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

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

GE pension changes: should my company be looking to do the same?

On October 7, General Electric (GE) announced a series of decisions around their salaried pension plan:

  • For participants continuing to accrue benefits, further accruals will be stopped at the end of 2020. (New employees hired after 2011 were not eligible for the pension plan.)
  • A lump sum buy-out proposal to 100,000 terminated but not yet retired participants will be offered.
  • Benefits in a supplemental plan for certain executives will also freeze.

Inevitably, whenever one of the largest pension plans in the country makes an announcement like this, it can cause executives at other companies to question if a similar decision makes sense for their plan.  The action item here most germane to other plan sponsors, and the focus of the remainder of this article, will be to focus on the middle bullet point.  Offering lump sums to non-retired, terminated participants has become a popular strategy among pension plan sponsors the last couple years as a way to reduce headcount without paying a premium to an insurance company to off-load the obligations.

Lump Sum Cashouts Defined

A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window.  Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.

Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction.

Advantages of Implementing Lump Sum Cashout Today

1. Improved Funded Status

An advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. Employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits in most cases. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk.

2. PBGC Premium Savings

The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat-rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.

These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some pension plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.

Other Considerations When Planning for a Lump Sum Cashout

There are some concerns that pension plan sponsors will also want to consider such as:

  • Potential increases to contribution requirements;
  • One-time accounting charges that could be triggered;
  • Potential increase to annuity purchase pricing upon pension plan termination. Note that a permanent lump sum feature may increase pension plan termination annuity pricing and cause some insurers to decline to bid.

The pension plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.

Some pension plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley article provides tips to map your route to pension plan termination readiness. Already have a frozen plan and been considering a termination in the near future? For a complete A-Z walkthrough, check out our guide below.

Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at, 216.875.1933 or Matt Klein at 216-875-1938.

Published on October 8, 2019

© 2019 Findley. All Rights Reserved.

Drug Price Transparency – Pitfalls for Consumers and Solutions for Employers

Recently, there has been a good amount of buzz about drug price transparency, and it’s not just private sector employers clamoring for better transparency. In October 2018, Centers for Medicare and Medicaid Services (CMS) posted proposed regulations for drug transparency on its website. These regulations would require specific drug manufacturer pricing disclosures as well as advertising guidelines. In addition, California has passed new regulations designed to hold pharmacy benefit managers (PBMs) accountable, and Health and Human Services (HHS) is pushing to require drug prices to be put into TV advertisements.

Any response from PBMs?

Earlier this month, a major PBM announced a “guaranteed net cost” model. Although few details have been shared, it appears this is a response to criticism of the PBM industry by CMS and other federal entities. At least one PBM is positioning itself to be part of the solution, responding to the lack of transparency and rising drug prices, rather than perpetuating the problem. However, here are a few things to keep in mind as the push for drug transparency continues.

Manufacturers’ drug prices do not represent what consumers would actually pay

With our complex healthcare system, actual drug costs to a consumer can depend on the:

  • Plan sponsor (Employer, Medicare Part B, Medicare Advantage with Part D, etc.)
  • Retail pharmacy (e.g. CVS, Rite Aid, Walgreens, etc.)
  • Plan design and cost-sharing (fixed dollar copay, coinsurance, etc.)

Showing the raw drug costs on TV ads could help, but it could also produce a negative impact as consumers will be more confused when they show up at the pharmacy and their costs don’t match what they saw on TV.

Knowing drug prices upfront does not necessarily mean that consumers will choose cheaper drugs

It wasn’t long ago that medical cost transparency was a new and hot topic in healthcare.While there is still much work to be done to improve medical cost transparency, one lesson learned early on was that just having transparency doesn’t lead to better consumerism. Technology and tools were developed to answer the demand for transparency, but many consumers, who have access to these tools, aren’t using them. Why?

  • Patients trust their doctors and often will not question or push for lower cost options
  • Doctors don’t often know what is the lowest cost option, especially for you and your specific plan
  • Some believe a higher cost option must work better than a lower cost option

Can employers help find the right solution?

We don’t know what the best solution is, but we know more prescription drug market transparency is needed. Perhaps the right answer is a combination of:

  • Transparency tools that are integrated with consumers’ actual prescription drug plan and benefits, and
  • A patient advocacy program that can intervene and help consumers navigate the complicated prescription drug system.

The good news is several PBMs have transparency tools and patient advocacy programs already available or currently being developed. If you are an employer with a self-insured prescription drug benefit, you likely have some options and should consider discussing what you can do with your consultant or broker and your PBM.

Questions? Contact the Findley consultant you normally work with, or Dave Tighe at 419.327.4194,

Posted to December 18, 2018

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CMS proposed regulations on transparency on Rx for Medicare/Medicaid

Drug prices in TV ads

California New Regulatory Scheme

Announcement of guaranteed net cost model