The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This $2 trillion economic relief package provides a financial backstop to individuals and businesses that are adversely affected by the COVID-19 pandemic.
There is a section of the law that provides funding relief to sponsors of single employer defined benefit plans. There are two funding relief measures:
- Due dates for minimum required contribution payments (including quarterlies) that fall in the 2020 calendar year are extended to January 1, 2021.
- A plan sponsor may elect to treat the Adjusted Funding Target Attainment Percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for any plan year which includes the 2020 calendar year.
Extension of Minimum Required Contribution Deadlines
If a contribution payment (including a quarterly) is due in the 2020 calendar year, its deadline is extended to January 1, 2021. The amount of the contribution is adjusted with interest for the period between the original due date of the contribution (prior to the CARES Act extension) and the payment date. For this purpose, the rate of interest to use is the effective interest rate for the plan year which includes the payment date.
Note that the interest rate to use for adjusting minimum required contribution payments is normally the effective interest rate of the plan year for which the payment is made, as specified in Internal Revenue Code Section 430(j). However, for purposes of the CARES Act due date extension, the interest rate to use appears to be the effective interest rate for the plan year in which the payment is made.
For example, if a single employer plan has required quarterlies for a July 1, 2019 – June 30, 2020 plan year, there are three quarterlies that are due in the 2020 calendar year: 1/15/2020, 4/15/2020, and 7/15/2020. Under the CARES Act, each of these due dates is extended to January 1, 2021. If the amount of each quarterly is $50,000, and the sponsor elects to pay each of these quarterlies five months after the initial due date (prior to the CARES Act extension), then the required payment amounts are determined as follows (assume that the effective interest rate is 3.50% for the 2019‑2020 plan year and 3.00% for the 2020‑2021 plan year):
- Quarterly initially due 1/15/2020 and paid on 6/15/2020, which falls within the 2019‑2020 Plan Year:
- $50,000 x (1.035)[5/12] = $50,722 minimum amount that must be paid on 6/15/2020
- Quarterly initially due 4/15/2020 and paid on 9/15/2020, which falls within the 2020‑2021 Plan Year:
- $50,000 x (1.030)[5/12] = $50,620 minimum amount that must be paid on 9/15/2020
- Quarterly initially due 7/15/2020 and paid on 12/15/2020, which falls within the 2020‑2021 Plan Year:
- $50,000 x (1.030)[5/12] = $50,620 minimum amount that must be paid on 12/15/2020
Without this relief, a penalty of 5 percentage points would be added to the effective rate for all months in which the contribution is past the due date. For the 2019-2020 plan year, the interest rate would be 8.5%.
AFTAP Election
A plan sponsor may elect to treat the AFTAP for the last plan year ending before January 1, 2020 as the AFTAP for any plan year which includes the 2020 calendar year. A sponsor may want to do this in order to avoid benefit restrictions under Section 436 of the Internal Revenue Code.
For example, a sponsor’s AFTAP for the July 1, 2018 – June 30, 2019 plan year is 84%. The sponsor’s AFTAP for the 2019‑2020 and 2020‑2021 plan years fall below 80%. In order to avoid Section 436 benefit restrictions, the sponsor may elect to use an AFTAP of 84% for the 2019‑2020 and the 2020‑2021 plan years.