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IRS Notice 2021-48 Provides Guidance on Single-Employer Defined Benefit Plan Funding Under ARPA-21
Practical Law Legal Update w-032-1476 (Approx. 5 pages)
IRS Notice 2021-48 Provides Guidance on Single-Employer Defined Benefit Plan Funding Under ARPA-21
by Practical Law Employee Benefits & Executive Compensation
| Published on 04 Aug 2021 • USA (National/Federal) |
The Internal Revenue Service (IRS) has issued Notice 2021-48, which provides guidance under the American Rescue Plan Act of 2021 (ARPA-21) provisions that changed certain funding rules for single-employer defined benefit plans. Specifically, Notice 2021-48 addresses Sections 9705 and 9706 of ARPA-21, which provide for an extended amortization period and enhanced stabilization of interest rates.
On July 30, 2021, the IRS issued Notice 2021-48, which provides guidance under the American Rescue Plan Act of 2021 (ARPA-21) provisions that changed certain funding rules for single-employer defined benefit plans. Specifically, Notice 2021-48 addresses:
- ARPA-21 Section 9705, which provides for an extended amortization period for calculating funding shortfalls.
- ARPA-21 Section 9706, which enhances the stabilization of interest rates.
For more information, see Legal Update, $1.9 Trillion COVID-19 Stimulus Legislation Includes COBRA Premium Assistance, Retirement Plan Funding Relief, and an Expansion of Covered Employees Under Section 162(m): Funding Relief for Single-Employer Defined Benefit Plans and Practice Note, Minimum Funding Standards for Defined Benefit Plans.
Funding Relief Under ARPA-21
Single-employer defined benefit plans must meet minimum funding requirements under Code Section 430 (26 U.S.C. § 430). Before ARPA-21 was enacted, when calculating minimum required contributions, single-employer plans amortized any funding shortfalls over a seven-year period. ARPA-21 extended that amortization period to 15 years, effective for plan years beginning after December 31, 2021 (January 1, 2022, for calendar-year plans). Plan sponsors may elect to have the 15-year amortization period apply for plan years beginning in 2019, 2020, and 2021. For more information, see Practice Note, Minimum Funding Standards for Defined Benefit Plans: Shortfall Amortization Installments; Funding Shortfall.
Code Section 430(h)(2) describes the interest rates used to calculate a single-employer defined benefit plan's minimum required contribution (26 U.S.C. § 430(h)(2)). Those interest rates are a set of three segment rates (or, alternatively, a full yield curve). The three segment rates must be adjusted to fall within a specific range that is determined based on a percentage of the corresponding segment rates over a 25-year period. These stabilization corridors were instituted with the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21).
ARPA-21 updated these interest rates and corridors by:
- Revising the corridors that are used to determine the 25-year average of segment interest rates.
- Setting a minimum interest rate of 5% for determining the 25-year average.
The provisions are effective for plan years beginning after December 31, 2019 (January 1, 2020, for calendar year plans). However, plan sponsors may elect to not have the ARPA-21 amendments apply to any plan year beginning before January 1, 2022, for either:
- Any purpose.
- Only for the purposes of determining the adjusting funded target attainment percentage (AFTAP) under Code Section 436 (26 U.S.C. § 436) and ERISA Section 206(g) (29 U.S.C. § 1056) for that plan year.
(ARPA-21, § 9706.)
For details on minimum required contributions, see Practice Note, Minimum Funding Standards for Defined Benefit Plans: Determining Minimum Required Contributions.
IRS Notice 2021-48
Notice 2021-48 provides extensive guidance under Sections 9705 and 9706 of APRA-21. Topics covered in the Notice include:
- Application of the extended amortization period.
- Application of the ARPA-21 segment rates.
- Elections to apply the extended amortization period.
- Elections to not apply the ARPA-21 segment rates for a plan year (see Legal Update, IRS and PBGC Issue Guidance on Pension Funding Stabilization Issues for Defined Benefit Plans under MAP-21).
- Elections to increase the prefunding balance, revocations of an election to use or reduce a prefunding balance or funding standard carryover balance, and redesignating contributions.
- Changes in a plan's AFTAP, after the AFTAP has been certified, to reflect changes made by ARPA-21 (see Practice Note, Benefit Restrictions Under Code Section 436: Adjusted Funding Target Attainment Percentage).
- Corrective actions to conform plan operations to a revised certified AFTAP.
- Interaction of elections under Section 3608(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the ARPA-21 segment rates (see Legal Update, IRS Notice 2020-61 Provides Q&A Guidance on Single-Employer Defined Benefit Plan Funding and Benefit Limitations Under CARES Act Section 3608).
- Redesignations of contributions that were made to avoid or terminate the benefit restrictions of Code Section 436 before ARPA-21.
- Reporting requirements for changes caused by ARPA-21 that relate to:
- minimum required contributions, excess contributions, and redesignated contributions;
- elections to use a prefunding balance or funding standard carryover balance; and
- excise taxes owed for unpaid minimum required contributions.
Practical Implications
Notice 2021-48 provides detailed guidance to help defined benefit plan sponsors and administrators implement the changes under Sections 9705 and 9706 of ARPA-21.