How will the CARES Act impact DB plans? And what other funding relief may be on the way?

The new stimulus package—the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—was signed into law by President Trump on Friday. While the 852-page piece of legislation was not focused on defined benefit (DB) plans, a few law changes were included that affect DB plan sponsors:

Contribution delay

DB sponsors that were required to make contributions during 2020, either for quarterly contributions or to satisfy minimum funding requirements, can delay payments to the plan until January 1, 2021. For context and background:

  • The final payment of the minimum required contribution (MRC) for calendar-year plans is usually due on September 15th of the year following the plan year. For example, the MRC for the 2019 plan year is due September 15, 2020. This payment due date can be delayed to January 1, 2021.

  • Underfunded plans (on a funding basis) need to pay quarterly contributions, which are generally paid 15 days after each quarter-end—April 15, July 15, etc.—for calendar-year plans. These contributions can now be delayed to January 1, 2021.

  • Contribution requirements continue to accumulate with interest. For example, if a $10 million contribution is due on September 15, 2020 and the interest rate is 6.0%, payment made on January 1, 2021 would need to be $10.17 million.

  • For plan years beginning May 1 or later, whose final MRC due dates would be January 15 or later, the only relief is to quarterly contributions.

Funded status used for benefit restrictions

Sponsors will be allowed to use prior Adjusted Funding Target Attainment Percentage (AFTAP) during the 2020 plan year. This measure is used for benefit-restriction purposes and has no direct impact on contribution requirements.

  • If a plan’s AFTAP falls below 80%, the sponsor is limited in how much they can pay participants in accelerated payment forms—such as lump sums—and it also limits their ability to pursue annuity purchases, plus other restrictions. This measure is affected by interest-rate stabilization. Meaning, the plan actuary may use a discount rate within the 90/110 corridor around the 25-year average of interest rates.

  • DB plan sponsors can now use the AFTAP for the last plan year ending before January 1, 2020 as the AFTAP for the 2020 plan year. Note that the AFTAP for most calendar-year plans was basically locked in as of January 1, 2020—except for receivable contributions—before all the market turmoil. For non-calendar year plans, this can be a significant relief, as the AFTAP may drop meaningfully from prior years, and the sponsor could be at risk of new benefit restrictions.

The first change should help free up cash where needed in the short term. The second change could eliminate some administrative challenges to sponsors and preserve benefit payment options for participants.

More funding relief on the way?

Other proposals in the industry have been made. These may be addressed later in the year by Congress but the chances of them occurring are not known. The main suggestions are:

  • Maintain the interest-rate stabilization provisions for five more years, through 2026. The stabilization corridors were set to expand from 90/110 to 85/115 (then 80/120, etc.) in 2021. This would have a significant impact on contribution requirements over the next 5-10 years.

  • Change the 90/110 corridors to 95/110, which would further increase the interest rates used to determine funding liabilities, thus decreasing contribution requirements.

  • Delay all filings (DOL/IRS/PBGC) and credit balance elections to free up time for plan sponsors.

  • Eliminate 2020 PBGC premiums and reduce future-year PBGC premiums.

Learn about the CARES Act's impact on defined contribution plans