The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), Public Law 116-136, was signed on March 27, 2020. The CARES Act is primarily concerned with providing financial relief for various sectors of the economy and individuals. As part of that relief, the CARES Act provides funding relief for single-employer defined benefit plans. This alert will review the funding relief provisions of the CARES Act.

Background

In general, single-employer defined benefit plans are subject to the minimum funding requirements of the Internal Revenue Code (Code) and the Employee Retirement Income Security of 1974 (ERISA), as amended. The calculation of the minimum required contribution for a plan year is determined under Code section 430 and ERISA section 303. These sections require that the minimum required contribution be contributed to a plan not later than 8½ months after the end of the plan year. In addition, plans that were underfunded in the prior year have quarterly contributions due in advance of the 8½ month period.

Single-employer defined benefit plans are also generally subject to the benefit restriction provisions of Code section 436 and ERISA section 206(g). The benefit restriction provisions are based upon the plans’ adjusted funding target attainment percentage (AFTAP) for the plan year as certified by the plan’s enrolled actuary (or the presumed AFTAP prior to the actuary’s certification).

Funding Relief

The CARES Act (section 3608(a)) provides that for any minimum required contribution under Code section 430 and ERISA section 303 that would be otherwise due during 2020 (including quarterly contributions),

(1)    the due date shall be January 1, 2021, and

(2)    the amount of each such contribution shall be increased by interest accruing for the period between the original due date (without regard to the funding relief) for the contribution and the payment date, at the effective rate of interest for the plan year which includes such payment date.

The CARES Act (section 3608(b)) also provides that for purposes of Code section 436 and ERISA section 206(g), a plan sponsor may elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020, as the AFTAP for plan years which include calendar year 2020.

Analysis

The funding relief has two parts. The first is the delay of the due date for any minimum required contribution. The second is the ability to elect to use the prior year’s AFTAP.

Due Date Delay

The change in the due date allows a plan sponsor to delay making contributions due during 2020 to January 1, 2021. For example, a quarterly contribution due April 15, 2020, will instead by due January 1, 2021, but will be adjusted for interest. The delay will help a plan sponsor with its cash flow and conserve current funds for other needs during this period of financial difficulty. It also gives a plan sponsor time to obtain any financial relief that might be due under the other provisions of the CARES Act.

It appears that all due dates occurring in 2020 are impacted by the relief without regard to the plan year giving rise to the due date. For example, the due date for the last payment for a plan year ending June 30, 2019, was March 15, 2020. If the payment was not made by that due date, it appears that the March 15, 2020, date became January 1, 2021, with the law change.

Cheiron Observation: There is some uncertainty as to how the interest adjustment interacts with the normal rules for adjusting the minimum required contribution. Normally, payments for the 2019 plan year would be discounted back to the valuation date for the 2019 plan year using the effective interest rate for 2019. Under the CARES Act, the statutory wording indicates that the payment should be increased using the effective interest rate “for the plan year which includes such payment date.” That would appear to be the 2020 effective interest rate for a calendar plan year. We anticipate that future guidance will clarify which rate to use.

Use of Prior Year’s AFTAP

The ability to use the AFTAP for the last plan year ending before January 1, 2020, for a plan year including calendar year 2020 has its own set of questions. The threshold question is what exactly the words “include calendar year 2020” mean.

The market drop that occurred in March 2020 would not impact the asset values at January 1, 2020. In contrast, a plan with a plan year commencing April 1, 2020, may well want to elect to use an earlier AFTAP to avoid the imposition of benefit restrictions. The imposition of benefit restrictions in 2020 could easily impede the ability of employees who lost their job due to COVID-19 to obtain lump sum distributions that can meet current expenses. It is likely that was the concern in adding this relief in late March 2020.

Therefore, we think that the intent is that a plan year that includes all or part of calendar year 2020 would be a plan year for which the plan sponsor could make the election. For the plan year beginning April 1, 2020, the last plan year ending before January 1, 2020, was the plan year ending March 31, 2019, which had an AFTAP determined as of April 1, 2018, (assuming that the valuation date was the beginning of the plan year, which is required for plans with an exception for small plans). However, official guidance is needed to confirm that understanding.

Other questions with respect to the use of the prior year’s AFTAP include (1) how the plan sponsor makes the election, (2) what time period, if any, applies to making the election, and (3) whether the election can be revoked. Given that there are questions, plan sponsors may want to wait for official guidance before making any election under section 3608(b) of the CARES Act.

We will update the information in this alert at such time the Treasury/IRS provide additional guidance.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.