Every sponsor of a traditional pension plan or a cash balance plan can be impacted by the effects of COVID-19. The impact of plan investment losses and decline in business revenue may make it difficult to meet pension contribution obligations. Here are some options that may help you during this unprecedented time.
First, remember that contributions can be delayed for the 2019 plan year into 2020. They would be due by the later of the tax filing due date or 8 ½ months following the close of the year (9/15 for a calendar plan year). Also, note that contributions for 2020 are similarly due in 2021, so plan accordingly in the event the market does not rebound to reverse any losses.
Freeze Plan Benefits
As another option, you may amend your plan to freeze accruals for 2020 and beyond. For 2020 accruals, you would need to make the amendment effective prior to employees earning a benefit. If your plan requires a participant to work 1,000 hours in a year before receiving a benefit accrual, then you likely have time to freeze benefits for 2020. However, if your plan has a different requirement, then you will have to give any benefits accrued through the freeze date, but not after the freeze date. If things turnaround before year end, you may be able to unfreeze and restore the benefits that were frozen. Consider the following pros and cons of freezing plan benefits:
|It stops the accrual of future benefits and helps limit the potential required contribution for at least 2020.||Typically, a plan cannot be frozen and unfrozen in the same year, and we usually recommend there be a 3-year wait between plan amendments that change benefit formulas. However, you may be allowed latitude for more frequent amendments to react to changing business situations in these unprecedented times.|
|You may be able to unfreeze benefits before year-end if things turn around, without recourse from the IRS, provided the IRS grants relief due to the impact of COVID-19. We are hopeful this relief will happen.||For small plans, the amendment to unfreeze will not be able to be reflected in a piece of the maximum contribution calculation, thus reducing the maximum deductible contribution for 2 years.|
|In order for an amendment to unfreeze to take effect, the plan must be at least 80% funded after the effect of the amendment is reflected, so it could force additional contributions to be made earlier than anticipated or desired to allow the amendment to take effect.|
Contribution Options if Plan is not Frozen
The employer can contribute any amount between the ERISA minimum required contribution and the IRS maximum deductible contribution. If you have a cash balance plan, that means you may be able to fund less than the contribution credits. Doing so has the following pros and cons:
|Allows benefits to continue to accrue at current levels||May leave plan underfunded|
|No amendments would be required||Could require higher contributions in the future to make up for any shortfall in the current year|
What is the impact on other plans? If benefits are not frozen, they will continue to accrue whether or not contributions are actually needed and/or actually made. If these accruals are skewed toward highly compensated employees and rely on combining with a profit sharing 401(k) plan to satisfy nondiscrimination testing, then profit sharing contributions for non-highly compensated employees will likely need to continue at or near the same level as previously required to satisfy such testing.
Have questions? We’re here to help. Please contact your BPAS representative.
Jill Casey, CEBS, EA, MAAA is a Vice President with BPAS Actuarial & Pension Services.