Tag Archives: single-employer retirement plans

CARES Act summary

The following is a summary of the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Defined contribution (DC) plan provisions

Distribution and loan relief to “qualified individuals” means either:

  • Participants (or their spouses or dependents) who have been diagnosed with a coronavirus disease (SARS-CoV-2 or COVID-19)
  • Participants who have experienced adverse financial consequences due to the virus resulting from:
    • Being quarantined, furloughed, or laid off
    • Having their work hours reduced
    • Being unable to work due to lack of childcare
    • Closing or reducing hours of a business they owned or operated

Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b), and governmental 457(b) plans. This applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.

  • 2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the Internal Revenue Code (IRC) Section 402(f) notice requirements (rollover rights explanation).

Single-employer defined benefit (DB) plan provisions

All single-employer funding obligations due during calendar year 2020 can be delayed until January 1, 2021. Accrued interest must be added to the delayed payment(s). There is no distinction as to which plan year the DB plan contributions are due.

A plan sponsor may elect to use the single-employer DB plan’s funded status for the 2019 plan year to determine whether benefit restrictions must be administered. Benefit restrictions prevent the plan sponsor from paying “accelerated forms of distribution” such as lump sums.

The CARES Act is silent on RMDs for defined benefit pension plans.

Plan compliance/federal forms and notice distributions

Plan amendments deadline for adopting any of the relief provided under the CARES Act would be no earlier than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans).

The U.S. Department of Labor (DOL) will have additional authority to postpone certain deadlines that apply to ERISA-covered plans for a public emergency declared by the U.S. Department of Health and Human Services (HHS), which would include the current public emergency for COVID-19. We believe this will apply to ERISA compliance deadlines, such as Form 5500, annual funding notice, quarterly (or other periodic) participant statements, and others. This is not an exhaustive list. We note that it is unclear whether the postponement authority for DOL extends to Treasury or the Internal Revenue Service (IRS) for compliance deadlines under IRS authority.

Year-end compliance issues for single-employer retirement plans

By year-end 2019, sponsors of calendar-year single-employer retirement plans must adopt necessary and discretionary plan amendments to ensure compliance with the statutory and regulatory requirements of ERISA and the tax code. This Client Action Bulletin looks at key areas—including administrative compliance issues—that defined benefit (DB) and/or defined contribution (DC) plan sponsors should address by December 31, 2019.

Implementation of a single-employer defined benefit plan spin-off

Kamenir-JeffA spin-off of a single-employer defined benefit (DB) pension plan is a complicated transaction, with an end result of one plan split into two or more DB plans. The objective of federal rules governing spin-offs is that participants should be no worse off with respect to the security of their accrued benefits immediately following the spin-off, compared with benefits that would have been received if the plan had been terminated immediately prior to the spin-off.

A change in business circumstances might be one reason a plan sponsor would consider a spin-off. For example, if a portion of the participants in a single-employer DB plan are sold to another company, the buyer and seller might agree that the assets and liabilities of the affected DB plan participants be spun-off into a new plan that becomes the responsibility of the buyer.

Another reason a plan sponsor might consider a spin-off would be for risk management purposes. Many plan sponsors today are interested in transferring the responsibility for pension liabilities to either participants by a lump-sum distribution or to an insurance carrier by an annuity purchase. That interest is due to various uncertainties that will affect the ultimate cost of the pension liabilities (e.g., investment performance, liability interest rates, participant mortality, legislative changes, pension insurance premium charges). A plan sponsor in an ongoing pension plan is generally not allowed to transfer the responsibilities for the liabilities of active participants unless the plan is being terminated. If the assets and liabilities related to active participants are spun off into a new separate plan, that plan can then be terminated with the liability responsibility transferred as described above.

The Pension Benefit Guarantee Corporation (PBGC) is the federal agency responsible for the insurance of unfunded pension liabilities. In the case of an underfunded pension plan termination, the amount of the shortfall covered by the PBGC is dependent on the PBGC’s rules on how liabilities are categorized, with certain lower-priority liabilities not insured by the PBGC. If 3% or more of plan assets are spun-off into a new plan, a complicated actuarial calculation must be done to determine the assets allocated to each plan, based on PBGC liability categorization rules for underfunded plan terminations. Also, a Form 5310-A must be filed with the Internal Revenue Service (IRS) at least 30 days prior to the effective date of the spin-off.

If less than 3% of plan assets are spun off into a new plan, the Form 5310-A filing is not required. Also, the actuarial calculation becomes much simpler because the assets allocated to the smaller plan are just equal to the present value of its liabilities rather than determined by the above rules for larger spin-offs.

In summary, given the complexities of the requirements for implementing a single-employer DB plan spin-off, a plan sponsor may wish to discuss the proposed spin-off with the plan actuary and legal counsel before proceeding.

Will more corporations need to file PBGC Form 4010 for their defined benefit pension plans for the 2016 fiscal year?

Kamenir-JeffThis blog post was originally published on January 5, 2016. It has been updated to reflect the PBGC’s final rule in March 2016.

The Pension Benefit Guaranty Corporation (PBGC), the federal agency responsible for insuring unfunded liability for single-employer defined benefit pension plans in the event of a distress plan termination, issued final guidance in March 2016 that will likely increase the number of companies required to submit a 4010 filing for the 2016 fiscal year and beyond. An example of a circumstance in which a distress plan termination can occur is when a company files for bankruptcy.

The PBGC is charged under federal law with monitoring poorly funded defined benefit pension plans in part by requiring a special filing under ERISA Section 4010, commonly referred to as a “4010 filing.” This filing requires the employer to submit defined benefit pension plan financial and actuarial information as well as the company’s financial information. The filing is generally due three and a half months after the end of the fiscal year. The PBGC keeps this information shielded from public disclosure, which protects the privacy of closely held companies, which are not required to follow U.S. Securities and Exchange Commission (SEC) regulatory rules for listed companies.

Under current rules, employers with defined benefit pension plans that are less than 80% funded based on prescribed interest rates are required to report under Section 4010 unless they can meet the requirements for certain limited exemptions. Plans with under 500 participants are exempt if they are underfunded by $15 million or less. Companies that sponsor one or more pension plans with a combined participant count of 500 or more are exempt if the combined underfunding of all plans is $15 million or less.

Beginning with the 2016 fiscal year, PBGC modified the actuarial assumptions used for determining the underfunding exemption if the combined pension plan participant count is 500 or more. The modified assumptions use lower interest rates for determining pension plan liabilities that will increase liabilities and therefore make it more difficult to qualify for the underfunding exemption. For example, a plan with 500 or more participants that is less than 80% funded and may have been exempt from submitting a 4010 filing because the underfunding was less than $15 million may no longer qualify for the exemption under the new final rules. A guess is that this plan deficit would swell to over $15 million and a 4010 filing will be required. On the other hand, if the combined participant count is less than 500, the final rules automatically exempt the plans from 4010 filing requirements.

Companies that sponsor pension plans with 500 or more participants that wish to avoid the 4010 filing requirements under the final rules should work with their actuaries to take steps to bring each plan up to at least 80% funded for the 2016 plan year or to meet the $15 million or less underfunding exemption based on the newly required actuarial assumptions.

Year-end compliance issues for single-employer retirement plans

By year-end 2015, sponsors of calendar-year single-employer retirement plans must act on necessary and discretionary amendments and perform a range of administrative procedures to ensure compliance with statutory and regulatory requirements. This Client Action Bulletin looks at key areas that such employers and sponsors of defined benefit (DB) or defined contribution (DC) plans should address by December 31, 2015.