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IRS Issues Guidance on Funding Rule Changes for Single-Employer DB Plans

Practice Management

The guidance in Notice 2021-48, issued July 30, pertains to changes to the funding rules that were made by Sections 9705 and 9706 of the American Rescue Plan Act of 2021 (ARPA). 

Before the ARPA was enacted, the applicable minimum and maximum percentages for the 24-month average segment rates set forth under Code Section 430(h)(2)(C)(iv)(II) were 90% to 110% for plan years beginning before Jan. 1, 2021, 85% to 115% for plan years beginning in 2021 and 80% to 120% for plan years beginning in 2022, with a wider corridor for later plan years. 

Section 9706(a)(1) of the ARPA changed those specified ranges. As amended by the ARPA, the applicable minimum and maximum percentages are 95% and 105% for plan years beginning in 2020 through 2025, with a wider corridor for later plan years. Section 9706(a)(2) of the ARPA amended Code Section 430(h)(2)(C)(iv)(I) to provide that if the average of the first, second or third segment rate for any 25-year period is less than 5%, then 5% is substituted for that 25-year average. 

Section 9706(c)(1) of the ARPA provides that the amendments made by Section 9706 are effective for plan years beginning after Dec. 31, 2019.1 However, Section 9706(c)(2) provides that a plan sponsor may elect not to have the amendments made by Section 9706 apply to any plan year beginning before Jan. 1, 2022, either (as specified in the election) for all purposes or solely for purposes of determining the AFTAP for the plan year. In addition, under Section 9706(c)(2), a plan is not treated as failing to meet the requirements of Code Section 411(d)(6) solely by reason of this election.

The Guidance

Notice 2021-48 says that for all plan years beginning after Dec. 31, 2021, shortfall amortization bases are amortized over 15 years, and for all earlier plan years, all shortfall amortization bases are eliminated. However, a plan sponsor may elect to have this rule apply to plan years beginning after Dec. 31, 2018, 2019 or 2020. If the plan sponsor elects an earlier application of Code Section 430(c)(8), then shortfall amortization bases are amortized over 15 years, and for all earlier plan years, all shortfall amortization bases are eliminated for all plan years beginning after Dec. 31 of the earlier plan year.

Guidance under Notice 2012-61 generally remains in effect following the enactment of the ARPA, but is modified to reflect subsequent statutory changes and to take into account any election under Section 9706(c)(2) of the ARPA not to apply the ARPA segment rates for a plan year.

The application of the ARPA segment rates for a plan year increases the effective interest rate for the plan for that plan year, compared to the effective interest rate determined using the pre-ARPA segment rates for that plan year. Although under Notice 2020-61, the effective interest rate for the plan year in which a contribution is made is used for certain interest adjustments regarding a contribution that is made after the original due date for the plan year (but no later than the extended deadline under Section 3608(a) of the CARES Act, the ARPA segment rates are not used for determining that effective interest rate if the plan year for which the extended due date applies is a plan year beginning before Jan. 1, 2020.

In addition, if a contribution for a plan year beginning before Jan. 1, 2020 is made after the original due date but no later than the extended due date under Section 3608(a) of the CARES Act, then, as described in Notice 2020-61, the interest adjustment rules of Notice 2020-61 apply for purposes of determining the value of plan assets for the next plan year. Accordingly, the pre-ARPA segment rates will apply to determine the effective interest rate that is used for this purpose.

Guidance Relevant to Code Section 430

Application of ARPA segment rates to statutory hybrid plan interest credits. Under Notice 2021-48, if a statutory hybrid plan provides an interest crediting rate that is based on any of the three segment rates specified in Code Sections 430(h)(2)(C)(i), (ii), or (iii) and that is determined taking into account the corridor under Code Section 430(h)(2)(C)(iv), the enactment of the ARPA will result in a change to the plan’s interest crediting rate.

Elections. The election under Code Section 430(c)(8) to have the first plan year for which 15-year amortization of shortfall amortization bases applies be a plan year that starts before Jan. 1, 2022, is made by the plan sponsor by providing written notification of this election to both the plan's enrolled actuary and the plan administrator. This election must be signed and dated by the plan sponsor, and must include the following information: 

  • the name of the plan; 
  • the plan number; 
  • the name of the plan sponsor; 
  • the plan sponsor's mailing address; 
  • the plan sponsor's employer identification number; and 
  • the first plan year for which the 15-year amortization period will apply.

The election not to have the amendments made by Section 9706 of the ARPA apply to a plan year (that is, to use the pre-ARPA segment rates for the plan year) is made in the same manner; however, it also must include the following: 

  • If the election is made for a plan year beginning in 2020, a statement of whether the election not to have the amendments made by Section 9706 of the ARPA apply is being made for all purposes or solely for purposes of determining the AFTAP under Code Section 436 for the plan year. 
  • If the election is made for a plan year beginning in 2021, a statement of whether the election not to have the amendments made by Section 9706 of the ARPA apply is being made for all purposes or solely for purposes of determining the AFTAP under Code Section 436 for the plan year.

Any plan sponsor election made in accordance with this notice other than the deemed election provisions must be made by the later of: (1) the last day of the plan year beginning in 2021, or (2) Dec. 31, 2021.

Election to add to a prefunding balance. If a plan sponsor is applying the ARPA for a plan year beginning in 2019, 2020 or 2021, the plan sponsor may make an election to increase the prefunding balance by an amount no greater than the amount of the increase in excess contributions for the plan year resulting from the amendments made by the ARP. 

Revocation of an election to use a prefunding balance or funding standard carryover balance. An election to use a prefunding balance or funding standard carryover balance to offset the minimum required contribution for a plan year that begins in 2019 or 2020 may be revoked to the extent of the reduction in the minimum required contribution that results from applying any of the amendments made by the ARPA. This revocation is made by providing written notification of the revocation to the plan's enrolled actuary and the plan administrator and is deemed timely if it is made by Dec. 31, 2021. 

Revocation of an election to reduce a prefunding balance or funding standard carryover balance. An election to reduce a plan’s prefunding balance or funding standard carryover balance under Treas. Reg. §1.430(f)-1(e) as of the first day of a plan year beginning in 2020 or 2021 may be revoked in full or in part if either of the amendments made by the ARPA apply for purposes of determining the minimum required contribution for that plan year. This revocation is made by providing written notification of the revocation to the plan's enrolled actuary and the plan administrator and is timely if made by Dec. 31, 2021. 

Redesignation of plan year for contributions. Under Treas. Reg. §1.430(j)-1(b)(3)(iii)(B), a plan sponsor may choose to redesignate all or a portion of a contribution that was originally designated as applying for the plan year beginning in 2019 or 2020 as a contribution for the immediately succeeding plan year. Any redesignation made under the new guidance applies only if the contribution could have been designated as made for that immediately succeeding plan year.

Guidance Relevant to Code Section 436

Prospective application of change in benefit restrictions reflecting amendments made by the ARPA. If the plan’s adjusted funding target attainment percentage (AFTAP) has been certified for a plan year, then any subsequent change to that AFTAP (including a change that results from the changes in the minimum funding requirements made by the ARPA and any related elections made as described in the guidance) is subject to the rules regarding a change in AFTAP set forth in Treas. Reg. §1.436-1(h)(4)(iii) and (iv). 

A change in a plan’s AFTAP is treated as a deemed immaterial change if: (1) the plan’s AFTAP has been certified for a plan year beginning in 2020 or 2021 based on the minimum funding requirements not reflecting the amendments made by the ARPA, (2) subsequently, but no later than Dec. 31, 2021, a revised certification of the AFTAP for that plan year is made taking into account those changes to the minimum funding requirements and any related elections made as described in this notice, and (3) the plan sponsor does not elect to apply the change in AFTAP retroactively. The event that gives rise to this deemed immaterial change is the revised AFTAP certification. Accordingly, the plan must be operated in accordance with the revised AFTAP certification on a prospective basis.

Retroactive application of change in benefit restrictions reflecting changes under the ARPA. A change in a plan’s AFTAP is also treated as a deemed immaterial change if: (1) the plan’s AFTAP has been certified for a plan year beginning in 2020 or 2021 based on the minimum funding requirements not reflecting the amendments made by the ARPA, (2) subsequently, but no later than Dec. 31, 2021, a revised certification of the AFTAP for that plan year is made taking into account those changes to the minimum funding requirements and any related elections made as described in this notice, and (3) the plan sponsor elects to apply the AFTAP determined taking into account those amendments and elections retroactively. In that case, the operations of the plan must be conformed to that updated AFTAP for the period beginning when the AFTAP for the plan year was originally certified.

Recharacterization of contributions made to avoid benefit limitations. A contribution that was designated pursuant to Treas. Reg. §1.436(f)-1(f)(2)(ii)(B) as a contribution made to terminate or avoid the application of a Code Section 436 limitation for a plan year beginning in 2020 or 2021 may be redesignated as an employer contribution that is taken into account under Code Section 430 to the extent that contribution is not needed to terminate or avoid the application of that benefit restriction as a result of the application of the amendments made by the ARP.

Guidance Relevant to Elections Under Section 3608(b) of the CARES Act

If an election under Section 3608(b) of the CARES Act applies for a plan year beginning in 2020, then any application of the changes in the minimum funding rules made by the ARPA for that plan year will not affect the application of Code Section 436 for that plan year. However, if the changes made by the ARPA apply for purposes of determining the AFTAP for the plan year beginning in 2020, then under Notice 2020-61, those changes will affect the presumed AFTAP that applies for the plan year that follows the last plan year for which an election under Section 3608(b) of the CARES Act was made. 

If an election under Section 3608(b) of the CARES Act applies for a plan year beginning in 2020 and the plan sponsor does not elect to apply the pre-ARPA segment rates for that plan year (including for purposes of Code Section 436), then the plan sponsor may no longer wish to retain the election under Section 3608(b) of the CARES Act for that plan year. Under Notice 2020-61, the election under Section 3608(b) may be revoked. Notwithstanding Notice 2020-61, the new AFTAP arising from the revocation of the election under Section 3608(b) of the CARES Act and the application of the amendments made by the ARPA will be eligible to be treated as a deemed immaterial change.

Making Corrections 

Once a plan’s AFTAP for a plan year has been certified taking into account the amendments made by the ARPA, the plan administrator must take any corrective actions necessary to conform plan operations to this certified AFTAP, if applying this certified AFTAP would have changed the application of the Code Section 436 restrictions for the period beginning either: 

  • with the date of the immaterial event described in section VI.A of Notice 2021-48 (if the AFTAP certification applying the ARP segment rates applies prospectively under section VI.A of Notice 2021-48); or 
  • with the date the AFTAP for the year was first certified, as applicable (if the AFTAP certification applying the ARP segment rates applies retroactively under section VI.B of Notice 2021-48). 

If the AFTAP for a plan year beginning in 2020 has been changed, the period for potential correction also includes the period during the 2021 plan year before the AFTAP for that plan year beginning in 2021 was originally certified. 

If the corrective actions described in this section are taken to reflect the application of the new certified AFTAP, then the plan's operations are treated as having been consistent with the provisions of the plan document relative to the requirements of Code Section 436. For this purpose, the provisions of EPCRS apply except that a plan is eligible for self-correction under sections 7, 8, and 9 of Rev. Proc. 2021-30 without regard to the requirements of sections 4.03 (requiring a favorable IRS determination letter) and 4.04 (requiring certain established practices and procedures) of that revenue procedure. 

Consistent with Treas. Reg. §1.436-1(a)(4)(iii), if unpredictable contingent event benefits due to an event occurring during a plan year beginning in 2020 are not permitted to be paid because of restrictions under Code Section 436(b), but are later permitted to be paid as a result of a new certification of the AFTAP for the plan year reflecting the amendments made by the ARPA, then those unpredictable contingent event benefits must become payable, retroactive to the period those benefits would have been payable under the terms of the plan other than those implementing the requirements of Code Section 436(b)). Consistent with Treas. Reg. §1.436-1(a)(4)(iv), if a plan amendment with an effective date during a plan year beginning in 2020 does not take effect because of the limitations of Code Section 436(c), but is later permitted to take effect as a result of a new certification of the AFTAP for the plan year reflecting the amendments made by the ARP, then the plan amendment must automatically take effect as of the first day of that plan year (or, if later, the original effective date of the amendment). 

For any prohibited payment that was not permitted to be paid during a plan year beginning in 2020 because of the restrictions under Code Section 436(d), but is permitted to be paid as a result of a new certification of the AFTAP reflecting the amendments made by the ARP, the plan has taken adequate corrective action if it makes the prohibited payment available to participants or beneficiaries who would have been eligible for the prohibited payment (including a prohibited payment that is available on a restricted basis under Code Section 436(d)(3)) on or after the dates described in the first paragraph of section VI.E of Notice 2021-48. 

For any accruals that were not permitted during a plan year beginning in 2020 because of restrictions under Code Section 436(c), but are permitted as a result of a new certification of the AFTAP reflecting the amendments made by the ARPA, the plan has taken adequate corrective action if it restores benefits that accrue during the period that begins on the date described in the first paragraph of Section VI.E of Notice 2021-48. 

In the case of a participant or beneficiary who, as a result of any of the changes described in this section is entitled to (1) increased benefits, (2) benefits payable at a special early retirement date, or (3) benefits payable in a different form of payment (and who elects such different form of payment, with spousal consent, if applicable), the corrective action is to provide the benefit payments in the increased amount or other form of payment commencing with a new prospective annuity starting date. 

Changes to Reporting Requirements 

2019 plan year. The guidance contained in Notice 2021-48 makes the following changes to reporting requirements concerning the 2019 plan year. 

The amendments made by the ARPA may affect the plan’s minimum required contribution for the plan year beginning in 2019 if the election to use the 15-year amortization is made for that plan year. If that election is made for the 2019 plan year, and it changes the minimum required contribution already reported on a 2019 Schedule SB, then the 2020 Schedule SB should reflect the revised minimum required contribution for the 2019 plan year. Alternatively, an amended Form 5500, Form 5500-SF, or Form 5500-EZ, for the 2019 plan year, with a revised Schedule SB, may be filed. 

If any contributions originally designated as applying for the 2019 or 2020 plan years are redesignated as for a different year, an amended Form 5500, Form 5500-SF or Form 5500-EZ with an amended Schedule SB must be filed for (1) the plan year for which the contributions are redesignated, and (2) the year for which the contributions were originally designated. 

If a plan sponsor: 

  • Makes an election to revoke some or all of an earlier election to use the prefunding balance or funding standard carryover balance to offset a minimum required contribution for the 2019 plan year, then the reporting of the amount of the prefunding balance or funding standard carryover balance used for the 2019 plan year entered on line 8 of the Schedule SB for the 2020 plan year should take the revocation into account. 
  • Reported an unpaid minimum required contribution on a Schedule SB, the plan sponsor filed a Form 5330 to report and pay the excise tax under Code Section 4971 and the unpaid minimum required contribution is subsequently reduced or eliminated as described in this notice, then the plan sponsor may file an amended Form 5330 to obtain a refund of the overpayment of the excise tax. 
  • Expects that an unpaid minimum required contribution shown on the Schedule SB for the 2019 plan year will be eliminated by the amendments made by the ARPA, Form 5330 should not be filed. 
  • Expects to have an unpaid minimum required contribution for the plan year once the amendments made by the ARPA are reflected but did not file a Form 5330 when due, the plan sponsor should file a Form 5330 reflecting the corrected unpaid minimum required contribution and pay the excise tax under Code Section 4971 as soon as possible.

2020 plan year. The guidance contained in Notice 2021-48 makes the following changes to reporting requirements concerning the 2020 plan year.

The amendments made by the ARPA for the 2020 plan year may affect the plan’s minimum required contribution for the 2020 plan year, and any elections made under the ARP that affect the minimum required contribution for the 2020 plan year should be reflected in the Schedule SB for the 2020 plan year. 

The IRS expects that most Schedules SB for the 2020 plan year will not have been filed before the issuance of Notice 2021-48, but some Schedules SB may have been filed. If a Schedule SB has been filed for the 2020 plan year that is inconsistent with the guidance in Notice 2021-48 (or if the plan sponsor makes an election pursuant to this notice that affects information reported on the Schedule SB for the 2020 plan year and that was not reflected on the filed Schedule SB), an amended Form 5500, Form 5500-SF or Form 5500-EZ, for the 2020 plan year, with a revised Schedule SB, may be filed.

If the Schedule SB that has been filed for the 2020 plan year has become inaccurate because of amendments the ARPA made, the guidance provided in Notice 2021-48 or any elections under it, then the rules of Section VIII of Notice 2021-48 should be applied for purposes of completing the Schedule SB for the 2021 plan year, but substituting 2020 for 2019 and 2021 for 2020.

If a Form 5500, Form 5500-SF or Form 5500-EZ is filed for the plan year beginning in 2020, and if line 21a of the Schedule SB reflects the segment rates determined without regard to the ARPA, then the plan sponsor is deemed to have elected to apply the pre-ARPA segment rates for purposes of Code Sections 430 and 436 for that plan year. If this deemed election is made by a filing on or before Oct. 15, 2021, then the election may be revoked by filing, no later than Dec. 31, 2021, an amended Form 5500, Form 5500-SF, or Form 5500-EZ for the plan year, with a revised Schedule SB that reflects the use of the ARP segment rates. If the plan sponsor revokes the deemed election, the plan sponsor may also elect to apply the pre-ARP segment rates only for purposes of Code Section 436.