Updated: March 30, 2020
What began as a viral outbreak in China has come around the globe and arrived in our states, counties and cities. As the coronavirus (COVID-19) continues to impact the stock market and organizations around the world, it is important to consider how recent market fluctuations may affect your retirement plan as well as offer some options you may have to minimize these effects on your business.
Defined Benefit Plan Freezes
Defined benefit and cash balance plans are subject to minimum funding requirements, and the investment risk is on the plan sponsor, meaning that investment returns may have an impact on required contributions from year to year. A plan can be amended to lower or freeze future benefits to participants, but the plan sponsor may still have a required contribution due to investment experience.
If you sponsor a defined benefit or cash balance plan, you may have a larger than anticipated contribution and may want to consider freezing the plan’s benefit formula now to minimize this.
In light of the current economic environment, many plan sponsors may not be in a position to continue the ongoing level of contributions they have made in the past and may want to consider freezing their plan’s benefit formula to minimize upcoming contribution requirements.
Note: Freezing the plan’s benefit formula will minimize future contributions, but contributions required for a prior year cannot be eliminated.
Late Defined Benefit Contributions
Some plans may be required to make quarterly contributions throughout the year based on their recent funded status. Failure to make these contributions in a timely manner will results in additional interest charges, increasing the amount necessary to meet annual funding requirements, and may result in additional reporting and notice requirements.
Additionally, failure to make the plan’s minimum required contribution by the final contribution deadline will result in an excise tax paid to the IRS equal to 10% of the missed contribution for each year until the missed payment is corrected. This may also result in additional reporting and notice requirements. Some plans may be subject to a lien on company assets.
Recent legislation in response to COVID-19 provides relief on the funding deadline for defined benefit plans. The deadline for all required contributions due in calendar year 2020 has been extended to January 1, 2021.
Note: Contributions are charged interest through the date of deposit so delaying a contribution will result in an increased interest charge.
Partial Plan Terminations
Employers who have significant staff reduction or layoffs may become subject to IRS partial plan termination rules. In general, the IRS defines a partial plan termination as a 20% or greater decrease in plan participants during a 12-month period, normally the plan year. If a partial plan termination occurs, all affected participants who terminated during the 12-month period must become 100% vested. Partial plan termination rules are complex and subject to a facts and circumstances determination. If your organization is experiencing significant employee turnover, it is important to work with your plan administrator to understand how this affects you. It is anticipated that these rules will also be modified in the near future to provide clarity and relief to plan sponsors. Your retirement plan consultant can provide an update if and when this occurs.
In order to be deductible, employer contributions must generally be deposited prior to the extended due date of the company’s tax return, including extensions. Federal tax return deadlines for 2019 tax years were recently extended to July 15. As a result, the deadline for contributions to be deposited to a plan are also extended.
Note: Defined benefit plans are additionally subject to a minimum funding deadline of 8-½ months following the plan year (September 15 for calendar year plans) regardless of the tax return deadline.
For More COVID-19 Information
We know you’re concerned about the impacts of COVID-19 on your retirement plan and your employees, but CBIZ Retirement Plan Services is here to help guide you through these turbulent times. Please contact the CBIZ RPS Technical Resource Center with any questions or concerns you have.
CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investment advisory and investment management services offered through CBIZ Investment Advisory Services, LLC, Registered Investment Adviser. Investments, investment advisory and investment management services may also be offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.