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On July 20, 2020, the Pension Benefit Guaranty Corporation posted frequently asked questions (FAQs) on two issues that the CARES Act extension of the due date for ERISA minimum funding contributions raises under ERISA Title IV. One of those issues – on whether these contributions may be counted against 2020 unfunded vested benefits (UVBs) for purposes of calculating the PBGC variable-rate premium – may be of financial significance to many DB sponsors.
Background
Under the CARES Act, required minimum contributions to defined benefit plans that would otherwise be due in 2020 may be made as late as January 1, 2021. But for this CARES Act rule, generally the last date on which a 2019 required contribution could be made for a DB plan would be September 15, 2020. Under CARES, that contribution would now be due by January 1, 2021.
This rule presents (at least) two issues under Title IV of ERISA – with respect to variable-rate premiums and reportable events. PBGC’s FAQ guidance on the calculation of variable-rate premiums is of particular importance for plan sponsors, providing a 1-month extension (to October 15, 2020) of the deadline for making contributions in 2020 that can be used to reduce 2020 variable-rate premiums.
Variable-Rate premiums
Absent the CARES Act relief, contributions could be made in 2020 for 2019 no later than September 15, 2020 and could be counted as 2020 plan assets for purposes of determining the plan’s unfunded vested benefits (UVBs) and the associated variable-rate premium (for 2020, generally, 4.5% of UVBs). The CARES Act relief, extending the due date to January 1, 2021, raises the question: when must contributions for 2019, made in 2020, be made in order to be counted against UVBs?
The FAQs published by PBGC state that to count against UVBs, 2019 contributions must be made by October 15, 2020, the (current) due date for filing the 2020 PBGC variable-rate premium. So, sponsors who want to make a 2019 contribution to reduce their 2020 UVBs must (at least as the current rules stand) make that contribution by October 15, 2020.
Two outstanding questions
Does the CARES Act extension apply only to required minimum contributions? All indications are that, at least for purposes of the calculation of variable-rate premiums, PBGC’s rule will apply to all contributions, not just minimum contributions. Thus, a sponsor may make additional contributions and reduce variable-rate premiums through October 15, 2020. We do not (yet), however, have explicit guidance on this point.
Will IRS extend the Form 5500 deadline to January 1, 2020? It is our understanding that IRS is considering such an extension. If that deadline is extended, then the due date for PBGC premiums would also be extended, and there would (one assumes) generally be no need to accelerate payment of 2019 contributions to reduce UVBs/variable-rate premiums.
Reportable events
The FAQs provide generally that there is no “missed contribution” reportable event with respect to 2019 minimum contributions until January 1, 2021, and provides reportable event rules for contributions that are not made by that special CARES Act due date.
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We will continue to follow this issue.
Resources
October Three has recently published The PBGC Premium Burden Report – 2020, which provides a detailed discussion of the challenges PBGC premiums present for DB sponsors and the analytical tools and premium reduction strategies they can use to mitigate them.