IRS Extends Contribution Deadline for Single-Employer Defined Benefit Retirement Plans

The IRS has issued Notice 2020-82 extending the deadline for contributions to single-employer defined benefit retirement plans as provided under Section 3608(a)(1) of the CARES Act.

This guidance will affect sponsors of single-employer defined benefit plans who must satisfy the Code Section 412(a) minimum funding standards. In general, Code Section 430(j)(1) requires minimum required contributions to be made within 8 ½ months of the end of the plan year. Plans that experienced a funding shortfall during the prior plan year are subject to the quarterly installment requirements of Code Section 430(j)(3).

In both situations, the CARES Act extended the deadline for single-employer defined benefit pension contributions until January 1, 2021. In doing so, Congress intended to allow plan sponsors to defer making contributions due to the adverse financial impact of the pandemic. Due to the New Years’ holiday and the potential inability of financial institutions to transfer funds by the deadline, Notice 2020-82 provides that a contribution to a single-employer defined benefit plan will be timely if made no later than January 4, 2021, the next business day.

Notice 2020-82 also extends to January 4, 2021 the deadline for a plan sponsor’s election to add to a prefunding balance or to use a prefunding account balance to offset the minimum required contribution for the 2020 plan year. The guidance further provides that if a contribution is made by January 4, 2021, the amount of the minimum required contribution that is satisfied by the contribution (and the amount that can be added to the plan’s prefunding balance related to any excess contribution) is determined by computing the applicable interest adjustment using the actual contribution date.

The guidance does not impact existing Notice 2020-61, which addresses the treatment of tardy contributions not made by the deadline. The Pension Benefit Guaranty Corporation has issued guidance to conform to Notice 2020-82.

Court Grants Partial Summary Judgment Dismissing Statutory Penalties

The US District Court of the Southern District of Texas recently granted partial summary judgment, dismissing penalties related to a failure to comply with a request for plan information. In this case, a participant in a company’s life insurance plan, died a few months after terminating his employment. His widow was denied a claim for benefits because the employee did not complete forms to convert the life insurance and no premiums were paid following his termination. As part of the employee’s widow’s lawsuit, she asserted a claim against the plan administrator and the company alleging their failure to provide a copy of the insurance policy and copies of specific telephone recordings related to the matter. Under ERISA, a plan administrator may be subject to statutory penalties of up to $110 per day for failing to timely provide certain requested plan related documents. The plan administrator, upon written request, must "furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated." In dismissing the claim against the plan based on a failure to provide telephone call records, the court noted that, in the Fifth Circuit, the “other instruments under which the plan is operated” provision has been narrowly interpreted to apply to only formal legal documents that govern a plan. This case highlights an issue common to many plan administrators. That is, knowing what to produce when responding to a request for information. When faced with such a request, plan administrators should consult with their legal counsel to better understand the scope of their obligations. (Huerta V. Metropolitan Life Ins., S.D. (November 2020))

Qualified Retirement Plan Distributions to State Unclaimed Property Funds: New IRS Guidance

One of the continuing challenges in administering distributions from qualified retirement plans (for example, 401(k) plans) is dealing with missing or unresponsive plan participants. Missing or unresponsive participants may never make a claim for benefits, or a distribution check may be sent out and never cashed. While qualified retirement plans may undertake a number of procedural steps to deal with unclaimed benefits or uncashed checks, there are instances in which a plan might provide for the unclaimed benefits or uncashed checks to escheat to a state unclaimed property fund. Overall, escheating to a state unclaimed property fund seems to be a relatively uncommon strategy for qualified retirement plans, especially for active plans – available guidance favors other strategies for dealing with unclaimed benefits or uncashed checks. Nonetheless, transfers to state unclaimed property fund do occur from time to time, and may be seen somewhat more frequently in the case of a terminating plan.

With that background in mind, the IRS recently issued two pieces of guidance relevant to qualified retirement plan benefits that are paid over to a state unclaimed property fund. First, in Revenue Ruling 2020-24, the IRS addressed withholding and reporting requirements. The scenario considered by Revenue Ruling 2020-24 involved a $900 distribution from a qualified retirement plan to a state unclaimed property fund that did not include any Roth or other after-tax amounts. The key aspects of the IRS rulings in Revenue Ruling 2020-24 are as follows:

• Internal Revenue Code Section 3405 provides federal income tax withholding rules with respect to designated distributions from qualified retirement plans. Because none of the exceptions for treatment as a designated distribution are applicable in the scenario presented in Revenue Ruling 2020-24, the IRS concluded that the payment of the benefit to the state unclaimed property fund is a designated distribution subject to federal income tax withholding under Internal Revenue Code Section 3405.
• Because the payment exceeded the $10 reporting threshold, the distribution paid over to the state unclaimed property fund must be reported on a Form 1099-R for the year of the distribution.
• The Revenue Ruling 2020-24 guidance includes a transition rule under which a person will not be treated as failing to comply with the withholding and reporting requirements described in Revenue Ruling 2020-24 with respect to payments made before the earlier of January 1, 2022, or the date it becomes reasonably practicable for the person to comply with those requirements.

Second, in Revenue Procedure 2020-46, the IRS provides relief from the 60-day requirement for rolling over amounts paid over to a state unclaimed property fund to an IRA or other eligible retirement plan. The relief takes the form of an update and modification to Revenue Procedure 2016-47 which provides for a self-certification procedure (subject to verification on audit) that may be used by a taxpayer claiming eligibility for a waiver of the 60-day rollover requirement with respect to a rollover into an IRA or other eligible retirement plan. Revenue Procedure 2016-47 provides a limited list of permissible reasons for such a self-certification. Revenue Procedure 2020-46 modifies and supersedes Revenue Procedure 2016-47 by adding “a distribution was made to a state unclaimed property fund” to the list of permissible reasons for self-certification. Note that a self-certification relates only to the reason for missing the 60-day deadline, not to whether a distribution is otherwise eligible to be rolled over. A taxpayer taking advantage of the self-certification procedures must not have been previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates, and generally must make the rollover contribution as soon as practicable after the permissible reason or reasons for the self-certification no longer prevent the taxpayer from rolling over some or all of the amount distributed. For purposes of accepting and reporting a rollover contribution into an IRA or other eligible retirement plan, a plan administrator or IRA trustee generally may rely on a taxpayer’s self-certification under Revenue Procedure 2020-46 in determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement, unless the plan administrator or IRA trustee has actual knowledge that is contrary to the self-certification. Revenue Procedure 2020-46 is effective on October 16, 2020.