Legislative Glitch Could Affect Pension Contributions for Eligible Charity Plans

Comments

By Lynn Cook, Russ Hall and Maria Sarli

Under a provision in the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (the 2010 Act) passed earlier this year, funding requirements and benefit restrictions enacted by the Pension Protection Act of 2006 (PPA) do not apply to eligible charity plans until 2017.¹ This change may cast a wider net than intended. Technical corrections in the Small Business Jobs Act (H.R. 5297) would narrow the definition of “eligible charity plan” and make the delayed effective date of the PPA requirements optional. Unfortunately, as Congress has adjourned until after Labor Day, the legislation might not pass in time to affect plan sponsors’ final 2009 plan year pension contributions, which, for calendar year plans, are due by September 15.

The pension relief in the 2010 Act defines an “eligible charity plan” as a defined benefit multiple employer plan maintained by a 501(c)(3) organization. For this purpose, the definition of “multiple employer plan” disregards the controlled group rules, so a plan sponsored by two or more affiliated organizations that is treated as a single-employer plan for funding purposes under the controlled group rules can still meet the definition of an “eligible charity plan” under the 2010 Act. For example, a plan sponsored by two 501(c)(3) organizations with at least 80% overlap in board membership would generally be treated as a single-employer plan under the controlled group rules. For purposes of determining the effective date of the PPA funding rules, however, it would be a multiple employer plan and an eligible charity plan if the other criteria for that status are satisfied. The delayed effective date provision applies only to plans in existence on July 26, 2005. It does not affect plans with only a single participating employer or plans sponsored by a for-profit entity as well as one or more 501(c)(3) organizations.

Applied literally, the existing definition could affect many hospital systems’ and other 501(c)(3) organizations’ plans. One might expect this change to reduce required contributions for the 2009 plan year — and it would in some cases, such as if five-year asset smoothing or asset smoothing with a 20% corridor, pre-PPA, were used. In other cases, however, it could increase 2009 funding requirements, such as by spreading the 2008 asset loss over five plan years instead of seven years.

The technical correction to the 2010 Act would significantly narrow the definition of “eligible charity plan.” Under the revised definition, the delayed effective date would apply only to plans maintained by one or more 501(c)(3) organizations with employees in at least 20 states and the primary purpose of serving children. That unusual level of specificity suggests that the provision might have originally been intended for a particular organization. In addition, under the technical correction these plans would not be treated as eligible charity plans unless their sponsors so elected. The revised rules generally would apply to an electing plan sponsor for plan years beginning after December 31, 2010, but the sponsor could optionally apply the provision to all plan years beginning with any earlier date after 2007.

As noted above, however, this fix might not make it into law soon enough for calendar-year plan sponsors to avoid having to recalculate their 2009 contributions under pre-PPA rules by September 15. Thus, sponsors of eligible charity plans, as currently defined, have a difficult choice. If their required contribution is greater under the PPA but they contribute the lesser amount called for under pre-PPA rules for 2009, there might be a funding deficiency under the technical correction. Alternately, ignoring the existing provision could have similar negative consequences — if the technical correction is not enacted — for plans whose minimum funding contribution is higher under pre-PPA funding rules.

Another potentially troubling implication of the 2010 Act is its retroactive elimination of section 436 benefit restrictions on underfunded eligible charity plans. If the technical correction is not enacted, and the 2010 Act retroactively eliminated benefit restrictions the sponsor has already implemented, the sponsor may face the administratively complex task of unwinding the restrictions, absent some sort of relief from the IRS. Moreover, having applied the restrictions could also raise technical compliance issues.

Thus, 501(c)(3) organizations that think they might sponsor an eligible charity plan will want to carefully review the issues with their legal counsel and plan actuary to determine the best course of action. Affected plan sponsors for whom the pre-PPA funding requirements might be higher must decide whether to have the enrolled actuary calculate the pre-PPA minimum contribution. If the required contribution would be higher, sponsors must decide whether to fund the higher amount before September 15. If they do not and technical corrections do not pass, sponsors could be late with their 2009 plan year contributions — thereby triggering associated excise taxes and notices to participants and the Pension Benefit Guaranty Corporation — unless relief is granted.

¹ The PPA funding requirements and benefit restrictions apply for plan years beginning in 2017 or, if earlier, the first plan year for which the plan ceases to be an eligible charity plan. The provision at issue is retroactive to the original effective date of the PPA funding changes (or, at the option of the plan sponsor, only retroactive to the beginning of the 2009 plan year).