As we collectively deal with the COVID-19 pandemic in our everyday lives, single-employer defined benefit (DB) plan sponsors may need to address the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We anticipate that the Internal Revenue Service (IRS) will issue guidance on several CARES Act provisions, including those affecting DB plans. This article focuses on the CARES Act provision allowing deferment to January 1, 2021, of required DB contributions due in the 2020 calendar year.
We present our good faith interpretations below and assume plan and fiscal years equal the calendar year.
Summary of cash funding extension
The CARES Act allows plan sponsors to delay making required cash contributions due in the 2020 calendar year. With accrued interest and no distinctions to which plan year the DB plan contributions are due, plan sponsors can delay making the cash contributions until January 1, 2021.
- For contributions due April 15, 2020, July 15, 2020, and October 15, 2020, the final amounts will be determined upon completion of the January 1, 2020, valuation, but will not exceed the amounts shown.
Cash funding extension considerations
Compliance issues arise with regard to receivable contributions for the 2019 plan year. The September 15, 2020, contribution shown in the chart above applies to the 2019 plan year. Typically, the plan sponsor would notify the plan actuary that the contribution was deposited in the trust by the required due date. The plan actuary would then apply the contribution in the Schedule SB of the 2019 Form 5500 filing due by October 15, 2020, with extensions. The application of the contribution would meet the 2019 Minimum Required Contribution under IRS rules.
IRS guidance will need to indicate how the delay of the 2019 plan year receivable contributions will be applied toward the 2019 Schedule SB of the Form 5500 filing. Otherwise, the plan will be considered to have failed to make required contributions when due. In our opinion, a practical solution would be for IRS guidance providing an extension of the 2019 Form 5500 filing deadline to meet the IRS rules on Minimum Required Contributions. For example for plans that delay contributions based on the CARES Act relief, a 30-day extension to January 31, 2021, for the 2019 Form 5500 would be consistent with current rules for IRS Form 5500 deadlines.
Pension Benefit Guaranty Corporation (PBGC) premium filings are due by October 15, 2020. The September 15, 2020, contribution shown in the chart above applies to the 2019 plan year and would be considered against the premium due in 2020. PBGC guidance will need to indicate how the delay of the 2019 plan year receivable contributions will be applied toward the 2020 PBGC premium. Further, PBGC reportable event filing or participant notification requirements may need to be addressed to avoid additional compliance issues for plan sponsors.
Within the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) frameworks, plan sponsors should consider the impact to the Net Periodic Pension Cost due to a decrease in expected weighted contributions. For balance sheet considerations, a contribution must be in the trust by the end of the fiscal year to be included in market assets. If there is a delay to January 1, 2021, the balance sheet would be affected. Alternatively, plan sponsors may decide to delay contributions to December 31, 2020, rather than January 1, 2021. Plan sponsors considering contribution deferment should discuss with their actuary, financial adviser, and auditor to avoid unintended accounting consequences of delaying contributions.
Additional considerations include non-calendar plan years, tax deductibility of delaying contributions, application of credit balances, impact on funding and investment policies, liquidity issues, liquidity shortfall calculations, impact to Top 25 funded ratios, and benefit restrictions. In addition to deferring 2020 contributions, plan sponsors will need to budget for the January 15, 2021, quarterly contribution.
As with so much about the current crisis, the effects of the pandemic on pension plans have added uncertainty to many aspects of our lives including DB pension plans. In the meantime, plan sponsors should work with their advisers to stay informed on the CARES Act and related guidance. Some areas to consider are:
- How do we apply contributions within the plan sponsor’s overall funding and investment strategy?
- How will the CARES Act affect PBGC premiums and FASB accounting?
- What if interest rates drop and/or assets decline further?
- Are there union considerations?
For more details on the CARES Act and implications for your pension plans, contact your Milliman consultant.