By Mike Clark, Consulting Actuary, the Principal Financial Group
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27 and allows defined benefit (DB) plan sponsors to postpone contributions required during calendar year 2020 until January 1, 2021. On the surface, the law seems to be a relatively simple adjustment designed to give employers breathing room during the financial crisis while their circumstances hopefully improve.
But for employers, consultants and actuaries who work closely on DB plans, the CARES Act introduced some detailed (some may say “wonky”) questions on the treatment of deferred contributions in the context of current regulations.
Receivable Contributions
Contributions to DB plans must be assigned to a particular plan year for valuation purposes, but the contributions made toward a given plan year don’t always fall within the year itself. ERISA allows sponsors to contribute toward a given plan year for 8½ months after it ends. The discounted value of these “receivable” contributions toward the prior plan year is then included in the asset value of the current year.
For simplicity, we’ll assume a plan year beginning on January 1 for the rest of this blog. Under normal rules, a sponsor of this calendar year plan could make contributions toward the 2019 plan year until September 15, 2020. The discounted value of this contribution would be included in January 1, 2020 plan assets for current year minimum funding and Pension Benefit Guaranty Corporation (PBGC) premium purposes.
Setting Tactical Contributions
This lag provides time for actuaries to calculate preliminary actuarial results and suggest tactically favorable receivable contributions to their clients. By increasing the January 1 asset value, discounted contributions can be used to reduce current year PBGC premiums or minimum funding, or to avoid benefit restrictions tied to a plan’s funding ratio.
(For example, a $1 million receivable contribution made by September 15 can reduce the current year’s PBGC premium by over $40,000.)
Wonky Deadline Stuff
Before the CARES Act, the receivable contribution used for minimum funding and PBGC premiums was the same. September 15 was the magic date for calendar year plans for both purposes.
A technical (again…”wonky”) detail behind this is that the PBGC actually allows for receivable contributions until their premium filing deadline of October 15. Since receivable contributions after September 15 have been impossible under ERISA funding law until now, however, the deadline for PBGC purposes was also effectively September 15.
CARES Splits Receivables
Now the CARES Act makes it possible for employers to make 2019 receivable contributions until January 1, 2021. This immediately triggered the wonky question, “How will the contribution extension under the CARES Act affect 2020 PBGC premiums?”
The PBGC declared that what has been written has been written, and the October 15 receivable contribution deadline would remain for PBGC premium purposes. This means two things to plan sponsors:
- Good news: They have an extra month to contribute to reduce 2020 PBGC premiums compared to previous years (though pragmatically the money may need to be in earlier than October 15 to allow enough time for filing.)
- Bad news: Contributions made after October 15 but by the CARES deadline of January 1 will be ignored for PBGC purposes (but still included for the 2020 funding valuation.)
Pragmatic Wonkiness
Since many extra receivable contributions are specifically intended to reduce PBGC premiums, sponsors who planned to fund at the last moment permitted by the CARES Act may be disappointed to learn they must now choose between moving up their contributions 2½ months, or accepting higher premiums.
It would have been convenient if the CARES Act relief would have applied to PBGC premiums and minimum contributions equally. But the PBGC is its own entity that makes its own decisions. For sponsors, unfortunately, this one simultaneously decreases funding flexibility and increases contribution deadline wonkiness.
Mike Clark is a fellow of the Society of Actuaries (SOA) and a member of the American Academy of Actuaries (AAA), so yeah…he’s wonky.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (Principal®), Des Moines, IA 50392.