The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) not only provided many crucial wage benefits to employees and employers but had many provisions that effected employee benefit plans as well. The purpose of the provisions was to provide relief to employees and employers by providing additional benefits and revising rules that are currently in place. Below is a summary of those provisions that affected defined benefit plans.
Employer Contribution Relief:
Under the Act, companies can postpose making required minimum employer contributions due in 2020 until January 1, 2021. Even though the payments can be deferred until 2021, interest will still accrue on the delayed payments (may result in a larger contribution due in 2021). If you are currently evaluating deferring the required minimum contribution payments, we would recommend getting your actuary involved early in the process so they can present alternative scenarios of what the future payments would look like before making your ultimate decision.
Changes to AFTAP:
Based on the Act, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) to the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years which include calendar year 2020. This change would not affect calendar year plans but may be beneficial for plans that use a fiscal year end.
Freezing or Termination Considerations:
Other questions that arose recently are nothing new to the current situation or the CARES Act but are being considered more now based on what is happening; freezing or terminating a defined benefit plan. In terms of freezing long-term benefits to new employees, it’s important to get your plan counsel and actuary involved early as this change would need to be performed through a formal plan amendment. Under this option however, even though future benefits will not be provided, prior participant obligations and benefits may still accrue. Regarding plan terminations, getting your plan counsel and actuary involved early in the process is key. When making this decision, there are many factors to consider such as market fluctuations, changes in interest rates and funding status. The time frame to formally terminate the plan is typically a long process.
One provision in the CARES Act that affected defined contribution plans but did not affect defined benefit plans has to do with distributions. For defined contribution plans, the CARES Act allowed defined contribution plans to pay out coronavirus related distributions. However, under an IRS FAQ issued May 4, 2020, defined benefit plans may not allow for such distributions.
The provisions in the CARES Act mentioned above gives plan sponsors some additional options to manage their defined benefit plans through these difficult times As with any changes with your plan, it’s important to get all parties involved (actuaries, legal counsel, and plan auditors) so you can make the best educated decisions. For further questions, please contact us.