The IRS on Oct. 12 issued funding relief for multiemployer pension plans under the American Rescue Plan Act of 2021 (ARP). The relief is contained in Notice 2021-57.
Notice 2021-57 provides guidance for sponsors of multiemployer DB plans on the elections under Sections 9701 and 9702 of the ARP, and the relief Section 9703 provides, which relate to Internal Revenue Code Sections 431 and 432.
These provisions permit plan sponsors to:
- Delay designating a plan as being in endangered, critical or critical and declining status under Code Section 432(b)(3), as applicable, or to delay updating the plan’s funding improvement plan or rehabilitation plan, as applicable;
- Extend the plan’s funding improvement period under Code Section 432(c)(4) or the rehabilitation period under Code Section 432(e)(4), as applicable; and
- Spread certain investment losses and other experience losses related to COVID-19 over a period of up to 30 years in determining charges to the funding standard account under Code Section 431.
Freeze Elections
In Notice 2021-57, the IRS says that ARP Section 9701 permits a multiemployer plan sponsor to make an election relating to the certification and update requirements under Code Section 432 for certain plan years. Further, Section 9701(a)(1) provides that—notwithstanding the actuarial certification of the plan’s status under Code Section 432(b)(3) for the plan year—a multiemployer plan sponsor may make a freeze election under which the plan’s Code Section 432 status for a plan year (election year) is the same as the plan’s Code Section 432 status for the preceding plan year. A multiemployer plan sponsor may make a freeze election for the first plan year beginning on or after March 1, 2020, or the next succeeding plan year.
If a freeze election applies to a multiemployer plan for a plan year, then the plan’s status under Code Section 432 for the preceding year applies for the plan year, and the plan must be operated in accordance with the elected Section 432 status for that plan year, rather than the plan’s Section 432 status as certified by the plan’s actuary under Code Section 432(b)(3) for that plan year.
Section 9701(a)(2) of the ARP provides that the sponsor of a multiemployer plan for which a freeze election is made for a plan year, and that was in endangered status or critical status for the preceding year, is not required to update its funding improvement plan, rehabilitation plan, or schedules as otherwise required under Code Section 432(c)(6) or (e)(3)(B) until the plan year following the election year. However, the actuary for a multiemployer plan that is in a funding improvement period or rehabilitation period must certify whether the plan is making the scheduled progress under its funding improvement plan or rehabilitation plan, as applicable, regardless of whether the plan year is an election year.
If elections under Section 9701(a) of the ARP are made for two plan years, then the plan’s status under Code Section 432 for both years is the plan’s Section 432 status for the plan year immediately preceding the first election year. Thus, for example:
If the sponsor of a multiemployer plan with a plan year beginning on April 1 makes freeze elections for both the plan year beginning April 1, 2020, and the plan year beginning April 1, 2021, then the plan’s Section 432 status for both plan years is the plan’s Section 432 status for the plan year beginning April 1, 2019. This is true even if the plan’s actuary had previously certified the plan’s Section 432 status for the plan year beginning on April 1, 2020.
Section 9701(b) of the ARP provides that if a multiemployer plan has, without regard to a freeze election, been certified by the plan actuary to be in critical status for the election year, then the plan is treated as a plan in critical status for that year for purposes of applying the minimum funding requirement under Code Section 412(b)(3) and the Code Section 4971(g)(1)(A) exception to the excise tax on an accumulated funding deficiency under Section 4971(a). Accordingly, the minimum funding requirements do not apply for a plan year with respect to such a plan for which a freeze election is made.
Extension Elections
Section 9702 of the ARP provides that the sponsor of a multiemployer plan in endangered status or critical status for a plan year beginning in 2020 or 2021 may make an extension election under which the plan’s funding improvement period or rehabilitation period, whichever is applicable, is extended by five years. Section 9702 also provides that a plan’s eligibility to make such an election is made taking into account the plan’s status under Code Section 432, as determined after application of Section 9701 of the ARP.
If the sponsor of a multiemployer plan that is in endangered status or critical status for a plan year beginning in either 2020 or 2021 makes an extension election, then, for purposes of Code Section 432, the plan's funding improvement period or rehabilitation period, whichever is applicable, is extended by five years.
A plan sponsor should take into account the interaction between Sections 9701(a) and 9702 of the ARP in choosing whether to elect the relief provided under either section.
Timing and Submission of Elections
Section 9701(c)(1)(A) of the ARP provides that a freeze election under Section 9701(a) must be made at the time and in the manner that the Secretary of the Treasury or the Secretary’s delegate may prescribe and, once made, may be revoked only with the Secretary’s consent. Under Section 9702(b)(1) of the ARP, an election to extend a plan’s funding improvement period or rehabilitation period, as applicable, must be made at the time, and in the manner and form as the Secretary of the Treasury or the Secretary’s delegate may prescribe, in consultation with the Secretary of Labor.
If a freeze election changes a plan’s status under Code Section 432 for a plan year, that election must be made within 30 days after the plan actuary certifies the plan’s Section 432 status (or, if earlier, 30 days after the due date for that). If a freeze election does not change a plan’s Section 432 status for a plan year, the freeze election must be made by the last day of the election year. However, a freeze election or an extension election will be treated as timely if it is made by Dec. 31, 2021.
Section 9701(c)(1)(B) of the ARP provides that if a freeze election is made for a plan year before the annual certification of the plan’s Code Section 432 status for that plan year is submitted to the Secretary (or the Secretary’s delegate), then the election must be included with the submission of the certification. If the election is made after the submission of the certification, then the election must be submitted to the IRS not later than 30 days after the due date for making the election.
Under Section 9702(b)(1) of the ARP, an extension election must be submitted to the Secretary (or the Secretary’s delegate) under the same rules that apply for a freeze election. If more than one election is made for a plan, the elections may be included in a single submission.
Revocation of Election
Under Notice 2021-57, revocation of a freeze election or extension election is automatically approved if the revocation request is submitted to IRS Employee Plans Compliance Unit in accordance with the instructions the notice sets and satisfies the conditions the notice sets for revocation of election contingent on outcome of arbitration and for revocation of a freeze election in other circumstances, as applicable.
Notice Requirements for Section 9701 Elections
Section 9701(c)(2) of the ARP provides special notice rules that apply when an election is made to freeze a plan’s status under Code Section 432.
In the case of a plan that has been certified to be in endangered status or critical status for a plan year, but that is in neither endangered status nor critical status as a result of the freeze election, the plan sponsor must provide the notice described in Section 9701(c)(2)(A) of the ARP to the participants and beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation and the Department of Labor in lieu of the notice that is otherwise required under Code Section 432(b)(3)(D). Section 9701(c)(2)(A) of the ARP provides that the notice must include such information about the election as the Secretary of the Treasury, in consultation with the Secretary of Labor, may require.
In the case of a plan that has been certified to be in critical status but is in endangered status as a result of a freeze election, Section 9701(c)(2)(B) of the ARP requires the plan sponsor to provide the notice that would have been provided if the plan had been certified to be in endangered status in lieu of the notice that is otherwise required under Code Section 432(b)(3)(D)(ii).
The notice required under Section 9701(c)(2)(A) of the ARP must be written in way that the average employee to whom the notice applies will understand.
Special Funding Rules
Section 9703(a)(2) of the ARP amended Code Section 431(b)(8) to provide a modified version of the special amortization rule under Code Section 431(b)(8)(A) and the special asset valuation rule under Code Section 431(b)(8)(B) for a multiemployer plan that meets the solvency test under section 431(b)(8)(C).
Specifically, Code Section 431(b)(8)(F)(i) allows a multiemployer plan sponsor to apply either the special amortization rule or the special asset valuation rule (or both) regarding certain experience losses that are incurred in either or both of the first two plan years ending after Feb. 29, 2020. Code Section 431(b)(8)(F)(ii) allows experience losses related to COVID-19 incurred during one of those two plan years to be added to those investment losses. The experience losses related to COVID-19 include experience losses related to reductions in contributions, reductions in employment and deviations from anticipated retirement rates, as determined by the plan sponsor. For purposes of this relief, the IRS is required to rely on the plan sponsor’s calculations of plan losses unless such calculations are clearly erroneous.
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