The economic impact of COVID-19 is causing concerns among many employers faced with contribution requirements associated with their Cash Balance and Defined Benefit Plans. In light of the current economic environment, many plan sponsors may not be in a position to continue, at least in the near term.
Cash Balance and Defined Benefit Plan Freezes
Defined benefit and cash balance plans are subject to minimum funding requirements. With the investment risk on the plan sponsor. Meaning, investment returns may have an impact on required contributions from year to year. Plan amendments can lower or freeze future benefits to participants. However, plan sponsors are still faced with contribution requirements.
There is an urgency about the decision as the amendment must be adopted before anyone works 1,000 hours in 2020, or by June 1. The required 204(h) notice to employees outlining the reduction in benefit must be provided 15 days prior to the amendment.
Note: Freezing the plan’s benefit formula will minimize future contributions, but contributions required for a prior year cannot be eliminated.
Late Cash Balance and Defined Benefit Plan Contributions
Some plans may be required to make quarterly contributions throughout the year based on their recent funded status. Failure to make these contributions promptly will results in additional interest charges. As well as, increasing the amount necessary to meet annual funding requirements. It may result in additional reporting and notice requirements.
Additionally, failure to make the plan’s minimum required contribution by the final contribution deadline will result in an excise tax paid to the IRS. This tax is equal to 10% of the missed contribution for each year until the missed payment is corrected. This may also result in additional reporting and notice requirements. Some plans may be subject to a lien on company assets.
Recent legislation in response to COVID-19 provides relief on the funding deadline for defined benefit plans. The deadline for all required contributions due in the calendar year 2020 has been extended to January 1, 2021.
Note: Contributions are charged interest through the date of deposit. Delaying a contribution will result in an increased interest charge.
Partial Plan Terminations
Employers who have significant staff reduction or layoffs may become subject to IRS partial plan termination rules. The IRS defines partial plan termination as a 20% or greater decrease in plan participants for 12 months. Typically, this is the plan year. If a partial plan termination occurs, all affected participants who are terminated during the 12 months must become 100% vested. Partial plan termination rules are complex and subject to a facts and circumstances determination. If your organization is experiencing significant employee turnover, it is important to work with your plan administrator to understand how this affects you. We anticipate modifications to current rules in the near future to provide clarity and relief for plan sponsors.
To be deductible, employer contributions must generally be deposited before the extended due date of the company’s tax return, including extensions. Federal tax return deadlines for 2019 tax years were recently extended to July 15. As a result, the deadline for contributions to be deposited to a plan is also extended.
Note: Defined benefit plans are additionally subject to a minimum funding deadline of 8-½ months following the plan year (September 15 for calendar year plans). This is regardless of the tax return deadline.
For More COVID-19 Information
We know you’re concerned about the impacts of COVID-19 on your retirement plan and your employees, but OmniStar Financial Group is here to help guide you through these turbulent times. Please contact us with questions or concerns.