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September 3, 2020

IRS releases guidance on 2020 pension plan funding relief and related tax deduction issues

See Tax Alert 2020-2339 for an update on the calculation of variable-rate premiums and amending plan filings.

In Notice 2020-61, the IRS answers questions concerning the special funding and benefit limitation rules for single-employer defined benefit pension plans under Section 3608 of the CARES Act.

This section created a pension funding holiday for contributions to single-employer defined-benefit pension plans that otherwise would have to be paid in calendar year 2020. Specifically, no minimum required contributions (MRCs) under IRC Section 430(j) that would be due in 2020 must be paid until January 1, 2021.

In addition to contribution requirements, plan sponsors are also subject to different reporting requirements. The effects of the funding relief must be considered for each reporting purpose individually and to the extent that changes to reporting for one purpose may affect reporting for another purpose.

MRC due dates

Single-employer defined-benefit pension plan sponsors must make certain contributions to maintain their qualified tax status. MRCs, as determined under IRC Section 430, are designed to help a plan remain adequately funded. Broadly speaking, the annual MRC equals the cost of the next year's accrual and a portion of underfunding from prior years.

To be designated for a given plan year, contributions, both required and discretionary, are generally due no later than 8½ months after the plan year ends. In some cases, funding shortfalls from previous plan years result in a quarterly contribution requirement for the plan year.

CARES Act considerations

Section 3608 of the CARES Act extends the due date for any MRC that would otherwise be due during calendar year 2020. The new due date for any such contribution is January 1, 2021.1

Interest adjustments to MRC

Interest applies to the MRC to the extent that it is contributed after the first day of the plan year, using that plan year's effective interest rate (EIR). If the MRC is made after the required due date(s), an additional 5% interest penalty applies during the late period. In addition, an excise tax under IRC Section 4971 applies to portions of the MRC not made within 8½ months following the end of the plan year.

CARES Act considerations

Notice 2020-61 clarifies that the additional interest from the original payment due date through the date of payment (January 1, 2021, at the latest) is calculated using the EIR of the plan year in which the payment is made. Any late payments (including amounts related to additional accrued interest) are subject to the 5% penalty and excise tax.

AFTAP certification

Pension plan actuaries must certify a plan's Adjusted Funding Target Attainment Percentage (AFTAP) each year. IRC Section 436 defines the AFTAP as a measure of funded status and restricts certain benefits earned and paid under a plan if the AFTAP falls below certain levels. The plan actuary must issue the AFTAP certification by specific deadlines in determining whether benefit restrictions apply. Contributions made on account of the prior year may only be considered for the purposes of the AFTAP certification date if those amounts have already been contributed before the plan actuary issues the certification.

CARES Act considerations

The CARES Act provides benefit-restriction relief by allowing plans to elect to use the prior plan year's AFTAP (ending before January 1, 2020) as the current plan year's AFTAP (ending before January 1, 2021). The ability to rely on the prior year AFTAP prevents having benefit restrictions apply if contributions made on account of the prior year have not been contributed by the AFTAP certification date.

PBGC premiums

Plan sponsors must pay premiums each year to the Pension Benefit Guaranty Corporation (PBGC). The premiums include a flat rate premium based on the number of plan participants and, for underfunded plans, a variable-rate premium (VRP) based on the funded position of the plan. Before the CARES Act, the asset values used for VRP calculations would reflect contributions made in the prior plan year as of September 15, 2020.

CARES Act considerations

Because the CARES Act extended the last day to make contributions for the 2019 plan beyond September 15, 2020, additional time is available for calendar-year plans to make contributions that would increase asset values for purposes of calculating (and thereby reducing) VRPs. Some plan sponsors may prefer to contribute amounts in excess of the MRC to achieve this reduction. While the CARES Act and Notice 2020-16 do not specifically address PBGC premiums, the PBGC has indicated2 that filings may not be amended for any contributions made after the 2020 PBGC premium due date of October 15, 2020. Therefore, while contributions made between September 15 and October 15, 2020, may now be reflected in the funded position used to calculate 2020 VRPs, any contributions made between October 16, 2020, and January 1, 2021, would not help to reduce 2020 VRPs.3

DOL reporting

Contributions made on behalf of a given plan year are presented on Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information of theForm 5500, Annual Return/Report of Employee Benefit Plan.

CARES Act considerations

Under Notice 2020-61, any contributions made on behalf of the 2019 plan year after the filing of the 2019 Form 55004 requires an amended Schedule SB attachment to be assigned to the 2019 plan year.

ASC 960 financial reporting

Certain plans must attach audited financial statements to their Form 5500. Accounting guidance for the disclosures that are related to the plan's assets and liabilities and included in the financial statements are described in FASB Accounting Standards Codification (ASC) 960, which includes guidance for recognizing contributions receivable. Contributions receivable are amounts due as of the financial reporting date to the plan under formal commitments, as well as legal or contractual requirements. Contributions presented on Schedule SB of the Form 5500 may differ from contributions recorded in the plan's audited financial statements. Such differences are expected and do not generate notifications from the Department of Labor.

Although not addressed by the CARES Act, amending the Form 5500 and Schedule SB to reflect contributions funded subsequent to October 15, 2020, should not result in the need to restate the plan's audited financial statements.

Tax deductions

Generally, a plan sponsor may make discretionary plan-year contributions to a defined benefit pension plan in excess of the MRC, up to the maximum deductible limit under IRC Section 404(o).5

Under IRC Section 404(a)(1), otherwise deductible pension plan contributions must be deducted in the tax year of payment. IRC Section 404(a)(6) deems payment to occur on the last day of the preceding tax year if the payment is on account of that tax year and is not made later than the due date (including extensions) of the tax return for that year.

Revenue Ruling 76-28 further clarifies that a taxpayer's payment is on account of the preceding year if (1) the payment is treated by the plan in the same manner that the plan would treat a payment actually received on the last day of the employer's preceding tax year, and (2) either the employer designates the payment in writing to the plan administrator (or trustee) as a payment on account of the employer's preceding tax year, or the employer claims such payment as a deduction on its tax return for the preceding tax year.

CARES Act considerations

Q&A 4 of Notice 2020-61 clarifies that any contributions made by January 1, 2021, whether required or discretionary, may be considered 2019 plan year contributions. Consistent with IRC Section 404(a)(6), however, Q&A 11 indicates that these contributions must be made by the tax return's extended due date (October 15, 2020, for a C corporation with a calendar-year tax year) to be deductible on the 2019 tax return. Typically, plan sponsors demonstrate that a pension-plan contribution is treated the same as a contribution for the preceding year, in accordance with Revenue Ruling 76-28, by reporting it on the Schedule SB attachment to the Form 5500 for the prior plan year. Because contributions must be made within 8 ½ months after the end of the plan year to be reported as contributions on the Schedule SB, many employers have come to regard September 15 as the effective due date for making contributions that may be deducted on the prior year's tax return, even if the employer's tax return for the prior year is not due until October 15, 2020.

While contributions made as late as January 1, 2021, for calendar-year plans may be reported on the 2019 Schedule SB, Notice 2020-61 clarifies that plan sponsors only have until the extended due date of their 2019 tax return (October 15, 2020, for a C corporation with a calendar-year tax year) to make contributions that may be deductible on their 2019 tax returns.

Taxpayers may want to consider modeling the impact of attributing a deduction to a certain year in the context of a taxpayer's overall tax return. The results of this modeling may identify instances in which allocating the expense to one year vs. another may produce a more favorable tax outcome. For example, the CARES Act amended IRC Section 172(b)(1) to allow a carryback of any net operating loss (NOL) arising in a tax year beginning after December 31, 2017, and before January 1, 2021, to each of the five tax years preceding the tax year in which the loss arises. The decision to attribute the deduction to a given year may affect the years to which a resultant NOL may be carried back.

Additionally, IRC Section 250 allows a domestic corporation a tax deduction based on its foreign-derived intangible income (FDII). Multinational C corporations may want to consider the US and foreign pension expense implications for purposes of FDII, including apportionment of pension cost between pre- and post-FDII enactment periods. As part of that exercise, interaction between FDII and global intangible low-taxed income (GILTI) will be relevant. Although the CARES Act is not expected to affect the tax treatment of foreign pension-plan expenses, expenses related to foreign pension plans may be used for determining taxable income under GILTI.

Once a contribution is reported on a tax return, it cannot be redesignated for a different year. Therefore, taxpayers may want to work with their actuaries and tax advisors to assess the decision to attribute pension funding to a given tax year.


Contact Information
For additional information concerning this Alert, please contact:
People Advisory Services - Actuarial
   • Sheva Levy (
   • Adam Berk (
   • Stephen Breeding (
   • TranLinh Quach (
People Advisory Services – Employee Benefit Compliance Services
   • Laura Anderson (
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
   • Andrew Leeds (


1 The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act would extend this date to January 4, 2021. Given previous IRS interpretations of IRC Section 7503, if this date is not extended, plan sponsors may want to consider making contributions by December 31, 2020, because January 1, 2021, is a legal holiday.

2 PBGC, COVID-19-Related Single-Employer Plan Sponsors and Administrators Questions and Answers (July 20, 2020).

3 Separately, because there are no required contributions in 2020, there would not be any reportable events necessary to be filed with the PBGC for delayed contributions that would otherwise have been required in 2020.

4 Due October 15, 2020, for calendar year plans.

5 Some complexities exist if the plan and tax year do not align.