Defined benefit plan

Congress Votes to Extend Paycheck Protection Program

A proposal to extend the Paycheck Protection Program (PPP) through the end of May has passed the Senate by a vote of 92-7. The PPP was set to expire on March 31, 2021, just weeks after changes were made to expand availability to certain small businesses. The House had voted earlier this month to pass the bill, and it now heads to the President for signature.

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security Act. The loans are meant to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include wages and salaries, as well as employer contributions to defined contribution and defined benefit retirement plans. Expenses for providing group healthcare coverage—including payment of insurance premiums—can also be included.


Washington Pulse: American Rescue Plan Act Provides Coronavirus Relief

President Biden has signed legislation that funds another round of assistance as the nation copes with the health and economic effects of the coronavirus pandemic. Several previous bills in 2020 provided direct cash benefits to Americans, created a small business lending program to help employers retain employees, and provided enhanced access to tax-favored retirement savings.

This latest round of relief, a $1.9 trillion stimulus bill known as the American Rescue Plan Act of 2021 (ARPA), contains a third round of direct payments to Americans, funding to help hard-hit industries, and many other provisions—including some that will affect health plans and defined benefit plans.

Health Plan Relief

ARPA’s health-related provisions are meant to help individuals who have suffered a job loss or a reduction of hours to maintain their health insurance coverage. The following text summarizes the most important health plan-related provisions.

COBRA Continuation Coverage Premium Assistance

ARPA provides premium assistance for COBRA continuation coverage. This type of coverage allows eligible individuals who lose their health benefits to continue participating in their group health plan for a limited period of time. The premium assistance is designed to help both employees and employers. For example, premium assistance can help former employees keep their employer health plan coverage at a critical time. COBRA coverage can be prohibitively expensive—individuals may have to pay up to 102 percent of the cost to the plan—which discourages enrollment in many circumstances. If the premium is subsidized, employees are more likely to opt for COBRA coverage. When faced with a serious medical event, individuals and families who have this coverage can avoid potentially catastrophic financial consequences.

Premium reimbursement can help employers by ensuring increased COBRA coverage enrollment. Having a large number of COBRA enrollees can help employers spread costs over a greater number of healthy individuals who will pay premiums without having significant claims (as opposed to having only individuals with substantial medical costs enrolled in COBRA coverage).

Premium Assistance Basics

ARPA effectively provides free COBRA coverage by creating a subsidy that pays 100 percent of the COBRA premiums. Normally, the individual who is enrolled in COBRA coverage would need to pay these premiums. ARPA authorizes payment for premiums arising from COBRA coverage during the period beginning on April 1, 2021, and ending on September 30, 2021. This premium assistance is available only for certain categories of individuals who are enrolled in COBRA coverage during this period. These “assistance eligible individuals” include the following persons:

  • Employees who are eligible for COBRA coverage because of involuntary termination of employment for reasons other than gross misconduct. (A key feature of the relief is that employees who voluntarily terminate are not eligible for the subsidy.)
  • Employees who are eligible for COBRA coverage because of a reduction in hours that causes them to lose eligibility for their employer’s health plan.
  • Dependents of the employees who have lost eligibility for the reasons indicated above.

COBRA-eligible individuals who meet these criteria and who either 1) have not yet enrolled in COBRA coverage, or 2) had already enrolled in COBRA coverage but discontinued their coverage, have an additional 60 days to elect COBRA coverage and to take advantage of the subsidy. The 60-day enrollment period will begin on the date that the individual receives an ARPA-required notice that explains both the subsidy itself and the individual’s extended opportunity to elect COBRA continuation coverage.

The subsidy is “paid” through a tax credit that is provided to the employer sponsoring the health plan or to the insurer providing the coverage when an individual enrolls in COBRA coverage.

ARPA also permits employers—at their discretion—to allow individuals who are eligible for the subsidy to enroll in different coverage also offered by the employer, as long as the other coverage is also offered to other similarly situated active employees and

  • does not exceed the premium cost of the health coverage initially enrolled in,
  • does not provide excepted benefits only, and
  • is not a qualified small employer health reimbursement arrangement (QSEHRA) or a flexible spending arrangement (FSA).

Premium Assistance Notification

Because awareness of the subsidy is critical to increasing COBRA enrollment, employers must communicate the availability of premium assistance and the option to enroll in different coverage (if allowed). Individuals must receive the additional notification within 60 days of becoming eligible. Employers may provide the disclosures by amending existing notices or by including a separate document with the COBRA election notice.

Within 30 days following the bill’s enactment, the Departments of Labor (DOL), Treasury, and Health and Human Services must issue model notice language in order to help employers comply with the COBRA premium assistance notification requirements. Specifically, the model notices must include

  • the forms necessary to establish eligibility for premium assistance;
  • the plan administrator’s or other party’s contact information—including name, address, and telephone number;
  • a description of the extended election period provided;
  • a description of the qualified beneficiary’s penalty for failure to notify the plan if eligibility for premium assistance ceases;
  • a description of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the reduced premium; and
  • a description of the qualified beneficiary’s option to enroll in different coverage (if the employer permits).

Expiration of Premium Assistance

Eligible individuals will generally receive subsidized premiums for coverage beginning on April 1, 2021, and ending on September 30, 2021. Individuals will become ineligible for premium assistance during that period if they

  • reach the maximum period for COBRA coverage, or
  • become eligible to be covered under another group health plan.

For individuals who reach the maximum period of COBRA coverage, a notice must be provided 15 to 45 days before the expiration of premium assistance. The notice must prominently identify the expiration date. To help employers comply with the requirement, the DOL must produce model notices to communicate the expiration of premium assistance 45 days following ARPA’s enactment.

If, during the period of COBRA coverage, individuals receiving the subsidy become eligible for coverage under another health plan, they must notify the plan that they are no longer eligible for premium assistance. Failure to notify the plan will result in a $250 penalty. If an individual intentionally fails to notify the plan, the penalty could be up to 110 percent of the premium assistance amount. The penalty does not apply if there is a reasonable cause for the failure to notify.

Tax Provisions for Premium Assistance

The premium assistance amount will not be included in the individual’s gross income for federal tax purposes.

Defined Benefit Plan Relief

ARPA’s retirement-related provisions are designed to provide relief to single-employer and multiemployer defined benefit (DB) plans. Following is a high-level summary of these provisions.

Amortization Relief for Single-Employer DB Plans

ARPA treat a single-employer DB plan as having no funding shortfall bases, and no shortfall installments from the bases, in prior years and spreads out funding shortfall installments to 15 years. These changes have the effect of reducing an employer’s minimum required contributions.

Extension of Pension Funding Stabilization Percentages for Single-Employer DB Plans

The three segment rates used for the applicable interest rates are provided with minimum and maximum percentages, effectively stabilizing the rates to be applied in future years. ARPA provides funding relief in a time of lower interest rates by setting the minimum percentage at a five percent “floor.” A plan can elect not to have this provision apply in plan years before 2022.

Multiemployer DB Plan Relief

ARPA provides relief for certain underfunded multiemployer plans for 2020 and 2021 plan years—including retention of the preceding plan year’s plan status (endangered, critical, etc.), extension of the plan’s funding improvement period or rehabilitation period (whichever is applicable) by five years, and use of a 30-year amortization base when amortizing investment losses.

Special Assistance Program for Multiemployer Plans at the Pension Benefit Guaranty Corporation (PBGC)

A special fund will be created for struggling multiemployer plans that are most vulnerable. The fund will provide financial assistance in the form of a lump-sum payment sufficient to provide benefits through 2051. Plans receiving this assistance must comply with additional conditions, including reinstating previously suspended benefits. For plan years beginning after December 31, 2030, multiemployer plan premiums to the PBGC will increase to $52 per participant.

Community Newspaper DB Plans

Certain community newspapers with DB plans can elect to take advantage of more favorable interest rates and amortization periods. They can also avoid some at-risk DB plan requirements.

Next Steps

Employers with defined benefit plans should start reviewing the new rules so they can take full advantage of the relief provided by the American Rescue Plan Act. Single-employer DB plans may want to consider whether to opt into or out of the relief. The stabilization percentages will automatically apply for 2020 if employers don’t opt out.

Employers with health plans should

  • work with COBRA service providers (if applicable) to meet the new COBRA notification requirements,
  • understand how premium amounts are reimbursed through the payroll tax credit process, and
  • coordinate with payroll providers and tax professionals to help ensure proper documentation and tax payments.

Ascensus will closely monitor all future ARPA-related guidance. Visit ascensus.com for the latest updates.

 

Click here for a printable version of this issue of the Washington Pulse.


House Passes Amended COVID-19 Relief Bill; President to Sign

Following Senate passage on Saturday, the House of Representatives has passed by a vote of 220-211 the American Rescue Plan Act of 2021 to provide additional relief to address the continued impact of COVID-19. Included in the package are several items that would affect retirement and health benefits.

Defined Benefit Pension Plan Relief

  • Extends the single-employer plan funding shortfall amortization period from 7 to 15 years, to be applied to all plans beginning with 2022 plan years and, by election, retroactive to 2019 plan years. The amended bill provides plan sponsors with more flexibility than earlier versions which would have required use of the 15-year amortization schedule starting with 2020 plan years.
  • Extends single-employer pension plan funding stabilization percentages, as follows.
  • The 10 percent interest rate corridor would be reduced to 5 percent, effective in 2020.
  • The phase-out of the 5 percent corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30 percent in 2030, where it would remain.
  • A 5-percent floor would be placed on the 25-year interest rate averages.
  • The amended bill now allows plan sponsors to elect not to apply the updated percentages until 2022.
  • Extends SECURE Act funding relief for certain community newspapers to additional community newspapers
  • Permits a temporary delay in the designation of a multiemployer (union) plan as being in endangered, critical, or critical-and-declining status
  • Permits a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by five years
  • Permits multiemployer plans to amortize investment losses over 30, rather than 15, years, as was granted to plans for 2008 and 2009 losses (for plan years ending on or after February 29, 2020)
  • Creates a financial assistance program under which cash payments would be made by the Pension Benefit Guaranty Corporation to financially troubled multiemployer plans to continue paying retiree benefits; such payments are to be made by Treasury transfer

Absent from the final bill was a provision that would have frozen cost-of-living adjustments (COLAs) for the annual additions limit and compensation cap after 2030.

Health Benefit Provisions

The American Rescue Plan Act also contains provisions to assist employees who have lost employer-provided health insurance benefits and employers that have provided benefit continuation assistance.

  • Provides premium assistance to cover 100 percent of the cost of COBRA continuation coverage for eligible individuals and families from April 1, 2021, through September 30, 2021. This is an increase from prior proposals for premium assistance that would have covered 85 percent of the cost of continuation coverage. Premium assistance is available if health coverage was lost due to involuntary termination of employment or a reduction in hours. It is not available when an employee has a voluntary termination of employment.
  • Extends the COBRA election period for individuals who had not currently enrolled in COBRA who are otherwise assistance-eligible individuals.
  • Requires health plans to provide additional notifications on the availability of the premium assistance and extended election periods; specifies that the Department of Labor must draft and issue model notice language within 30 days following the enactment of the Act.
  • Provides a refundable payroll tax credit to reimburse employers and plans that paid a premium on behalf of an assistance-eligible individual
  • For the 2021 plan year, the dependent care flexible spending arrangement (FSA) contribution limit will increase from $5,000 to $10,500 (half that dollar amount per parent if married filing separately)

President Biden is expected to sign the bill Friday.


House Passes COVID-19 Relief Bill

The House of Representatives has passed by a vote of 219-212 the American Rescue Plan Act of 2021 to provide additional relief to address the continued impact of COVID-19. Noteworthy retirement and health provisions include the following.

  • Freezing of cost-of-living adjustments after 2030 for retirement plan annual additions and compensation cap limits
  • Extending defined benefit single-employer plan funding shortfall amortization period from 7 to 15 years beginning with 2020 plan years
  • Extending single-employer pension plan funding stabilization percentages, with the 10 percent interest rate corridor reduced to 5 percent effective in 2020 and phase-out of the 5 percent corridor delayed until 2026
  • Health benefit provision granting premium assistance to cover 85 percent of the cost of COBRA continuation coverage, and extending the COBRA election period
  • Refundable tax credit reimbursing employers and plans that paid a subsidized portion of the premium on behalf of an assistance-eligible individual

The Senate is likely to take up and debate later this week a version of the bill that, once passed, would need to return to the House. The Senate parliamentarian is also expected to weigh in on whether multiemployer pension bailout relief and premium subsidies for laid-off workers through COBRA can be included in the bill. While legislation created through the budget reconciliation process can be passed through the Senate with a simple majority vote—additional restrictions apply—including that provisions be predominantly fiscal in nature.


Pandemic Relief Package Includes Multiple Retirement, Health Benefit Provisions

Legislation proposed by the House Ways and Means Committee to provide COVID-19 pandemic relief and economic stimulus includes several items that would affect retirement and health benefits. Among them are the following.

COLA Freeze for Certain Retirement Plan Limitations

The legislation would freeze cost-of-living adjustments (COLAs) for the following retirement plan limitations after 2030, to reduce federal tax expenditures in keeping with the budget reconciliation process under which this legislation is being managed.  (The freeze would not apply to collectively bargained plans.)

  • Annual additions limit for defined contribution plans ($58,000 for 2021)
  • Annual additions limit for defined benefit pension plans ($230,000 for 2021)
  • Compensation cap for determining retirement plan allocations ($290,000 for 2021

Defined Benefit Pension Plan Relief

  • Extends the single-employer plan funding shortfall amortization period from 7 to 15 years, to be applied to all plans beginning with 2020 plan years and, by election, 2019 plan years
  • Extends single-employer pension plan funding stabilization percentages, as follows
  • The 10% interest rate corridor would be reduced to 5%, effective in 2020.
  • The phase-out of the 5% corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30% in 2030, where it would remain.
  • A 5% floor would be placed on the 25-year interest rate averages.
  • Extends the SECURE Act funding relief for certain community newspapers to additional community newspapers
  • Permits a temporary delay in designation of a multiemployer (union) plan as being in endangered, critical, or critical-and-declining status
  • Permits a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by 5 years
  • Permits multiemployer plans to amortize investment losses over 30 rather than 15 years, as was granted to plans for 2008 and 2009 losses (for plan years ending on or after February 29, 2020)
  • Creates a financial assistance program under which cash payments would be made by the Pension Benefit Guaranty Corporation to financially troubled multiemployer plans to continue paying retiree benefits, such payments to be made by Treasury transfer

Health Benefit Provisions

The legislation also contains provisions to assist employees who have lost employer-provided health insurance benefits and employers that have provided benefit continuation assistance.

  • Provides premium assistance to cover 85% of the cost of COBRA continuation coverage for eligible individuals and families, effective the first of the month after enactment, through September 31, 2021
  • Extends the COBRA election period
  • Provides a refundable payroll tax credit to reimburse employers and plans that paid a subsidized portion of the premium on behalf of an assistance-eligible individual

A vote by the full House of Representatives is expected by the week of February 22. If passed, the legislation would be referred to the Senate for its consideration.


Legislation Introduced to Aid Struggling Defined Benefit Plans

House Ways and Means Committee Chairman Richard Neal (D-MA) has introduced in the initial days of the 117th Congress the Emergency Pension Plan Relief Act (EPPRA) of 2021. Rep. Neal has previously introduced legislation to aid struggling defined benefit pension plans, including the Rehabilitation for Multiemployer Pensions Act—also known as the Butch Lewis Act—during the 116th Congress. EPPRA has some features in common with that legislation.

EPPRA has limited provisions addressing the solvency of single employer defined benefit pension plans. They include allowing certain single employer plan funding shortfalls to be amortized over 15 years instead of 7 years and extending pension funding stabilization percentages for single employer pension plans.

Among EPPRA’s multiemployer pension plan provisions are the following.

  • Expand existing Pension Benefit Guaranty Corporation (PBGC) authority to allow the agency to provide financial assistance to certain qualifying plans that are in critical or declining status, to help them maintain solvency and provide benefits.
  • Following enactment, deny new approvals for plans seeking to suspend benefits under the Multiemployer Pension Reform Act.
  • Delay future designations of multiemployer plans as being in endangered, critical, or critical-and-declining status, in order to provide flexibility and ease administrative burdens during the coronavirus (COVID-19) public health crisis.
  • Provide certain multiemployer plans in endangered or critical status an extension of their rehabilitation periods, giving them additional time to improve contribution rates, limit benefit accruals, and maintain plan funding.
  • Allow plans that experienced investment losses in 2019 and 2020 to amortize such losses over an extended period of time.
  • Double certain PBGC benefit guarantees for multiemployer plan participants and beneficiaries.

DOL Guidance to Aid Retirement Plans Facing Missing Participant Issues

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has released a three-part guidance package to assist retirement plan fiduciaries in dealing with issues of missing or unresponsive participants. These issues typically involve terminated participants who have vested benefits remaining in an employer-sponsored plan, or terminating or abandoned plans. An EBSA news release accompanies the guidance package.

The guidance package consists of the following components.

 

Best Practices Guidance

The “Missing Participants – Best Practices for Pension Plans” element of the guidance describes steps that fiduciaries of retirement plans—including both defined benefit and defined contribution plans, such as 401(k) plans—can take to avoid incidents of missing or unresponsive participants, and to locate those with benefits due them that have not responded to efforts to locate them. This element also describes documentation that should be retained by retirement plans to show evidence of due diligence in meeting this fiduciary obligation.

 

Compliance Assistance Release 2021-01

The Compliance Assistance Release No. 2021-01—addressed to EBSA regional directors—describes the investigative and enforcement approach that the agency will take in assessing whether a defined benefit pension plan fiduciary has met its obligations to find and convey plan benefits that are due terminated participants. It is intended to guide the EBSA’s regional offices in facilitating voluntary compliance by retirement plan fiduciaries under the agency’s Terminated Vested Participants Project.

 

Field Assistance Bulletin (FAB) 2021-01

FAB 2021-01 describes the DOL’s temporary enforcement policy with respect to retirement plans’ use of a recently provided option that allows participant benefits in terminating or abandoned defined contribution plans to be transferred to the Pension Benefit Guaranty Corporation (PBGC) under its Defined Contribution Missing Participants Program.

There is currently a regulatory safe harbor for participant benefits in terminating or abandoned defined contribution plans to be transferred to IRAs, and—in limited circumstances—to be transferred to state unclaimed property funds. The EBSA envisions expanding this regulatory safe harbor to include the transfer of such benefits to the PBGC under its Defined Contribution Missing Participants Program.

Pending the expansion of this safe harbor, FAB 2021-1 states that it will not pursue violations against responsible plan fiduciaries of terminating defined contribution plans or qualified termination administrators (QTAs) of abandoned plans who transfer benefits to the PBGC in accordance with its missing participant regulations.


PBGC Final Rule for Computing Union DB Plan Withdrawal Liability

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations that amend earlier agency guidance on the determination of withdrawal liability when a participating employer withdraws from a multiemployer (union) defined benefit pension plan. The regulations being amended are entitled, Allocating Unfunded Vested Benefits to Withdrawing Employers and Notice, Collection and Redetermination of Withdrawal Liability.

The amendments reflect certain statutory changes with respect to multiemployer plan withdrawal liability, including statutory changes in 2006 and 2014. They affect the determination of a withdrawing employer’s liability and annual withdrawal liability payment amount when the plan has had benefit reductions, benefit suspensions, surcharges, or contribution increases that must be disregarded. These amendments also provide simplified withdrawal liability calculation methods.

 


IRS Revenue Ruling Addresses Tax Benefits Related to Paycheck Protection Program Loans

The IRS has issued Revenue Ruling (Rev. Rul.) 2021-02, guidance that addresses certain tax benefits associated with employer loans under the federal Paycheck Protection Program (PPP), an element of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The PPP is a Small Business Administration lending program created by the CARES Act to help small employers meet payroll and other expenses, as businesses and the nation dealt with the economic effects of the coronavirus (COVID-19) pandemic. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group healthcare coverage, including payment of insurance premiums. If certain conditions are met, PPP loans can be forgiven and treated as a grant.

Rev. Rul. 2021-02 addresses questions related to other potential tax ramifications and/or benefits associated with expenses for which PPP loans are taken, including loans that are ultimately forgiven.

Rev. Rul. 2021-02 retroactively amends the CARES Act, as well as supersedes post-CARES Act guidance (Notice 2020-32 and Rev. Rul. 2020-27). In doing so, it provides that no amount will be included in the gross income of a PPP participant as a result of a PPP loan being forgiven. No tax deduction for such PPP-related expenses is to be denied, and no other tax benefit reduced, as a result of that exclusion from gross income.