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Case of the Week: DB Plan Annual Funding Notices

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Wisconsin is representative of a common question relating defined benefit plans. The advisor asked: 


“I have a client who is a participant in a defined benefit (DB) plan. I know it is important to keep an eye on the funding level of the plan.% How does my client know the funding level of his DB plan?” 


Highlights of Discussion 



  • By law, sponsors of single-employer and multiemployer DB plans must issue funding notices to participants annually. More specifically, under final regulations issued Feb. 2, 2015, DB plan sponsors must furnish a funding notice each year to the Pension Benefit Guaranty Corporation (PBGC), each plan participant and beneficiary, each labor organization representing such participants or beneficiaries and, in the case of a multiemployer plan, each employer that has an obligation to contribute to the plan.

  • The penalty for late distribution of the funding notice is $110 per day per participant.

  • The funding level of the plan is important because it reflects the general health of the DB plan. Plans that slip below a funding level of 80% are considered “at risk.” Sponsors of such plans are required to increase contributions. There are also limitations on the amount of benefit that can be paid in a particular payment form. For example, if a plan’s funded status is 60 to 80%, only half of the benefit can be paid in a lump sum; the remainder has to be paid in the form of an annuity. Lump sum payments are suspended completely when the funding level dips below 60%.

  • Plans generally must furnish funding notices no later than 120 days after the close of each plan year (e.g., by April 30, 2015, for a 2014 calendar year plan). There is an exception for small plans, however. Small plans (plans with 100 or fewer participants) must furnish funding notices no later than the filing of the plan's annual report, including filing extensions (i.e., within nine months after the end of plan year, or two months after the due date for filing Form 5500 (with approved extension)).

  • The final rule includes two model notices (one for single-employer plans and one for multiemployer plans) to aid plan sponsors in meeting their obligations. The notice must include the follow information:






    • Funding Percentage — Annual notices must include the plan's funding percentage. Single-employer plans must report their "funding target attainment percentage" and multiemployer plans must report their "funded percentage." The funding percentage of a plan is a measure of how well the plan is funded on a particular date. In general, the higher the percentage, the better funded the plan. The funding percentage must be reported for the past three plan years.

    • Assets and Liabilities — Annual notices must include information regarding the plan's assets and liabilities. For example, notices must include a statement of the value of the plan's assets and liabilities on the same date used to determine the plan's funding percentage. Notices also must include a description of how the plan's assets are invested as of the last day of the plan year.

    • Material Effect Events — Annual notices must disclose amendments, scheduled benefit increases (or reductions) or other known events having a material effect on the plan's assets and liabilities if the event is taken into account for funding purposes for the first time in the year following the notice year. If an event first becomes known to a plan administrator 120 days or less before the due date of a notice, the plan administrator is not required to explain, or project the effect of, the event in that notice.

    • PBGC Guarantees and other ERISA Title IV Information — Annual notices must include a general description of the benefits under the plan that are eligible to be guaranteed by the PBGC, along with an explanation of the limitations on the guarantee and the circumstances under which such limitations apply. Single-employer plan notices must include a summary of the rules governing plan termination and multiemployer plan notices must include a summary of the rules governing insolvency.


    Conclusion


    Sponsors of DB plans must furnish annual funding notices annually or face penalty. DB plan participants and their financial advisors should be on the look out for these gems of information. 


    The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2015 Columbia Management Investment Advisers, LLC. Used with permission.

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