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On January 30, 2015, the Department of Labor released a final regulation on the content and form of the annual funding notice generally required to be provided by plan administrators of defined benefit plans. The regulation is effective for plan years beginning on or after January 1, 2015.
In this article we review the final regulation. Our purpose is to provide a general overview of it; plan administrators preparing funding notices will want to consult the regulation itself.
Generally, sponsors of defined benefit plans covered by ERISA Title IV (the Pension Benefit Guaranty Corporation defined benefit insurance program) must provide the notice. Our focus is on single employer plans; thus, we will not discuss the multiemployer plan rules.
The final rule (like the proposal) provides a special rule in the case of a merger or consolidation of two or more plans. In such circumstances, the plan administrator of the plan that has legally transferred control of its assets to a successor plan is not required to provide the notice for its final plan year; information for that year is provided by the successor plan. In the final regulation, DOL clarified that “[b]ecause the assets and liabilities of the non-successor plan were not assets and liabilities of the successor plan before the merger or consolidation, the successor plan’s funding notice for the year of the merger would not have to reflect [information for the two preceding plan years].”
Generally, the notice must be provided:
When: No later than 120 days after the close of the ‘notice year’ (generally, the notice year is the plan year to which the notice relates). So, for a calendar year plan, the notice for 2015 is due on the 120th day of 2016.
To whom: To each participant covered under the plan on the last day of the notice year; each beneficiary receiving benefits under the plan on the last day of the notice year; each labor organization representing participants under the plan on the last day of the notice year; and the PBGC. For this purpose, an alternate payee under a qualified domestic relations order is considered a ‘beneficiary.’
The notice must include the following:
The name of plan and the name, address and telephone number of the plan administrator; each plan sponsor’s name and employer identification number; and the plan number.
Information about plan funding is, of course, the heart of the notice. There are basically three sets of numbers that must be provided:
3 years’ FTAP: a statement as to whether the plan’s funding target attainment percentage (FTAP) for the notice year, and for each of the two preceding plan years, is at least 100 percent, and, if it is not, the actual percentages. The plan’s FTAP may include permitted smoothing of assets and liabilities; in calculating assets, credit balances are generally subtracted; and in calculating liabilities, at-risk liability assumptions are not used. The FTAP is a beginning-of-the-year number. So the 2015 FTAP (disclosed on the 120th day of 2016 for a calendar year plan) is determined as of January 1, 2015.
3 years’ assets and liabilities: a statement of the total assets (separately stating credit balances) and liabilities of the plan for the notice year and each of the two preceding plan years. For this purpose, ‘assets and liabilities’ are the asset and liability numbers used to determine the plan’s FTAP. So, again, these numbers will reflect any smoothing used. In addition, applicable at-risk liability assumptions must be used.
Year-end ‘real world’ funding: the value of the plan’s assets and liabilities as of the last day of the notice year. For purposes of this statement, the plan administrator must use the fair market value of assets. Liabilities are, with the exception of the interest rate assumption, determined using regular funding assumptions. So, again, at-risk valuations assumptions would be used (if and to the extent that the at-risk rules apply to the plan). The interest rate assumption used is, in effect, the ‘spot rate’ yield curve for the last month of the notice year. Stating the obvious, unlike the other two disclosures, these numbers are as of the end of the notice year. Contributions for the notice year, made after the end of the year but before the notice is given, may be included (adjusted for interest) in year-end assets.
A statement of the number of participants who, as of the valuation date of the notice year (that is, as of the beginning of the notice year), are: retired or separated from service and receiving benefits; retired or separated and entitled to future benefits (but currently not receiving benefits); or active participants under the plan. Plan administrators must state the number of participants in each of these categories and the sum of all such participants.
A statement setting forth the funding policy of the plan and the asset allocation of investments under the plan (expressed as percentages of total assets) as of the end of the year. Also required: a general description of any investment policy of the plan as it relates to the funding policy and the asset allocation of investments. The latter requirement is not in the statute. In this regard the preamble states:
The purpose of the requirement to include a “general description of any investment policy of the plan” simply is to provide participants and beneficiaries with contextual information to help them better understand and appreciate the plan’s approach to funding benefits. Use of the word ‘any’ … reflects that the maintenance of a written statement of investment policy is not specifically required under ERISA, although the Department expects that it would be rare for a plan subject to [ERISA’s funding notice requirement] not to have such a policy.
The regulation provides a model notice (see below), which includes a table of asset classes and disclosure methodology. Special asset allocation disclosure rules apply where a plan invests in a master trust, common/collective trust, or pooled separate account.
Generally, the notice must include an explanation of the effect of any plan amendment, scheduled benefit increase or reduction, or other known event, taking effect in the year following the notice year, that has a ‘material effect.’ Generally, an event has a material effect if either:
It results, or is projected to result, in an increase or decrease of five percent or more in the value of assets or liabilities. Or,
In the judgment of the plan’s enrolled actuary, it is material for purposes of the plan’s funding status.
The notice must also include: a summary of the rules under title IV of ERISA relating to plan termination; a statement of PBGC guarantees; that a copy of the plan’s annual report may be obtained on request; and, in certain circumstances, a statement that a 4010 notice has been filed with the PBGC.
The plan administrator may also include any additional information that the administrator determines would be necessary or helpful to understanding the information required to be contained in the notice.
Generally, the notice must be written in a manner calculated to be understood by the average plan participant and in a format that does not have the effect of misleading or misinforming recipients.
The regulation ‘reserves’ on the issue of the extent to which electronic communications may be used to provide the notice. In this regard the preamble states: “[t]he reservation reflects the fact that the Department has not yet finished exploring whether, and possibly how, to expand or modify the standards … applicable to the electronic distribution of required plan disclosures.”
The Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA) provided special rules for the calculation of valuation interest rates for ERISA/Tax Code rules with respect to plan funding and benefit restrictions (‘funding stabilization’). MAP-21 and HATFA also provided for special funding notice disclosures, generally requiring the presentation of funded status ‘with’ and ‘without’ funding stabilization. Because the MAP-21 and HATFA supplementary funding notice disclosure rules are temporary – they only apply to plan years beginning before January 1, 2020 – the final funding notice regulation does not address them.
DOL has provided Field Assistance Bulletins (FAB 2013-01 and FAB 2015-01) describing the supplementary MAP-21 and HATFA funding notice rules. Generally, plan administrators must provide with/without funding stabilization numbers where:
The funding target ‘with’ funding stabilization is less than 95% of the funding target ‘without’ funding stabilization;
The plan’s funding shortfall without regard to HATFA/MAP-21 is greater than $500,000; and
The plan had 50 or more participants on any day during the prior plan year.
As noted, the regulation is effective for plan years beginning on or after January 1, 2015. Plan administrations may elect compliance prior to that applicability date, or they may rely on the interim guidance in Field Assistance Bulletin 2009-01.
The regulation includes a model notice that will likely form the basis of most sponsors’ funding notice policies.
The funding notice requirement was one of the key disclosure provisions of the Pension Protection Act (PPA). Many have raised questions about whether the provision of so many different numbers to participants will enhance their understanding of the funded status of their plan and the effect of funded status on their benefit security.
Sponsors will want to review their data and the model notice and consider the consequences – whether the news will be good, bad, or simply confusing. It’s unclear, however, given the rigidity of the statutory requirements, whether there is much that a sponsor can do to change that result.