With the release, on August 6, 2020, of IRS Notice 2020-61, we are beginning to get a clearer idea of the timing of defined benefit plan contributions in 2020. In this article we briefly review what we know as of the current date.
Background – minimum funding, tax deduction, and calculation of PBGC variable-rate premiums
DB contribution timing is critical with respect to at least three issues – ERISA minimum funding, Internal Revenue Code tax deductions, and the calculation of unfunded vested benefits (UVBs) for purposes of determining Pension Benefit Guaranty Corporate variable-rate premiums.
The CARES Act provides that the due date of any ERISA-required minimum contributions to a DB plan in 2020, including quarterly contributions, is delayed to January 1, 2021, at which time the amount due will be increased for interest. Notice 2020-61 provides detailed guidance on how this provision affects ERISA minimum funding requirements for most single employer DB plans, the due date for the DB plan’s annual report (Form 5500), and tax deductions.
On July 20, 2020, PBGC posted frequently asked questions (FAQs) providing guidance on (among other things) the effect of the CARES Act minimum funding extended due date on the UVB calculation that determines 2020 PBGC variable-rate premiums.
We summarize the three critical elements of this guidance in what follows.
1. Extended January 1, 2021 minimum funding deadline applies to “excess” contributions
The due date for any 2020 minimum contribution is delayed to January 1, 2021. (We note that Congress is considering extending this due date to January 4, 2021.) Notice 2020-61 clarifies that this extension also applies to amounts in excess of the minimum – a critical issue in the calculation of PBGC variable-rate premiums (see below).
2. Tax deduction and Form 5500 deadlines are not extended
Notice 2020-61 clarifies that the CARES extension does not apply to the contribution due date for tax deduction. That date remains the tax return due date (with extensions) – for 2019 for calendar year C Corporation taxpayers, generally October 15, 2020 (if extended).
The timing of tax deductions presents a number of complicated issues, and sponsors will want to consult with their tax advisor with regard to to it.
On a related issue, Notice 2020-61 did not extend the due date for filing Form 5500. That date remains (for calendar year plans) July 31, 2020 and may generally be extended another two-and-one-half months, to October 15, 2020.
3. PBGC premiums – deadline for UVB calculation remains October 15, 2020
In its FAQs, PBGC stated that for contributions to be counted in the 2020 UVB calculation they must be made by October 15, 2020 – generally a 1-month extension of the “normal” due date for such contributions.
At the time PBGC posted its FAQs, there were two questions outstanding to which – based on IRS Notice 2020-61 – we now have answers:
Does the CARES Act extension apply to contributions in excess of the required minimum? Given IRS’s guidance in Notice 2020-61(noted above), the answer to this question is “yes” – that is, contributions in excess of the ERISA minimum may be taken into account in the 2020 UVB calculation.
Will IRS extend the Form 5500 filing deadline? Such an extension would have also extended the due date for contributions that may be considered in calculating 2020 UVBs. As noted above, the answer to this question is (at least as of this writing), “no” – Notice 2020-61 appears to indicate that the Form 5500 due date will not be extended.
We note, however, that it has been reported that there is some sentiment in Congress for an extension of the due date for contributions for purposes of the UVB calculation to the end of the year. It is (at least) conceivable that, before October 15, 2020, we may get further guidance on this issue.
Critical decision point with respect to the calculation of UVBs – election of the alternative method
We also note that for some plans the most significant decision with respect to the calculation of UVBs will be whether to elect the Alternative method for 2020. We discussed this issue in a May 2020 article. For most sponsors, the time for considering this issue will be September 2020, and we will provide a comprehensive review of it at that time.
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We note that PBGC variable-rate premiums present different issues depending on the plan’s funded status, e.g., plans to which the headcount cap applies likely won’t be able to reduce premiums by making “excess” contributions. We discuss PBGC premium reduction strategy generally in our March 2020 article.
We will continue to follow these issues.