Changes to Defined Benefit Pension Plan Funding & Defined Contribution Plans
The third round of legislation approved by Congress on March 27, 2020—the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—is a $2.2 trillion package that includes significant relief for individual Americans, healthcare facilities, small businesses and other industries affected by the SARS-CoV-2 virus and incidence of COVID-19. The CARES Act also includes important changes to both defined benefit retirement and defined contribution plans, giving participants access to retirement savings and employers relief for some funding requirements.
Defined Benefit Pension Plans Section 3608
- Due dates of required minimum funding contributions that would otherwise be due during the 2020 calendar year (including quarterly contributions not yet paid) have been extended.
- Contributions are now due January 1, 2021, and are subject to increase by interest (based on the plan’s effective interest rate for the plan year) accruing for the period between the original due date and the payment date.
- A plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the previous plan year, the year ending before January 1, 2020, as the AFTAP for plan years that include calendar-year 2020.
- The result of these changes may allow some plans to avoid some prompts on benefit restrictions enacted by the Pension Protection Act of 2006, which were required for plans whose AFTAP is less than 80 percent.
Companies sponsoring single-employer pension plans should understand these pension provisions aren’t mandatory and present choices to consider. Companies will need to determine whether to make contributions on their original due dates or delay these contributions. These expanded choices may help alleviate companies’ immediate cash flow needs for daily operations but also could adversely increase expenses in future periods due to interest accrued from delayed contribution payments.
Due to the timing of this legislation and current funding schedules, calendar-year pension plans will have to act quickly in deciding how to handle current and upcoming funding requirements. Companies should keep in mind that it’s still too early to predict COVID-19’s effects on 2020 and 2021 minimum funding requirements for calendar-year pension plans. Market volatility and low interest rates also will likely have an effect on funding decisions, and historical assumptions used in actuarial estimates will need to be challenged. Management should consider contacting its plan administrator and actuarial advisor to discuss these changes and model the effects on the plan based on various assumptions and forecasted scenarios.
Defined Contribution Plans §2202 & §2203
The CARES Act also includes early withdrawal and loan changes in defined contribution retirement plans such as §401(k) plans, §403(b) plans and, in the case of governmental employers, §457 plans that can be helpful for participants affected by the crisis who need access to cash. Some key provisions available to participants from the CARES Act are as follows:
Participant Early Withdrawals for Coronavirus-Related Distributions
- Waives the withholding requirements and the existing 10 percent penalty for early withdrawals for “coronavirus-related distributions” temporarily from qualified retirement plans up to $100,000 per individual (generally applicable to participants under age 59 1/2).
- Allows qualified participants to pay income tax ratably over three years and also provides participants with the opportunity to repay up to 100 percent of the amount withdrawn within three years. The repayment(s) can be made either to the originating plan or to another eligible retirement plan. It’s anticipated that repayments occurring after income taxes have been incurred in intervening years will lead to opportunities to file amended income tax returns to claim any applicable refunds, similar to the aftermath of Hurricane Katrina.
- Distributions must be made on or after January 1, 2020, and before December 31, 2020, to an eligible participant from an eligible retirement plan or individual retirement account (IRA).
Increased Loan Availability for Eligible Participants
- In contrast to the availability of the early withdrawal provision until December 31, 2020, the enhanced provision applicable to new loans is available through September 23, 2020.
- During the 180-day period ending on September 23, a qualified plan participant may borrow up to the lesser of their entire account balance or $100,000.
- The due date for repayments for eligible participants with existing loans that are scheduled to be made as of this act’s enactment (March 27, 2020) and December 31, 2020, may be delayed for up to one year.
- The five-year repayment limit for loans issued to qualified participants may be determined by disregarding the one-year delayed repayment period, effectively increasing the repayment limit to six years for eligible participants.
Participants Eligible for Relief
- Participants who have been diagnosed, or who have a spouse or dependent as defined in Internal Revenue Code (IRC) §152 who has been diagnosed, by a test approved by the Centers for Disease Control and Prevention with the SARS-CoV-2 virus or COVID-19.
- Participants experiencing adverse financial consequences as a result of being quarantined, furloughed or laid off, having work hours reduced due to such virus or disease, being unable to work due to lack of child care or closing or reduced hours of a business owned or operated by an individual due to such virus or disease or other factors as determined by the U.S. Secretary of the Treasury (or the Secretary’s delegate).
- The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions listed above in determining whether any distribution is a coronavirus-related distribution.
Eligible Retirement Plans
- Employer plans qualified under IRC §401(a), such as §401(k) plans, profit-sharing plans and employee stock ownership plans, §403(b) plans, §457 plans of governmental plan sponsors and IRAs described in §408(a) or §408(b) of the Code.
Other Provisions for Consideration
- Changes don’t have to be adopted as an amendment to the applicable plan document until on or before the last day of the first plan year that begins on or after January 1, 2022; however, changes implemented can be immediately adopted. In addition, governmental plans have an additional two years to adopt amendments from the date of the enactment (March 27, 2020).
2020 Waiver of Required Minimum Distributions (RMD) for Participants
- The requirement for RMDs to be made in calendar-year 2020 under IRC §401(a)(9) is temporarily waived.
- Applies to qualified defined contribution plans, §403(b) plans, governmental §457(b) plans and IRAs.
- Applies to distributions otherwise required to be made in 2020.
Management should discuss these changes with its human resources department, tax advisor, actuarial advisor and plan administrator as appropriate. In addition, companies should update their plan documents and evaluate funding strategies to qualified retirement plans while considering the effects of changes to the global economy, market conditions and their individual workforce.
It’s important to note that the specifications of the provisions above aren’t fully developed in the text of the CARES Act, and we expect to see further guidance on this topic. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication.
If you have additional questions or would like more information about this specific provision within the CARES Act, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.