Why Add the Student Loan Benefit Now?
Many Americans struggle with student debt and this entices employers to create an educational assistance program or revise an existing program to include student loan repayments. It is a benefit that can set companies apart from competitors. This benefit would be especially valuable to employers who are highly competitive in hiring recent college graduates. Surveys from 2019, including a Society of Human Resources Institute survey, indicate that less than 10% of employers are offering the student loan repayment benefit.
There is some thought that this temporary exclusion from gross income may become permanent. It would make sense, the IRS provides the benefit for students to stay out of (or reduce) debt through excluding tuition reimbursement from gross income, it seems it could do the same in allowing employees to get out of debt quicker.
It is not difficult to set up and administer an educational assistance program and right now they can provide employees and employers with a substantial tax-free benefit. The one challenge to the benefit is that is one that is not available for all employees to enjoy, as opposed to health insurance, short-term disability, etc. However, offering this as a benefit could prove valuable to employers in attracting talented employees.
To learn more about the student loan tax benefit and how it affects employers, please contact Brad Smith in the form below.
Employers that are partly or completely prohibited from operating during the shutdowns caused by the coronavirus pandemic but who continue to fund employee health care coverage, may be able to take up to a $10,000 tax credit for each employee, regardless of whether they are paying wages to those employees.
As part of The Coronavirus Aid, Relief and Economic Security (CARES) Act, the IRS created an Employee Retention Tax Credit (ERTC) of up to $10,000 it pays in “qualified wages.” Under the CARES Act, “qualified wages” included (a) cash compensation paid between March 13, 2020 and December 31, 2020, and (b) “qualified health plan expenses.” The original position within the CARES Act allowed Employers to claim the ERTC who continued to provide health coverage AND continued paying other wages. This was negatively received by many lawmakers as it seemed prohibitive. The new position allows Employers to claim the ERTC regardless of whether the employee is paid qualified wages.
Who is eligible?
Businesses of all sizes, including non-profits, can receive the ERTC in two circumstances:
If the business operations were fully or partially suspended as a result of government-mandated COVID-19 shut-down order, or
If the business experiences a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019.
For the second qualifier, the employer eligibility ends if gross receipts in a quarter exceed 80% compared to the same quarter in 2019.
Who is NOT eligible?
Importantly, any employer who receives a Paycheck Protection Program (PPP) loan will not be eligible for the ERTC, unless it is fully paid back by 5/14/2020.
This PPP caveat protects from double dipping, but regardless, this will likely be welcome news and will encourage employers to continue to pay for health expenses.
While this article focuses on the highlights, a full list of Q and A regarding tax credits for insured furloughed workers can be found here on the IRS website.
The coronavirus pandemic continues to ripple across the country and many organizations face several unprecedented, difficult decisions surrounding their workforce and the use of cash. While payroll-reducing strategies may be necessary during this time of substandard revenue, they may also present other costs or hurdles in the company’s pension, retiree medical, and retiree life insurance programs. Significantly changing employee demographics can trigger unexpected accounting, cash flow, and compliance issues that could be an unwelcome surprise given current market conditions.
State mandated stay-at-home orders not only reduce the ability for consumers to purchase, but also the need for employees to produce. For many industries, this means downsizing workforces and payroll at record levels via layoffs, furloughs, reductions in force, and salary cuts. However, in this time where management decisions are focused on the best positioning of their organization from “crisis” to “rebound” mode, it is important that pension and retirement programs are not placed on the back burner.
Identify and Prepare for Potential Consequences
A proactive analysis of an organization’s workforce reduction program, as well as the group of employees impacted, may help identify and prepare for the impact of some of these potential unintentional consequences due to coronavirus:
Curtailment Accounting Under U.S. GAAP
Curtailment accounting may be initiated when more than 5-10% of the plan’s active participants are impacted by a workforce reduction event such as layoffs or forced termination, or a reduction or elimination of future benefit accruals. The curtailment impact is an immediate recognition of a portion of unrecognized prior service costs and could also prompt an interim re-measurement at the time of the event, likely unfavorable given the current market environment. Curtailment accounting can increase the “below the line” expense for accounting for pension, retiree medical, and retiree life insurance plans under U.S. GAAP.
Settlement Accounting Under U.S. GAAP and Cash Concerns for Pension Plans Offering Lump Sums
Settlement accounting is set into motion when lump sum payouts exceed the service cost and interest cost components of net periodic pension cost during the fiscal year. This may be increasingly likely as laid off participants may access their pension benefits for their own financial security. The settlement impact is an immediate recognition of unrecognized gains and losses, and similar to curtailments, could also cause an interim re-measurement at the time of the event.
In addition, while payroll reducing strategies may be advantageous for cutting current expenses, pension plans that offer lump sums upon termination could end up in a situation where the plan requires more cash in the future. Paying an increased number of lump sums to participants could force the pension plan to raise cash by selling equities at a time when the market is significantly depressed. Selling equity at market lows may inhibit the pension plan’s ability to recover in the long term.
Benefit Enhancements and Plant Shutdown Liability under PBGC and ERISA
Benefit enhancements and plan shutdown liability may be triggered when either a facility closure impacts more than 15% of the plan sponsor’s active participants benefitting in any pension or defined contribution plan; or if the pension plan document provides for special shutdown benefits in any size closure. Special, enhanced shutdown benefits that can increase pension plan liability and plan costs may be required to protect employees close to retirement if defined in the plan document. In addition, the Pension Benefit Guaranty Corporation (PBGC) may require special reporting and accelerated cash contributions under ERISA 4062 for some underfunded pension plans. The PBGC also may require a special report under ERISA 4043 if the number of active participants is significantly reduced for any reason.
Vesting Enhancements under IRS Partial Pension Plan Termination
A partial pension plan termination may occur when more than 10-20% of the plan’s active participants are impacted by closing a facility or division, or from any higher turnover due to economic factors. Partial pension plan termination requires the plan sponsor to grant immediate vesting eligibility or face Internal Revenue Service (IRS) disqualification in the pension plan. This is ultimately an IRS decision based on facts and circumstances and might be avoided if the reduction is structured to furlough (not typically a formal separation) rather than permanently terminate employees.
Increased Liability and Cash Requirements for Unfunded Retiree Medical Plans
Eliminating participants who are retirement eligible can lead to a spike in retiree medical claims costs and liabilities. Unfunded retiree medical plans “pay as you go” and do not have back-up trust assets to use toward claims in the event more participants begin retiree medical plan benefits sooner than expected. Retiree medical plans with early eligibility may be responsible for benefits over a much longer period than expected at a time when rates charged by insurers may also be increasing. Together, plan sponsors may see increased claim costs in 2021, as well as higher liability and net periodic benefit costs in fiscal 2021.
IRS Compliance Concerns Related to Passing Pension Plan Non-discrimination Testing
There is a likelihood for increased difficulty in obtaining favorable non-discrimination testing (NDT) results when there is a significant change in the demographics of the plan’s active employees. For example, NDT results will be less favorable when non-highly compensated employees (NHCEs) are forced to terminate at higher rates than highly compensated employees (HCEs) and also when salaries for NHCEs are reduced at higher levels than HCEs. Alternatively, workforce reductions impacting HCEs at higher rates could improve testing results.
Violation of Union Agreements and Debt Covenants
While not tied exclusively to workforce reductions, any decision that deviates from normal practice has a potential to violate established agreements with union contracts and debt covenants. Keep in mind, relief permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may not be permitted under current arrangements.
Minimum or Variable Interest Credit Rates for Cash Balance Plans
While interest crediting rates have already been set for most cash balance plans with calendar plan years, if low interest rates persist it could mean a significant drop in the crediting rate for 2021, possibly requiring the minimum interest crediting rate to apply. In addition, plans using variable interest crediting rates may see negative returns, making non-discrimination testing more difficult.
The bottom line is this: the coronavirus crisis continues to evolve and any workforce strategy decision should be pursued with guidance from your actuary, auditor, or legal counsel. Early analysis may help your company prepare for retirement program concerns that may arise from implementation of the selected cost-saving payroll strategy. Contact your Findley consultant to discuss any workforce reduction program you may be considering to ensure all relevant issues are addressed.
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.
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.
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.