Employers that sponsor qualified defined benefit plans, including traditional pension plans and cash balance plans, will need to prepare and distribute a special notice to participants and certain other parties as soon as April 30, 2009. The “Annual Funding Notice” must include substantial information regarding a plan’s assets and liabilities. While recent guidance from the Department of Labor (DOL) provides a model form for this notice, collection of the information necessary to complete the form may be time consuming. Employers and their advisers should begin work now to be prepared to meet the distribution deadline — particularly plans with calendar plan years, which are subject to the April 30 deadline.
New Annual Funding Notice Created by the Pension Protection Act
The Employee Retirement Income Security Act of 1974 (ERISA) has long required multiemployer defined benefit plans to issue annual notices describing the funding status of such plans. The Pension Protection Act of 2006 (PPA) expanded this requirement to apply to all defined benefit plans that are insured by the Pension Benefit Guaranty Corporation (PBGC). For single employer plans, the funding notice must be sent to the PGBC, any labor union representing plan participants, and to each plan participant and beneficiary.
The expanded funding notice requirements are effective for plan years beginning in 2008. Generally, plans have only 120 days after the close of each plan year to distribute the notice. Small plans (i.e., those with 100 or fewer participants) have until each year’s Form 5500 filing deadline to distribute the notice for that plan year. Thus, any calendar year defined benefit plan that is not a small plan must issue its 2008 funding notice by April 30, 2009.
Disclosing Funding Status
The DOL has issued question and answer guidance on the new annual funding notices that includes model notices.
The guidance provides that the annual funding notice for single-employer plans must include the plan’s assets, liabilities, and funding target attainment percentage. All of these items must be provided for the plan year to which the notice relates and the prior two plan years.
Assets should be measured according to fair market value (without any smoothing) as of the last day of the plan year. Liabilities should be determined as the present value of accrued benefits as of the last day of the plan year. The interest rate assumption used in the present value calculations should be the multi-segment “PPA” interest rate (calculated without 24-month averaging) that was in effect during the plan year’s final month. The guidance clearly states that it is acceptable for plans to make reasonable estimates of liabilities where necessary.
Although plans are required to disclose their actual asset values in the funding notice, actuarial asset values are used to calculate the funding target attainment percentage. The model annual funding notice for single-employer plans lists these actuarial asset values, including total assets, credit balances, and net plan assets. The net assets are divided by the liabilities to determine the funding attainment percentage.
For plan years prior to 2008, plans did not have funding attainment percentages. The DOL guidance recommends that plans instead disclose the plan’s “funded current liability percentage” for those years in an appendix to the notice.
Other Required Content
In addition to funding status, the annual funding notice must include a variety of other information. The notice must contain the number of participants, retirees in pay status, and other vested retirees and terminated participants. The notice must contain summaries of the plan’s funding and investment policies, including asset allocations according to asset class.
If any event with a “material effect” on plan assets or liabilities has occurred during the plan year (such as a plan amendment increasing or reducing benefits), the notice must include an explanation of the event and describe the actual and projected impact of the event on plan assets and liabilities. In addition, the model notice also includes a detailed description of the effects of plan termination, as well as the nature and amounts of PBGC’s benefit guarantees.
The DOL guidance provides that, pending further guidance, employers that use its model notices will be deemed to comply with the content requirements of ERISA’s new annual funding notices.
Despite the availability of a model notice, completing such a notice is not a trivial matter. The model notice for single-employer plans includes almost 80 blanks or optional provisions. Many of these items will require actuarial calculations and some items — such as descriptions of the plan’s investment policy and descriptions of material events — will warrant careful scrutiny for legal implications.
The size and complexity of a typical annual funding notice may create confusion or generate questions from participants. In particular, the use of both market and actuarial asset values in the same notice could cause confusion. Employers may want to include a cover letter or supplement the annual funding notice itself, explaining what it is and clarifying points that may confuse participants. The DOL has indicated that providing supplemental information is permissible, so long as that information does not have the effect of misleading or misinforming participants.
Finally, employers should be certain that they are prepared to distribute the notice in time to meet the delivery deadline, which is April 30, 2009, for calendar year plans. The DOL has indicated that the notice can be provided to participants electronically in accordance with the DOL’s safe harbor rules for electronic distribution of summary plan descriptions and other participant communications, and that the safe harbor rules are not the only means by which delivery of the notice may be accomplished. Employers contemplating electronic delivery should review their procedures to determine whether they will meet the safe harbor or otherwise use a reasonable method that provides for actual delivery of the notice.