The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) altered some of the rules for employer health and retirement plans, including allowing sponsors of single-employer defined benefit pension plans to delay 2020 contributions to January 1, 2021. On August 6, 2020, the IRS issued Notice 2020-61 to provide clarification on the CARES Act relief provided to single-employer defined benefit plans.
Impact of Contribution Deadline Extension
Plan sponsors that opt to take advantage of the due date extension for calendar year 2020 required contributions should be aware of the potential impact to the administration of the plan, including the following:
Increase in contribution amounts. As required by IRC §430, interest is added to delayed contributions at the plan’s effective interest rate until the contribution’s payment date. Under the CARES Act, the late contribution penalty of 5% has been waived until January 1, 2021. Contributions made after January 1, 2021, will accrue the 5% late contribution penalty in addition to the effective interest rate.
Amended Form 5500 filing required. Form 5500 only allows for inclusion of contributions made to the plan as of the October 15 filing date for calendar-year plans. If a plan sponsor delays 2019 contributions, it will still be necessary to file a Form 5500 without those contributions and then amend the 5500 filing once the contributions are made to avoid any additional penalties.
Updated audit report may be necessary. Once the contributions are made and the Form 5500 filing has been amended, the audit report may need to be updated. Some auditors may elect to footnote the audit report while others may wish to update the audit report. This should be discussed with the plan auditor prior to delaying 2020 contributions.
Contribution deadline also applies to excess contributions. Any contribution made to a calendar-year plan prior to January 1, 2021, can be applied to the 2019 plan year, including those contributions made after September 15, 2020. However, contributions made after a 2020 PBGC premium payment has been filed cannot be included in order to reduce PBGC premiums.
Delay in Prefunding Balance elections. The deadline for plan sponsors to use the Prefunding Balance toward contribution requirements or to increase the Prefunding Balance with excess contributions is delayed to January 1, 2021.
Potential for lower 2020 AFTAP certification. Since calendar year plans require an AFTAP certification by September 30, 2020, AFTAP certification for 2020 may be lower since the certification can only include contributions made as of the certification date. Once contributions are made, the plan can update its AFTAP certification if it makes a material change to the plan’s funded percentage. As an alternative, the CARES Act also allows for the use of a plan’s 2019 AFTAP certification for 2020.
Use of Prior AFTAP Certification
To help plans from falling into benefit restrictions due to a lower 2020 AFTAP certification, plan sponsors may use the prior year AFTAP certification for any plan year occurring in 2020.
Any plan ending in 2020 is eligible. Any plan with a plan year ending in 2020 may use the prior year’s AFTAP if that prior year ends on or before December 31, 2019. For example, 2019 plans that end mid-year (June 30, 2020) may use the July 1, 2018 AFTAP for the 2019 plan year as well as for the 2020 plan year starting July 1, 2020.
Election notification must be made in writing. Plan sponsors electing to use the prior year’s AFTAP certification must notify the plan actuary and administrator in writing. The actuary must still certify an AFTAP for 2020 and report it on Schedule SB of the plan’s Form 5500.
We help our clients stay on top of the legislative and regulatory changes that apply to their businesses and ensure that their benefit plans and processes are updated to stay in compliance. To learn more, call our team today at 678-439-6236.
Hall Benefits Law, LLC
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