A plan sponsor may wish to offer coronavirus-related distributions (CRDs) during 2020 from a single-employer defined benefit (DB) plan as well as, or in addition to, a CRD from its defined contribution (DC) plan. Lump-sum payments from a DB plan may be treated as CRDs, similar to withdrawals from DC plan accounts.
If a plan sponsor chooses to offer CRDs from both the DB and DC plans, careful joint plan administration coordination needs to be taken as the total CRDs to an individual cannot exceed $100,000. In this Benefit Alert, Milliman’s Bret Linton, Vicki Mazzie, and Vanessa Vaag explain in more detail coronavirus distributions for DB plans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
In the first general survey of defined benefit (DB) pension plan sponsor actions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Milliman consultants report that, in 40% of their clients’ DB plans, cash contributions that would have been due on April 15, 2020, prior to the CARES Act were deferred. The due date was extended to January 1, 2021, under the CARES Act.
Milliman has written many times about the CARES Act since it was enacted on March 27. However, this is the first evidence of how employers sponsoring these plans have reacted to the new law and the strategic use of cash to finance current workforce obligations compared to long-term financial promises to plan participants during the extraordinary hardships imposed by the COVID-19 pandemic. CARES has given them some statutory relief to better assess ongoing cash commitments to these pension plans.
We acknowledge that some of our clients have other reasons under pension rules that did not require contributions before April 15. Such reasons could be that their plans were at least 100% funded or that prior contributions over the past years in excess of the statutory minimum amounts permitted them to use a “credit balance.”
We plan to follow up with more details as we discuss 2020 funding strategy with plan sponsors.
In just a few months, COVID-19 has changed our businesses
and organizations dramatically—in the United States and around the world. Many
employers have taken immediate action by increasing staff or staff hours, transitioning
to remote workforces, reducing staff or staff hours, or even closing their
If you are considering major changes in your workforce and
think your defined benefit (DB) plan can help ease the pain of this transition,
you will want to proceed carefully. With every action, there’s a reaction—often
a good one but not always. Keep this in mind if you are increasing staff and
- In-service distributions: Amending the DB plan to allow for in-service distributions as early as 59½ can help retain key talent but it can also make the ongoing administration quite complicated as well as removing the component of orderly retirement, which is an important factor in DB plans. This added complexity is less of an issue if you have a frozen plan, and are looking to terminate it in the near future or de-risk it with an annuity purchase. In this case, more in-pay participants could result in better annuity pricing. You can also include employees over 59½ in frozen plan lump sum window offerings to save on Pension Benefit Guaranty Corporation (PBGC) headcount premiums.
- Waiving suspension of benefits for rehired retirees: Rehiring retired professionals can be easier if you allow them to continue to collect their pension benefits while they work. But be aware that rehires who are subsequently laid off may be entitled to some form of paid leave. And this “double dipping” could increase plan costs due to the additional service earned.
- Increasing Normal Retirement Age: Amending the plan to increase the Normal Retirement Age from 65 to, for example, 67 could help retain more experienced, needed talent at work. But as the talent pipeline starts to fill up again, you could risk suppressing personal growth. Young talent will go elsewhere if they see older workers blocking their career paths. And keeping more expensive talent around long-term could result in more expensive benefits at retirement from longer accrual periods.
If you are decreasing staff and are exploring:
- An early retirement window: During a designated period, an early retirement window with enhanced benefits—often including temporary continuation of health insurance—can encourage retirement. The upside is that you can reduce active participant cost; the downside is that it can increase the plan cost over time if the plan is not well funded. Nondiscrimination and liquidity requirements also must be carefully considered when offering an early retirement window. Use projections to ensure you won’t trigger special accounting events (like settlements, curtailments, and special termination benefits, in both the pension plan and the post-retirement medical plan if applicable) or a partial plan termination if the plan is not frozen.
- Lower Normal Retirement Age: Amending the plan to decrease the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere so workers may leave on their own accord. There could be a few downsides: Some may be entitled to full benefits as they retire early and increase the cost of the plan. Or you also risk losing high-quality workers to competitors.
It’s important to note that all of the above defined benefit plan changes could open collective bargaining agreements in place and may affect your nonqualified plan arrangements. Short-term and long-term impacts should be carefully considered.
To discuss the benefits and possible consequences of leveraging your defined benefit plan as you increase or decrease staff, contact your Milliman consultant today.
This blog post is the third of a three-part series on workforce management during the coronavirus pandemic.
The effect of COVID-19 has been devastating for some
businesses. In a relatively short amount of time, we’ve seen thriving
businesses brought to their knees—some closing temporarily or for good. Others,
anticipating a longer recovery period, are considering some difficult changes
such as laying off workers.
If your company is being forced to downsize or temporarily close, don’t forget that you can leverage your defined benefit plan during these difficult times. You can make the transition for your employees more palatable by:
- Offering an early retirement window:During an early retirement window, you are able to offer enhanced benefits to encourage retirement. Consider offering medical benefits to bridge the gap and to make the offer even more worthwhile. Although an early retirement window reduces active participant cost, it can increase the cost of pensions paid over time (but is less problematic with well-funded plans).
- Lowering Normal Retirement Age:Amending the plan to lower the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere. This should be carefully considered as you could risk losing high-quality workers to competitors, and a lower Normal Retirement Age becomes a permanent feature of the plan.
It’s possible you will need to consider more drastic action and close your doors permanently. If you are unable to fund, manage, or administer the plan, a plan termination is the likely scenario. In these unprecedented times, remember your defined benefit plan can ease the pain as you make difficult decisions such as workforce reductions.
As you consider taking action and want to discuss how you could leverage your defined benefit plan, contact your Milliman consultant.
This blog post is the second of a three-part series on workforce management during the coronavirus pandemic.
The coronavirus pandemic has completely changed the way Americans work and live. Some employers have been on the front lines fighting the virus head-on, while others have been forced to close their doors temporarily or perhaps permanently.
If your company is one of the “essential” businesses with “essential” personnel—for example, in the healthcare industry—you may be immediately looking to increase the workforce to address the demand. Your older, more experienced employees, who may now be more critical than ever to your workforce, may struggle with the need to access retirement income and remain employed if hardship withdrawals from a defined contribution (DC) plan are not enough. Leverage your defined benefit (DB) plan to retain essential talent. Consider these strategies:
- Offer in-service distributions: The Setting Every Community Up for Retirement Enhancement (SECURE) Act recently allowed for in-service distributions as early as age 59½. Amending the DB plan to allow for this could help retain key talent who might be tempted to leave just to get their pension benefits.
- Waive suspension of benefits for rehired retirees: Rehiring retired professionals can be easier if you allow them to continue to collect their pension benefits. Amending the plan to temporarily waive the suspension of their benefits during reemployment could make returning to work very attractive.
- Increase Normal Retirement Age: Amending the plan to increase Normal Retirement Age from 65 to 67 could help retain more experienced, needed talent at work. This change would be consistent with moves in other retirement ages to reflect longer life expectancies (Social Security Retirement Age and, more recently, the Minimum Required Distribution Age).
Your DB plan can be an important tool in your kit as you respond to this crisis and work to retain key talent. Don’t forget to emphasize the advantages to your employees as you communicate the improvements. Working longer will increase DB plans for people who are accruing longer. And, if overtime, shift pay, or other forms of pay that are not base pay are included in pensionable compensation, pension benefits will reflect this additional pay.
For more details on how you can leverage your DB plan to even more effectively manage your workforce, contact your Milliman consultant.
This blog post is the first of a three-part series on workforce management during the coronavirus pandemic.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act will lead to technical and administrative actions that defined benefit (DB) pension plan sponsors should explore. In this article, Milliman’s Vanessa Vaag and Mary Hart summarize mandatory and voluntary changes arising from the SECURE Act related to human resource administration and DB plan calculations that plan sponsors must address.