What help is available for defined benefit or cash balance plans if cash flow is a concern?
Defined Benefit and cash balance plan funding isn’t discretionary, but actuarial tools do exist to help manage the impact of market volatility and help businesses manage contribution requirements to meet minimum funding standards.
Plans with March 31 or April 30 plan year ends will be the first to include the market losses in their valuation results. A calendar year plan has more time to recover if the COVID-19 economic impact is softened by end of 2020. Relief in the form of longer amortization periods, where losses in assets can be spread over a seven-year period, adjusting the actuarial value of assets where possible, and using contributions made in excess of minimum funding to offset future contributions may help. With respect to cashflow management, while not suggested across the board, new benefit accruals may be frozen.
When done timely, usually by May/June timeframe for calendar year plans, it can substantially reduce contribution requirement. A couple of other important points. The CARES Act delayed minimum contribution requirement for 2019 from 8½ months after plan year end (September 15 for calendar year plans) to January 1, 2021. This delay will help with cashflow planning and alleviate the 10% excise tax on missed minimum funding deadline; however, if a deduction for the 2019 year is desired to help reduce 2019 taxable income, then it will need to be made by the due date of employer’s tax return including extensions. So, contribution timing and deductibility will be an important decision to balance in the coming months.
Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.