Pension Benefit Guaranty Corporation Issues Additional Guidance on Defined Benefit Plan Funding Relief Enacted by the CARES Act

The U.S. Coronavirus Aid, Relief and Economic Security Act (the CARES Act) provided relief for sponsors of single-employer defined benefit pension plans in recognition of the economic impact of the COVID-19 pandemic. Specifically, the CARES Act permits plan sponsors to suspend minimum required contributions to their plans during 2020.

The Pension Benefit Guaranty Corporation (the PBGC), the federal agency responsible for insuring most private sector pension plans, recently published a series of questions and answers that provide further guidance on how it will implement the relief enacted by the CARES Act and, more broadly, how it will operate during the current economic downturn.

Making required contributions after their original due date but no later than January 1, 2021, will not give rise to a reportable event

Sponsors of single-employer pension plans are required to make minimum contributions to their plans during each plan year. The entire amount of the contribution is generally due by September 15, but sponsors of underfunded plans must make quarterly installment payments throughout the year. The CARES Act suspended the due date of all required pension contributions (including quarterly installment payments) until January 1, 2021, whereupon all suspended contributions will be due with interest.

Typically, if a pension plan sponsor misses a required minimum contribution, it must report such missed contribution to the PBGC unless a waiver applies. This reporting obligation allows the PBGC to monitor the financial health of private-sector pension plans in connection with its role as the insurer of such plans.

The PBGC confirmed that if a plan sponsor makes its required contribution by January 1, 2021, no reportable event will occur. If, however, the plan sponsor fails to make the entire contribution, including interest, by such date, the event must be reported in accordance with the PBGC’s normal procedures.

Calculating variable rate premiums

The PBGC collects premium payments from pension plan sponsors in order to fund benefit payments for participants in underfunded terminated plans. For ongoing underfunded plans, premiums include a variable rate premium that, for calendar-year plans, generally must be paid by October 15 of each year. The variable rate premium is determined based on a plan’s unfunded vested benefits. The determination of such benefits may include any required contributions made to the plan before the date that the premium is paid.

As a result of the contribution suspension period authorized by the CARES Act, many plan sponsors will make no required contributions prior to October 15, 2020. Thus, such plan sponsors will not be able to take into account the value of their required contributions when calculating the plan’s variable rate premium. The PBGC confirmed that it will not permit premiums to be recalculated once contributions are made and will not offer a refund to plan sponsors whose required contributions would have resulted in a lower premium had they been made prior to the due date.

Plan sponsors that owe a variable rate premium in 2020 should consult with the plan’s actuaries to determine whether making their required contributions prior to the premium due date would decrease the amount owed.

Distress terminations and the PBGC Early Warning Program

In addition to the guidance above, the PBGC provided some updates on how it will operate in light of the current economic environment. In particular, the PBGC made the following statements:

• It will continue to process distress termination applications during the COVID-19 pandemic but encourages plan sponsors to schedule a prefiling consultation prior to submitting an application given the current economic uncertainty. Where appropriate, the PBGC will continue to consider involuntary plan terminations on a case-by-case basis.

• It will continue to review the funding status of pension plans and request information from plan sponsors under its Early Warning Program.

• It will work with plan sponsors that owe a termination liability in 2020 to resolve such liability, considering their ability to pay based on the facts and circumstances of each case.