On June 25, 2010, President Obama signed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. The Act offers single-employer and multiemployer defined benefit plans relief from certain funding requirements and some benefit restrictions. On July 30, 2010, the IRS issued guidance on the availability of the funding relief for sponsors who have filed the Form 5500 for the 2009 plan year.
One component of the minimum required contribution is the amortization of shortfall amortization bases that are established when there is a gap between the plan’s assets and liabilities. Absent the relief under the Act, these shortfalls must be amortized over 7 years. The Act would allow single-employer plan sponsors to use either of two alternative amortization schedules:
- 2+7-year method - pay interest only on the shortfall amortization base for two years and amortize the remaining balance over the following 7-year period; or
- 15-year method - extend the amortization period to 15 years.
However, if a plan sponsor opts for funding relief under the Act, it may be necessary to make accelerated contributions under certain circumstances; for example, if the plan sponsor or any company in its controlled group pays:
- Certain compensatory payments (such as certain compensation in excess of $1 million to an employee for services performed after February 28, 2010), or
- Certain dividends or redemptions of stock.
The sponsor of a single-employer plan may elect to use this relief for any two plan years beginning in 2008 through 2011 for new bases established in those plan years, as long as the due date for making the final contribution for that plan year occurs on or after June 25, 2010. A plan sponsor that elects to use this relief for more than one year must use the same alternative amortization schedule (2+7-year or 15-year) for both years and must notify all plan participants and beneficiaries, as well as the PBGC. The plan may not revoke its election without the Secretary of the Treasury’s approval and the PBGC must have an opportunity to comment on the revocation.
The Act also extends a single-employer plan’s ability to use the adjusted funding attainment percentage (AFTAP) for an earlier year when applying the restriction on continued accruals under IRC Section 436.
Under the Act, sponsors of multiemployer plans that satisfy a solvency test may:
- spread the difference between expected returns and actual returns for either or both of the first two plan years ending after August 31, 2008, over a period of not more than 10 years, and /or
- expand the smoothing corridor so that the actuarial value of assets for either or both of the first two plan years ending after August 31, 2008, can range from 80% to 130% of the fair market value of assets.
Additionally, if the solvency test is met, multiemployer plans may, after providing notice to participants, beneficiaries and the PBGC, elect to amortize net investment losses that occur during either or both of the first two plan years ending after August 31, 2008, over a period beginning when the loss is first reflected in valuation assets and ending 30 years after the plan year in which the loss first occurred (29 years after the first base is established instead of the 15-year period that applies otherwise.)
A plan that uses the relief cannot increase benefits during the two-year period following a plan year in which the relief applies unless certain funding requirements are met or unless a plan amendment increasing benefits is required by law.
On July 30, 2010, the IRS issued Notice 2010-55 (for single-employer plans) and Notice 2010-56 (for multiemployer plans), which provide that, in the case of an eligible plan year that ends before the IRS issues guidance under the Act, the funding relief is available without regard to whether the plan sponsor has filed the Form 5500 (and Schedule SB or Schedule MB) for that year. The obligation to timely file the Form 5500 (and Schedule SB or Schedule MB) is unchanged (taking into account the rules for obtaining an extension). The notices also describe issues that may be addressed by future guidance, including:
- How to determine the amount needed to satisfy minimum funding requirements;
- How to make an election to use the special funding rules;\
- How to meet the requirement to notify participants and beneficiaries of affected plans; and
- Any effect of an election to use the special funding rules on the certification of a multiemployer plan’s status (for example, endangered, critical or neither) under IRC Section 432(b), including certifications already made.