The IRS has issued guidance related to the relief provided for single-employer defined benefit (DB) plans in the American Rescue Plan Act (ARPA).
The stimulus bill provides DB plan sponsors with the ability to extend the amortization period for funding shortfalls to 15 years from the seven years provided under the Pension Protection Act (PPA).
In Notice 2021-48, the IRS says that for all plan years beginning after December 31, 2021, shortfall amortization bases are amortized over 15 years, and for all earlier plan years, all shortfall amortization bases are eliminated. However, a plan sponsor may elect to have this rule apply to plan years beginning after year-end 2018, 2019 or 2020, which could change the years for which shortfall amortization bases are eliminated.
Prior to the enactment of ARPA, the applicable minimum and maximum percentages for the 24-month average segment rates used in calculations for minimum required contributions and other things were 90% to 110% for plan years beginning before January 1, 2021; 85% to 115% for plan years beginning in 2021; 80% to 120% for plan years beginning in 2022; and a wider corridor for later plan years. Section 9706(a)(1) of ARPA changed those ranges.
The IRS notes that Notice 2012-61 specifies the items for which the adjusted 24-month average segment rates apply or do not apply. The agency says that guidance generally remains in effect following the enactment of ARPA but has been modified to reflect subsequent statutory changes and to take into account any election by a plan sponsor not to apply the ARPA segment rates for a plan year.
As an example, the IRS says, Notice 2012-61 provides that if the adjusted segment rates apply for a plan year, then those rates apply for the purposes of determining the minimum required contribution, including the calculation of target normal cost and funding target; the calculation of the present value of remaining shortfall and waiver amortization installments for purposes of determining any shortfall amortization base established in the current plan year; the determination of shortfall and waiver amortization installments; and the limitation on the assumed rate of return for purposes of determining the average value of assets. Therefore, for a plan year beginning in 2020, the ARPA segment rates apply for these purposes unless the plan sponsor has elected to apply the pre-ARPA segment rates for that plan year.
As for electing to use segment rates for a prior plan year, the IRS says elections may be revoked by filing, no later than December 31, an amended Form 5500, Form 5500-SF or Form 5500-EZ for the plan year, with a revised Schedule SB that reflects the use of the ARPA segment rates.
The IRS notes that ARPA will result in a change to the interest crediting rate for a hybrid plan that uses any of the three segment rates specified in Section 430 of the Internal Revenue Code (IRC). Sponsors of hybrid plans can make an election to use pre-ARPA segment rates. However, if they don’t, they may “apply a reasonable interpretation of plan terms … in determining when this change in the interest crediting rate takes effect.”
The notice also explains the manner and timing of making elections under ARPA, as well as the flexibility to redesignate contributions between plan years.