Coronavirus Relief Part IV - Funding Relief for Defined Benefit Plans

This article is Part IV in a series about coronavirus relief offered by the CARES Act. For more information, see:

Section 3608 of the CARES Act contains provisions relating to the funding of single employer defined benefit plans. Note that the term “single-employer” is misleading since it also applies to multiple-employer plans, that is, those which are sponsored or adopted by multiple employers. What it does not include are so-called “multiemployer” plans which are typically sponsored by a union.

Funding deadlines extended

Defined benefit plans are subject to minimum funding standards. If the plan’s actuary determines that a minimum contribution is required for a given plan year, the contribution must be made within 8½ months after the end of the plan year (by September 15 for calendar year plans).

Under CARES section 3608(a), the deadline for all funding contributions which were originally due on any date in calendar year 2020 is now January 1, 2021. For sponsors of calendar year plans, this means they have an extra 3½ months to make their minimum required contributions.

The amount due as of any date later than the original due date is determined by taking the amount due as of the original due date and increasing it with interest. Due to this, the total amount required to be contributed would end up being more than originally calculated, if taking advantage of the delay.

The plan’s actuary is required to certify (by signing a Schedule SB, attached to Form 5500)  that the plan has satisfied its funding obligation each year. Form 5500 and the attached actuarial certification are  generally due 7 months after the end of the plan year, or 9½ months on extension. To date, there has been no extension announced for filing Form 5500. It is unclear at this time how the DOL and the IRS want plan sponsors and enrolled actuaries to complete the Schedule SB with respect to contributions made under the extended deadline. It is likely that more guidance will be forthcoming on this issue.

May rely on prior year’s funding ratio

Each year, the plan’s actuary is required to certify a calculation known as the “Adjusted Funding Target Attainment Percentage” or AFTAP. This is, roughly speaking, a ratio of the plan’s assets to the actuarial value of its liabilities; essentially, it is a measure of how well funded the plan is.

If the plan’s AFTAP drops below 80%, the plan becomes prohibited from adopting new amendments increasing benefit liabilities, and it is restricted in the amount of benefits which may be paid in accelerated forms, such as lump sums. If the AFTAP drops below 60%, the plan must freeze all benefit accruals and may not pay out any accelerated benefits until the AFTAP recovers.

CARES section 3608(b) permits plans to use their 2019 AFTAP as their 2020 AFTAP. For a non-calendar year plan, the AFTAP for the last plan year ending before January 1, 2020 may be used as the AFTAP for all plan years occurring during calendar year 2020. This will help a plan avoid becoming subject to AFTAP-related restrictions due to a sudden drop in the value of plan assets.

If you have any questions about how these provisions will affect your defined benefit plan, please contact us to speak with an enrolled actuary or defined benefit plan consultant.