The BCG Pension Insider

May 2020 - Volume 103, Edition 1

CARES Act May Help DB Plans Avoid Funding-Based Limitations

PLANSPONSOR | April 3, 2020 | By Lee Barney

DB plan sponsors can use help provided in the CARES Act and take other actions to avoid falling into funded status zones that would impact benefits.

PLAN SPONSORS WITH single-employer defined benefit (DB) plans may benefit from recently enacted legislation when it comes to funding-based limitations.

In early April, the Coronavirus Aid, Relief and Economic Security (CARES) Act released guidance amending Internal Revenue Code (IRC) Section 436—also known as the look-back rule—which affects payments of accelerated benefit distributions and other benefits. The rule allows plans to use 2019’s adjusted funding target attainment percentage (AFTAP) instead of 2020’s.

The rule is especially important, given that certain benefit restrictions apply if a plan falls below a certain funded status. Althea R. Day, partner at Morgan Lewis, explains that if a plan has a funded ratio of 80% or more, it is deemed financially sound. However, anything less than 80% would require a 50% reduction in accelerated payments, and if a plan was 60% funded or less, it would result in a total prohibition of accelerated benefit payments. There are also limitations for future benefit accruals and implementation of benefit increases triggered by plan underfunding or plan sponsor bankruptcy. Details of funding-based limitations are outlined in a blog post on law firm Morgan Lewis’ website.

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The RMD Waiver for RMDs Already Distributed

Reported by PS

“I read that the CARES Act waives all required minimum distributions (RMDs) for retirement plans such as our 403(b) plan for 2020. But what about participants who turned 70 ½ in 2019 and already took their required distribution prior to the CARES Act being issued? I know that their initial distribution could have been delayed until April 1, but all of our participants took theirs well before the deadline.”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

With the caveat that, as with many provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act—a massive piece of legislation that was enacted extremely quickly—it is probably going to take some clarifying guidance to provide a definitive answer in this regard, here is what the relevant section of the legislation says...

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IRS Offers Some Clarifications About CARES Act Retirement Plan Provisions


The guidance explains how repayment of coronavirus-related distributions works and whether plan sponsors are required to accept them, among other things.

Section 2202 of the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, provides for special distribution options and rollover rules for retirement plans and individual retirement accounts (IRAs) and expands permissible loans from certain retirement plans.

A new Q&A document from the IRS clears up some questions stakeholders may have about the CARES Act provisions. The agency says the Treasury Department and the IRS are formulating guidance on Section 2202 of the CARES Act and anticipate releasing that guidance in the near future. It points to IRS Notice 2005-92, issued on November 30, 2005, that provided guidance on the tax-favored treatment of distributions and plan loans under Sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) as those provisions applied to victims of Hurricane Katrina. The Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of Section 2202 of the CARES Act are substantially similar to the provisions of KETRA that are addressed in that notice.

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Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)

Retirees (duration of 7) – 1.77%
Term Vesteds (duration of 10) – 1.93%
Actives (duration of 15) – 1.90%

Annuity Purchase Rates as of May 1, 2020