The BCG Pension Insider

August 2020 - Volume 106, Edition 1

IRS Issues Guidance on Special Funding and Benefit Limitation Rules for Single-Employer DB Plans

Reported by John Iekel | August 7, 2020

Practice Management

The IRS on Aug. 6 in Notice 2020-61 issued guidance on special funding and benefit limitation rules for single-employer pension plans under the Coronavirus, Aid, Relief and Economic Security (CARES) Act.

Specifically, Notice 2020-61 provides guidance regarding the special rules relating to single-employer defined benefit plans under Section 3608 of the CARES Act.

Under these special rules:

  • a contribution that would otherwise be required to be made to such a plan during 2020 must be made by Jan 1, 2021;
  • special interest adjustment rules apply to a contribution that is made after the otherwise applicable deadline; and
  • an employer may elect to apply the benefit restrictions for underfunded plans under Internal Revenue Code Section 436 for the 2020 plan year (or a fiscal plan year that contains any part of 2020) using the plan’s funded status for the last plan year ending in 2019.

Section 3608(b) of the CARES Act provides that for purposes of applying Code Section 436 and Section 206(g) of ERISA, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before Jan. 1, 2020, as the AFTAP for plan years that include calendar year 2020.

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Six Questions for Defined Benefit Plan Sponsors

Today it is a corporate necessity to consider all options with something as impactful for many companies as defined benefit pension liabilities. More tools exist today for pension de-risking than ever before and best practice calls for strategically considering pension de-risking on a regular basis. The strategies are primarily focused in three areas: Cost Containment, Funding and Investment Policy and Liability Management. These are all complex areas with many different approaches and options. There is no single right answer, therefore the plan sponsor should focus their efforts on finding the right advisors/solution providers to evaluate their plan’s specific situation and to put them in a position to make ongoing, informed decisions.

For companies with DB pension exposure, their de-risking solution will likely include one or more asset management and liability management strategies. These generally require a solid understanding of all the variables involved in the decision and implementation and the associated costs / financial impact.

We provide below six critical questions that we think all DB plan sponsors should evaluate as part of their plan’s ongoing management. [Rationale explained below each question.]

  1. What are the long-term objectives for the defined benefit plan? Do you have a strategic de-risking plan in place for your DB plan?
    De-risking a pension plan reduces leverage and firm beta. Pension de-risking announcements have been well received by shareholders, credit rating agencies and other stakeholders, including plan participants.
  2. Has the plan sponsor been educated on the range of pension de-risking strategies available, the trade-offs and the financial implications of those strategies?
    Plan sponsors should know what de-risking strategies are available that could have a major impact on the company’s financials and risk profile, including the costs or trade-offs of adopting any particular de-risking strategy(ies). It is crucial for plan sponsors to view pension de-risking as an ongoing, iterative process rather than an all or nothing decision geared towards the identifying the “perfect time” to act.
  3. How are the contribution policy and investment policy coordinated?
    Sponsors who are paying variable rate PBGC premiums should consider strategic contributions to improve funded status and revisit investment policy to ensure any improvements to funded status are not only preserved but also that the risk of the plan’s current investment structure is in-line with the plan’s objectives.
  4. Do you know how your plan’s funded status on an accounting basis compares to your plan’s “Exit Liability”?
    A plan’s “Exit Liability” represents a plan sponsor’s cost to transfer their obligation to pay retirement benefits to either the plan participants themselves in the form of single lump sum cash payments; or to an insurance company in the form of a premium/fee to take over the payment of benefits. When taking a plan’s estimated lump sum take rate into account, a plan’s exit cost is often-times at or below the plan’s accounting valuation.
  5. Have you assessed your plan’s current operating expenses and compared those costs to the savings and service enhancements that can be achieved through a bundled services arrangement?
    There are comprehensive solutions available that can result in simplified plan operations, significant cost savings for ongoing plan services and optimal positioning for future de-risking events. Steps can be taken now to strategically position your plan’s design and structure for optimal attractiveness to eventual annuity providers.
  6. Have you put in place customized buyout price monitoring for your plan to identify opportunistic times to de-risk?
    In the past 15 years, there have been many times when it was especially attractive to allocate more plan assets to liability driven investing, pay lump sums as well as purchase annuities for retirees and/or pursuing full risk transfer through a plan termination. A plan sponsor should be in position to capture these opportunities.

Managing the pension assets and liabilities associated with past, current and future employees is a formidable challenge for plan sponsors, but many of the questions we’ve posed here take on an even greater importance in the current market environment associated with COVID-19. To initiate a free BCG consultation, please click here.


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

Retirees (duration of 7) – 1.27%
Term Vesteds (duration of 10) – 1.43%
Actives (duration of 15) – 1.48%

Annuity Purchase Rates as of August 1, 2020