Pubic companies that sponsor nonqualified deferred compensation plans with grandfathered benefits will want to be aware of helpful payment guidance in the Internal Revenue Code Section 162(m) final regulations. The final regulations, which were published in the Federal Register on December 30, 2020, implement amendments made to Section 162(m) by the Tax Cuts and Jobs Act (TCJA). The regulations adopt the Section 162(m) proposed regulations issued on December 20, 2019, with certain modifications.
On December 22, 2020, the Internal Revenue Service (“IRS”) issued an advance version of Notice 2021-03 (the “Extension Notice”) to extend the temporary relief from the “physical presence” requirement for participant elections under retirement plans that was previously granted in Notice 2020-42 (the “Relief Notice”).
Public companies that sponsor nonqualified deferred compensation plans that require Internal Revenue Code Section 162(m) payment delays may want to consider whether removing the payment delay provision from a plan is warranted in light of the 2017 Tax Cuts and Jobs Act (TCJA) changes to the definition of a “covered employee.” The December 31, 2020 deadline is approaching to amend plans to remove Section 162(m) payment delays without the change being considered an impermissible acceleration of payment under Internal Revenue Code Section 409A.
Section 162(m) imposes a $1 million deduction limit on remuneration paid to a “covered employee.” The TCJA changed the Section 162(m) rules so that an individual’s status as a “covered employee” will continue after he or she terminates from employment with a public company. Prior to the TCJA change, an individual ceased to be a covered employee for purposes of Section 162(m) when he or she terminated employment. This change to the “covered employee” definition applies to tax years beginning after December 31, 2016. As a result, covered employees identified for a public company’s 2017 tax year (in accordance with the pre-TCJA rules for identifying covered employees) continue to be covered employees for the company’s 2018 tax year and thereafter.
On November 16, 2020, the Internal Revenue Service (IRS) issued Notice 2020-82 (the Notice), to further extend the deadline for required minimum contributions for single-employer defined benefit pension plans that would otherwise be due during the 2020 calendar year, from January 1, 2021, to January 4, 2021. On the same day, the PBGC issued complementary guidance, in Technical Update 20-2 (the PBGC Update), to reflect the January 4, 2021, deadline established by the IRS in the Notice when calculating variable-rate premiums.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) previously established a January 1, 2021, deadline for certain required minimum contributions that would otherwise be due during the 2020 calendar year. This pension funding holiday applies for contributions to single-employer defined benefit pension plans required under Section 430(j) of the Internal Revenue Code (the Code). Under Code Section 430(j), single-employer defined benefit pension plan sponsors are required to make certain minimum contributions that are designed to keep the plan sufficiently funded. For a given contribution to apply for a plan year, generally the contribution must be made no later than 8-1/2 months after the plan year ends. However, when a plan has a funding shortfall for the prior plan year, the plan sponsor is required to pay four quarterly installments toward the required minimum contribution for the plan year (due on April 15, July 15, and October 15 of the plan year, and January 15 of the following year, for a calendar year plan). The CARES Act gave plan sponsors additional time to make these required minimum contributions, by providing a January 1, 2021, due date for amounts otherwise due during 2021.
In the Notice, the IRS recognized the legislative intent to defer a plan sponsor’s payment obligation to calendar year 2021. The IRS acknowledged that this deferment to 2021 would not be possible with a January 1, 2021, deadline, given that January 1, 2021, is a bank holiday, and financial institutions cannot transfer funds on the January 1, 2021, due date. As a result, the Notice extends the deadline to January 4, 2021, the next business day after January 1, 2021. For amounts that are contributed on January 4, 2021, and treated as timely made pursuant to the Notice, the amount of the required minimum contribution that is considered satisfied by the contribution is determined by computing the applicable interest adjustment based on the actual contribution date.
The Notice also extends the deadline for a plan sponsor of a single-employer defined benefit pension plan to make certain elections related to the plan’s prefunding balance. These extended deadlines relate to (a) an election to add contributions made in excess of the minimum required contribution for a plan year to the plan’s refunding balance (i.e., a balance that may be used at the plan sponsor’s election to offset minimum required contributions for a later plan year) and (b) an election to use an existing prefunding balance or funding standard carryover balance to offset a required minimum contribution for a plan year. The deadline for those elections is now also January 4, 2021, for a plan year for which the extended due date for required minimum contributions applies. Note, however, that the Notice does not impact the treatment of certain missed quarterly installment contributions otherwise due on January 1, 2021, pursuant to the CARES Act. Further, the extended deadline (previously January 1, 2021, and now January 4, 2021) does not apply for a multiemployer plan, a money purchase pension plan, a “cooperate and small employer charity” (CSEC) plan, or a fully insured plan as described in Code Section 412(e)(3).
Prior to this Notice, the IRS had issued guidance on the CARES Act funding rules for single-employer defined benefit pension plans in Notice 2020-61. That notice addressed the payment of annual premiums to the Pension Benefit Guaranty Corporation (PBGC) (as well as interest adjustments for minimum required contributions, the actuarial certification of a plan’s adjusted funding target attainment percentage (AFTAP), and Form 5500 reporting for contributions made with respect to the 2019 plan year that were made after the filing deadline for the 2019 plan year).
The PBGC Update referenced above addresses the IRS guidance and its impact on the PBGC premium filings by providing that, for premium filings due on or after March 1, 2020, and before January 1, 2021, the date by which prior-year contributions must be received by the plan to be included in plan assets used to determine the variable-rate premium is extended to January 4, 2021. If such a contribution is made by January 4, 2021, a plan sponsor may amend the premium filing to revise the originally reported asset value and the applicable variable-rate premium. Note that the PBGC relief does not impact the premium due dates, and it does not allow a plan sponsor to include a contribution that has not yet been made in the premium filing.
Contact your Faegre Drinker attorney for more information on the extended deadline for required minimum contributions, the variable-rate premium contribution calculation and deadlines, and other aspects of the CARES Act relief for single-employer defined benefit pension plans.
In October 2020, the IRS issued two pieces of guidance addressing (1) the tax withholding and reporting of distributions from qualified retirement plans to state unclaimed property funds, and (2) the ability of taxpayers to roll over funds that were previously escheated to a state unclaimed property fund.
In Notice 2020-76 (Notice), the IRS extended the deadline from January 31, 2021, to March 2, 2021, for furnishing Forms 1095-B and 1095-C to individuals for reporting year 2020. Note that the Notice does not extend the deadline to file Forms 1094-B, 1095-B, 1094-C or 1095-C with the IRS. Those forms must be filed with the IRS by March 1, 2021 or if filed electronically, by March 31, 2021.
The Notice also extends “good-faith” reporting relief for employers that report incomplete or incorrect information on their returns (such as missing taxpayer identification numbers or dates of birth). This relief is available only when the employer can show it made a good-faith effort to comply with the filing requirements, such as gathering and transmitting the necessary data to an agent to prepare the data for submission, or testing its ability to transmit information to the IRS. The IRS has provided this good-faith relief in the past, but the Notice states that the 2020 reporting year will be the final year this type of relief is available.
In our May 2020 client alert, we addressed the possibility that COVID-19 layoffs could inadvertently cause a partial termination of a company’s qualified retirement plan. Recently issued IRS guidance provides that if participating employees whose employment was terminated due to COVID-19 are rehired by the end of 2020, the IRS generally will not deem a partial plan termination to have occurred. However, rehiring employees by the end of 2020 will not guarantee that employers will avoid a partial plan termination.
The IRS deadline to file for a determination letter for an individually designed statutory hybrid plan is August 31, 2020. Statutory hybrid plans include cash balance plans, pension equity plans and certain other variable annuity plans. This deadline has not been extended under any recent IRS pandemic-related guidance.
Beginning in 2017, the IRS suspended the cyclic determination letter program for individually designed retirement plans. However, subsequent IRS guidance established a limited window for statutory hybrid plans to apply for a new determination letter.
On June 29, 2020, the IRS issued Notice 2020-52 addressing mid-year reductions and suspensions of contributions to Safe Harbor 401(k) and 403(b) plans. In response to the COVID-19 pandemic, the Notice provides some temporary relief for plan sponsors that wish to reduce or eliminate safe harbor contributions mid-year.
In recent years, it has become the norm for the IRS to respond to a federally declared disaster by issuing guidance enabling employers to establish “Leave Donation Programs,” which allow employees to “convert” accrued vacation, sick, or personal leave benefits into an employer-paid monetary donation to a charitable relief organization, without the employee being taxed on the value of donated leave.1 Therefore, it is not surprising, but certainly welcome, that the IRS recently issued Notice 2020-46 (the Notice) to allow employers to adopt the same type of employer-based Leave Donation Programs in response to the COVID-19 pandemic.