On July 22, 2021, the American Academy of Actuaries (“the Academy”) provided comments to the Department of Treasury and the IRS on temporary funding relief under the American Rescue Plan Act of 2021 (ARPA). The comments pertain to interpretive issues and considerations for the temporary funding relief provisions outlined in sections 9701, 9702, and 9703 of ARPA as follows:
Section 9701. Temporary Delay of Designation of Multiemployer Plans as in Endangered, Critical, or Critical and Declining Status
The Academy proposes that the IRS issue future guidance and/or clarification on the following issues:
- Under section 432 of the Internal Revenue Code, plan sponsors may elect to “pause” their plan’s status for the first plan year beginning March 1, 2020, and ending February 28, 2021, or for the next plan year. Since ARPA section 9701 broadly refers to section 432(b((3) of the IRC, the position of the AAA is that a plan sponsor’s election to “pause” applies to both the plan’s zone status and the certification as to whether the plan is making progress toward its funding improvement or rehabilitation plan.
- For a plan in critical status, the plan sponsor is not required to update the rehabilitation plan for the year relief is elected, and the relief provisions provide an exemption regarding potential excise taxes if the plan has an accumulated funding deficiency. The statute, however, does not include a similar exemption for a plan in critical status that is certified as not making scheduled progress in meeting the requirements of its rehabilitation plan for three years in a row.
- The extent to which an election of temporary funding relief affects a plan’s eligibility for special financial assistance under section 9704 of ARPA.
- A plan that would otherwise be in critical status may have already begun assessing surcharges on employer contributions before the plan sponsor elects to freeze the prior year status. It is unclear whether the plan in this situation would be required to refund any surcharges it had already collected.
- Some plans sponsors are considering using this relief provision to remain in critical status for an additional plan year, which could provide bargaining parties more time to adopt a rehabilitation plan that includes a reduction in adjustable benefits. Delaying emergence could also avoid a situation in which a plan passes through endangered status for one year before eventually returning to the “green zone.” Clarification is needed as to whether plan sponsors can use relief provisions in this manner.
- Notice 2009-31 detailed the process for electing to freeze zone status (as well as to extend a funding improvement period or rehabilitation period) under WRERA, including the content for the submission to the IRS. The Academy encourages the IRS to issue similar guidance on the election requirements for relief under ARPA.
- Notice 2009-31 also detailed the content of the notice that plans electing a freeze must send to participants, beneficiaries, the bargaining parties, PBGC, and the secretary of labor. The Academy encourages the IRS to issue similar guidance on the notice requirements for relief under ARPA.
Section 9702. Temporary Extension of the Funding Improvement and Rehabilitation Periods for Multiemployer Pension Plans in Critical and Endangered Status for 2020 or 2021
- The statutory title of this section begins with the words “temporary extension,” which could be read to imply the extension will expire. Alternatively, the word “temporary” could be read to mean the extended funding improvement period or rehabilitation period will not continue indefinitely and will eventually end. Clarification is needed for any ambiguities related to this point in the IRS’ guidance.
- The statutory language states that in order to be eligible for relief under this section, a multiemployer plan must be in endangered status or critical status. To avoid doubt, IRS may wish to clarify in its guidance that seriously endangered plans are also eligible for relief under this section.
- The Academy encourages the IRS to clarify through guidance how the availability of the five-year extension is affected by a change in a plan’s zone status, as well as any election under section 9701.
- The Academy encourages the IRS to clarify through guidance how a five-year extension under section 9702 of ARPA interacts with a three-year extension that was previously elected under WRERA. The Academy notes that the statutory language references an extension of the applicable period by five years, rather than specifying the duration of the period after extension.
- Notice 2009-31 detailed the process for electing temporary funding relief under WRERA, including the content for the submission to the IRS, and how to coordinate elections to freeze zone status with elections to extend a funding improvement period or rehabilitation period. The Academy encourages the IRS to issue similar guidance on the election requirements for relief under ARPA.
- There is no statutory notice requirement associated with an election to extend a funding improvement period or rehabilitation period under this section. The IRS may wish to consider providing guidance for updating the applicable funding improvement plan or rehabilitation plan to acknowledge the election of the extension.
Section 9703. Adjustments to Funding Standard Account Rules
Most of the temporary funding relief provisions afforded by section 9703 of ARPA are similar to the funding relief provisions in the Pension Relief Act of 2010 (PRA). These provisions include the extended amortization of a plan’s eligible net investment losses in the funding standard account and expanded smoothing period for a plan’s actuarial value of assets. The IRS could issue guidance similar to Notice 2010-83. However, some provisions in section 9703 of ARPA do not have a counterpart in PRA, necessitating IRS guidance as follows:
Other Losses Related to COVID-19/Reductions in Contributions. ARPA allows an eligible plan sponsor to elect to amortize “other losses related to the virus SARS–CoV–2 or coronavirus disease 2019 (COVID–19) (including experience losses related to reductions in contributions, reductions in employment, and deviations from anticipated retirement rates, as determined by the plan sponsor)” over an extended time period in the funding standard account.
However, contributions—whether higher or lower than expected—are directly reflected in a plan’s credit balance (or funding deficiency) and usually do not generate a gain or loss in the funding standard account. As a result, there is discussion around how to create losses in the funding standard account related to reductions in contributions.
Under the statute, the IRS is required to rely on the plan sponsor’s calculations. The Academy believes it would be helpful for the IRS to provide an approved method for determining losses related to reductions in contributions and proffers a methodology:
For purposes of calculating the experience loss for a plan year, calculate the plan’s expected asset value using expected contributions; actual contributions would be included in the plan’s actual asset value. The difference in actual and expected contributions (with interest) will create an experience loss that can be amortized in the funding standard account in the following plan year.
Coordination with Special Financial Assistance. The temporary funding relief provisions in section 9703 of ARPA do “not apply to a plan to which special financial assistance is granted under section 4262 of the Employee Retirement Income Security Act of 1974.” It is important to note that some plan sponsors may elect to apply the funding relief provisions in this section and subsequently be granted special financial assistance.
For example, consider a hypothetical plan sponsor that elects to apply the funding relief provisions to losses occurring during the plan year beginning April 1, 2019, and ending March 31, 2020. At the time of election, the plan is not eligible for special financial assistance, and the plan sponsor does not anticipate that the plan will become eligible for special financial assistance in the future. However, due to unanticipated poor future experience, the plan eventually becomes eligible for and is granted special financial assistance.
The Academy encourages the IRS to consider providing guidance on how plans in this or a similar situation should handle their prior elections for temporary funding relief. For example, the IRS may clarify through guidance how to unwind the extended loss recognition in the funding standard account if a plan is later granted special financial assistance. Guidance should also specify whether the unwinding of relief should be made prospectively or retroactively.
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