September 29, 2020
PBGC reverses previous position on effect of CARES Act relief on plan filings
The Pension Benefit Guaranty Corporation (PBGC) released Technical Update 20-2 on September 23, 2020, reversing its position on the calculation of variable-rate premiums (VRPs) and amending plan filings to reflect contributions made after the 2020 Comprehensive Premium filing date, which is no later than October 15, 2020, for calendar-year plan years. As a result, contributions made as late as January 1, 2021, may be reflected in the funded position used to calculate 2020 VRPs. If those contributions are made after the initial filing, the sponsor may amend its PBGC filing to be eligible for any refund resulting from reduced 2020 VRPs.
Single-employer defined benefit pension plan sponsors must make minimum required contributions (MRCs) to maintain their qualified tax status. 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.
Section 3608 of the CARES Act 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 MRCs under IRC Section 430(j) that would be due in 2020 must be paid until January 1, 2021 (see Tax Alert 2020-2176).
Apart from plan contributions, plan sponsors must pay premiums each year to the PBGC. The premiums include a flat-rate premium based on the number of plan participants and a variable-rate premium (VRP) for underfunded plans 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.
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 more than the MRC to achieve this reduction.
While the CARES Act did not specifically address PBGC premiums, the PBGC stated in a July 20, 2020 Q&A that filings may not be amended for any contributions made after the 2020 PBGC premium due date of October 15, 2020. Under that position, while contributions made between September 15 and October 15, 2020, could 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.
In a September 21, 2020 press release, "PBGC to Expand COVID-19 Relief, Support Economic Recovery," and then Technical Update 20-2, the PBGC reversed its position to better align with provisions in IRS Notice 2020-61. Technical Update 20-2 states that the "discounted value of a 'prior year contribution' received after the premium is filed and on or before January 1, 2021, may be included in the asset value used to determine the [VRP]. Thus, if such a contribution is made, the premium filing may be amended to revise the originally reported asset value and resulting [VRP]." Plan sponsors then have until February 1, 2021, to amend their premium filing. Because no contributions are required 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.
The decision regarding the plan year to which a contribution is attributed will impact reporting on Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information of the Form 5500, Annual Return/Report of Employee Benefit Plan. The decision will also affect disclosures included in the financial statements described in FASB Accounting Standards Codification (ASC) 960. Finally, plan sponsors should consider the applicable tax deductions under IRC Section 404, which in turn may have broader implications for a taxpayer's overall tax position. See Tax Alert 2020-2175 for additional considerations.