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CARES Act – Defined Benefit Plans & Testing

*updated 3/31/20

The CARES Act, signed into law on Friday, March 27th, 2020, included changes providing flexibility for both businesses and employees in the form of retirement hardship distribution accessibility and retirement plan loan relief.

Defined benefit plans are a separate category of employee retirement plan, different than a traditional 401(k), where the employee benefits are promised a specific pension payment or are calculated using a formula considering a variety of factors. Historically, low interest rates are making defined benefit plans very difficult for organizations to maintain.

The following changes for single employer defined benefit plans were included in the recently signed CARES Act:

  1. Delay of Required Contributions

    Under the CARES Act, a company can delay to January 1, 2021 any required contributions otherwise due in 2020 to meet funding standards. This provision will provide cash conscious companies with the ability to conserve their cash in 2020 by delaying contributions to the plan until January 1, 2021. Any contributions that are delayed are increased by interest for the period beginning on the original due date to the actual payment date.

  2. Benefit Restrictions Relief

    Normally, a pension plan must impose restrictions on certain benefit distributions (for example, lump sums) when the plan’s funding status falls below 80 percent. The primary intent of these restrictions is to prevent retirement-eligible participants from drawing down a large portion of the plan’s assets at the expense of participants who are not yet retirement-eligible and unable to draw benefits. Recognizing the current, unique circumstances that could adversely impact a plan’s funded status (such as historically low interest rates), the CARES Act provides that a pension plan can use its funding status for the plan year ending in 2019 when determining whether it must impose benefit restrictions for plan years which include calendar year 2020.

Trade organizations representing retirement plan sponsors and providers were among a consortium of 25 trade groups asking Congress to implement relief measures amid the coronavirus pandemic. The list of measures requested went beyond the provisions that were part of the CARES Act signed by President Trump.

In a letter to lawmakers prior to passage—signatories included the American Benefits Council, American Retirement Association, Insured Retirement Institute, the Spark Institute, and the ERISA Industry Committee—requested more extensive relief for defined benefit plans from single employer PBGC premiums and interest rates.

The groups are hopeful that their requests will be included in those under consideration if there is a need for another round of stimulus related changes down the road.

For more information on the important steps businesses should take in the wake of the coronavirus, visit our  OneDigital Coronavirus Advisory Hub , or reach out to your local OneDigital advisory team.

Advisory services offered by Greenleaf Advisors LLC, a SEC registered firm.