Given current circumstances, if you are at all concerned about your company’s ability to afford your 2020 defined benefit/cash balance pension plan contributions, you must consider action now that will allow you to reduce or eliminate the plan’s 2020 required contribution.
Most plans provide that benefits are “earned” once employees complete 1,000 hours during the year. For full-time employees, 1,000 hours is usually reached approximately June 21st for a calendar year plan. At least 15 days before this date, the plan may be “frozen” by providing a notice to plan participants and amending the plan to curtail benefits. Once amended, this will stop plan benefits from increasing, thereby eliminating the “normal cost”, typically the largest component of a plan’s required contribution. If the economy recovers quickly and 2020 turns out to be a good year, you may unfreeze the plan by amending before year-end to restore your plan contribution to its previous level.
If the plan is not amended to freeze benefits before the 1,000-hour threshold, it will be very difficult, if not impossible, to significantly reduce the 2020 required plan contribution.
Compounding this situation, if your plan investments have suffered losses in the stock market, the decline in value will tend to increase plan contributions. Depending on the value of your plan assets at the end of 2020, a contribution may still be required for the year even if the plan is frozen, though it will be much reduced from what it would be if the plan is not frozen.
Also, while this is hopefully premature, in recessions companies may need to reduce staff. Please be aware that the IRS considers a 20% reduction in plan participants to be a “partial plan termination.” In the event of partial plan termination, the tax code requires all affected participants to be fully vested in their plan benefits.
Finally, be aware that there are not currently any changes to the 2019 funding requirements (contributions due in 2020), but the IRS, DOL and PBGC are exploring the possibility of some sort of relief.
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