Defined Benefit Plans and Disaster Relief (Hurricanes Harvey and Irma and Beyond)
In the pension world, the word “disaster” is often applied to new laws, regulations or proposed tax or benefit reforms. We also refer to the usual weather-related events of hurricanes, floods and tornados as disasters. This article is concerned with impact of the weather-related disasters and the regulatory relief provided by the Internal Revenue Service (IRS), Department of Labor (DOL), and the Pension Benefit Guaranty Corporation (PBGC) (collectively, “the agencies”) with respect to defined benefit plans.
The main focus of the article will cover Hurricane Harvey and Hurricane Irma (which will be referred to simply as Harvey and Irma in the remainder of the article). More generally, the relief process and reasoning will be covered. Therefore, the goal of the article is three-fold. First, actuaries will understand the background for the current law and agency relief. Second, actuaries will gain an understanding of the process and relief typically provided so that they are prepared to advise clients and others on what might be expected. Third, actuaries will understand what relief is given for Harvey and Irma.
Need for Relief
Let’s start with a question. Why is relief needed? The obvious answer is that events such as major hurricanes will disrupt normal business operations. Communications are often disrupted and commercial transactions must wait. The focus becomes on returning to normal operations, or, as sometimes is the case, simply working to ensure the survival of the business. The “business” does not refer solely to the plan sponsor, but also means the advisors to the plan sponsor. The return to normal operations may take a few hours, or it may take months. Business records may or may not have been backed up in a manner that allows a speedy recovery.1 With the business disruption many activities with respect to a pension plan may not (or cannot) take place in a timely manner. Examples include:
- payment of benefits
- providing election notices
- making plan contributions
- certifying plan funding percentages
- paying PBGC premiums
- filing required government forms
The law applies non-trivial taxes and penalties for failure to timely carry out activities with respect to a pension plan.2 While the agencies have their individual correction programs, these programs charge user fees, have conditions (for example, a plan may not be under examination by the IRS), and are not tailored to the business disruption associated with weather-related disasters.
Aside from the taxes and penalties, the failure to meet the requirements of ERISA has other consequences for many plan sponsors. For PBGC-covered plans, statutory liens spring up on the failure to make quarterly contributions. Late employer pension contributions may result in a “technical” breach of the company’s loan covenants that may have financial consequences for the company, depending on how forgiving the lender will be.
While § 7508A of the Internal Revenue Code (Code), as added in 1997, had provided for some income tax relief for federally declared disasters, the activities and relief were limited (the time period was extended 90-120 days for certain tax-related items) and did not extend to most acts related to pension plans. This Code provision certainly did not extend to the requirements of ERISA. A better solution was needed, but required an impetus. The impetus came on Sept. 11, 2001.
Victims of Terrorism Tax Relief Act of 2001
Sept. 11, 2001, was a landmark day in the recent history of our nation. The events of 9/11 shaped the course of legislation and policies that affect us today. In addition to the death and destruction, the terrorist attacks in New York City caused massive problems within the financial structure, and made it almost impossible for financial transactions to take place for days.3 One outcome of 9/11 was the passage of the Victims of Terrorism Tax Relief Act of 2001, which provided tax relief for victims (per its title) but also recognized the financial difficulty for pension plans.
Section 112 of the Victims of Terrorism Relief Act of 2001 revised Code § 7508A and added subsection 7508A(b), which applies to pension and other employee benefit plans. In addition, Section 112 added § 518 and § 4002(i) of ERISA. Collectively, these sections allow up to a one-year postponement of the date by which an action need be taken with respect to any employee benefit plan. Furthermore, a plan shall not be treated as failing to operate according to its terms by the postponement.4
The changes in law apply to any federally declared disaster or a terroristic or military action.5 Aside from the aftermath of Sept. 11, 2001,6 the disaster relief provisions of the Code and ERISA have typically been applied only to federally declared weather-related disasters. That is certainly the case for minimum funding requirements. That prompts the question of how disasters are declared and defined. For the answer, we need to look at the Federal Emergency Management Agency (FEMA).
Federally Declared Disasters7
FEMA administers the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”). Under the Stafford Act, there are two types of disaster declarations: emergency declarations and major disaster declarations. All declarations are made solely at the discretion of the President of the United States. Both types of declarations authorize the President to provide supplemental federal disaster assistance, but the governor of the affected state (or Tribal Chief Executive) must submit a request and show that requirements are met.
The President can declare an emergency for any occasion or instance when the President determines federal assistance is needed. The total amount of assistance provided for a single emergency may not exceed $5 million. The assistance available under emergency declarations is public assistance (debris removal and emergency protective measures) and individual assistance (individual and household program). Individual assistance is rarely authorized for an emergency declaration.
Major Disaster Declarations
The President can declare a major disaster for any natural event, including hurricane, tornado, storm, high water, etc. that the President determines has caused damage of such severity that it is beyond the combined capabilities of state and local governments to respond. A major disaster declaration makes a broad range of federal assistance programs available. The assistance may include various types of individual assistance and public assistance, and depends on the requested assistance and a damage assessment. Individual assistance appears to indicate more serious damage.
FEMA lists a disaster with a number and has a separate number for each disaster notice in a state. Major disasters have the designation “DR.” Thus, for example, DR-4338 is the designation for the major disaster for Irma in Georgia, and DR-4337 is the designation for Irma in Florida. The disaster notices list the counties that qualify for individual assistance and for public assistance.
Relief Under Section 7508A
Section 7508A of the Code and the regulations thereunder allow the IRS to postpone deadlines by reason of federally declared disasters. While the regulations list certain deadlines, the regulations also list any “other act specified in a revenue ruling, revenue procedure, notice announcement, news release, or other guidance published in the Internal Revenue Bulletin …”8 For DB plans, there are two types of relief, which I will call “standard relief” and “funding relief.”
Standard Relief – Rev. Proc. 2007-56
Rev. Proc. 2007-56 provides a list of tax related events that are postponed when the IRS issues a news release or other guidance after a specific federally declared disaster that authorizes relief for the disaster. The IRS makes standard relief available on a broad basis for disaster declared by FEMA. Section 8 of Rev. Proc. 2007-56 lists 39 acts with respect to employee benefit issues including cafeteria plans and IRAs. These include relief under § 401(a)(9) and filing of the Form 5500 series returns. Importantly, the revenue procedure states that whatever postponement is provided for the Form 5500 series due date by the IRS will be permitted by the Department of Labor and PBGC. The period for making deductible contributions under § 404(a)(6) is also listed.
For DB plans, some important deadlines are not included in Section 8 of Rev. Proc. 2007-56. For example, the minimum funding deadline, quarterly funding deadlines and funding certifications are not part of the standard relief provided by Rev. Proc. 2007-56. Additionally, Rev. Proc 2007-56 does not extend PBGC deadlines.
The IRS announced disaster relief for Harvey in Texas, and for Irma in Florida, in Georgia, in Puerto Rico, and in the Virgin Islands. Each of the news releases referred to Rev. Proc. 2007-56, listed the counties or municipalities for which relief applied,9 and provided a postponement to Jan. 31, 2018. The news releases for Texas and Florida were updated to add counties after the initial relief was provided. See TX-2017-09 and FL-2017-04, for Texas and Florida, respectively.
Funding Relief – Notice 2017-49
Unlike the broadly applied standard relief, funding relief is narrowly provided. It is provided for a more limited number of disasters than standard relief, and to date has been provided by a more formal communication than an IRS press release. Additionally, funding relief may be announced later than standard relief and may apply to a smaller group of plans than standard relief.
For Harvey and Irma, funding relief was provided in Notice 2017-49. Notice 2017-49 provides funding relief to an “Affected Plan.” An Affected Plan is a plan for which any of the following are located in the Affected Area:
- the principal place of business of the employer that maintains the plan (in the case of a plan covering employees of one employer, determined disregarding the rules of §§ 414(b) and (c));
- the principal place of business of employers that employ more than 50% of the active participants covered by the plan (in the case of a plan covering employees of more than one employer, determined disregarding the rules of §§ 414(b) and (c)):
- the relevant office of the plan or the plan administrator;
- the relevant office of the primary record keeper serving the plan; or
- the office of the enrolled actuary or other advisor that previously had been retained by the plan or the employer to make funding determinations or certifications for which the due date falls between the date specified by FEMA as the beginning of the incident period (Aug. 23, 2017 for Harvey and Sept. 4, 2017, for Irma in Florida) and Jan. 31, 2018.
For purposes of the above list, the term “office” means the worksite of the relevant individuals and the location of any records necessary to determine the plan’s funding requirements for the relevant period.
The “Affected Area” is defined as any of the Texas counties identified for individual assistance by FEMA because of Harvey, any of the Florida counties identified for individual assistance by FEMA because of Irma, and any other areas identified for individual assistance by FEMA because of Harvey or Irma. Because the IRS news releases providing standard relief may not distinguish between individual assistance and public assistance, it is necessary to check the FEMA website to see what counties received individual assistance (and keeping in mind that there may be updates adding counties). For Texas, 39 counties received individual assistance because of Harvey, and for Florida, 40 counties received individual assistance because of Irma. Also, seven counties in Georgia received individual assistance because of Irma.
Whether a plan is an Affected Plan depends upon the location of the offices, not the ability to provide services or the ability of the business to function. That avoids any necessity for a time-consuming or subjective look at how bad the disaster was for that business. Let’s consider some examples of Affected Plans, and how that plays out in some circumstances.
Affected Plan Example 1 – Assume you are the president of a consulting firm whose sole office is in one of the counties in Texas that is listed for individual assistance. Your office building was not damaged by Harvey and all of your employees can get to work. All of your clients’ DB plans for which you (or your employees) are the enrolled actuary or the record keeper get funding relief, no matter where they are located. Thus, your client in Chicago gets relief even though the client is not in the Affected Area.
Affected Plan Example 2 – Assume you work out of your house for a consulting firm located in another state that was not impacted by Harvey or Irma. You are the enrolled actuary for your clients’ plans. Your house is located in the Affected Area. Your clients get funding relief, including that habitually late client located in Dallas that would have been late in making the required contribution even if Harvey was not an issue.
Affected Plan Example 3 – Assume you work for a TPA firm in Miami that does not employ an enrolled actuary. Your firm contracts with an enrolled actuary on the west coast for actuarial calculations for the firm’s DB plans. However, you are the firm engaged by the clients to provide advice with respect to minimum funding requirements and maximum deductible limits. The clients have no contact with the enrolled actuary. Your clients’ plans get funding relief.
Affected Plan Example 4 – A large multinational corporation is headquartered in Houston. Its office building is essentially unaffected by Harvey and, in any case, the corporation has offsite back-up facilities in another state so that there is no loss of basic business operations. The company and its executive committee located in Houston is the plan administrator for all of its plans. The plans of the company get funding relief.
Affected Plan Example 5 – Karen’s firm has a new client located in Dallas, which is outside of the Affected Area. Karen’s firm will be doing the actuarial work for 2018, but a retiring actuary in Dallas is responsible for 2016 and 2017 calculations. Even though Karen’s firm is in the Affected Area, the new client’s plan does not get funding relief because Karen’s firm was not engaged to make any determinations or certifications between Aug. 23, 2017, and Jan. 31, 2018.
Funding Relief Under Notice 2017-49
Notice 2017-49 provides funding relief for single-employer plans, multiemployer plans and CSEC plans. The relief is not the same for all plans. The single-employer plan (other than CSEC plans) funding relief (which is the only relief addressed in this article) is provided by the IRS, the DOL and the PBGC. The relief is provided for certain due dates that fall within the period starting on the date specified by FEMA as the beginning of the incident period, which is called the Initial Relief Date. The Initial Relief Date will differ from disaster to disaster. For example, the Initial Relief Date is Sept. 4, 2017, for Irma in Florida and Sept. 7, 2017, for Irma in Georgia. The funding relief consists of:
- postponing the due date for a contribution to meet the MRC, or a quarterly contribution due date, where the date that falls within the period beginning on the Initial Relief Date and ending on Jan. 31, 2018, to Jan. 31, 2018;
- if the date specified in § 1.430(f)-1(f)(2) of the IRS regulations for making an election relating to a plan’s prefunding balance or funding standard carryover balance falls within the period beginning on the Initial Relief Date and ending on Jan. 31, 2018, then the date by which the election must be made is postponed to Jan. 31, 2018;
- if the first day of the 10th month of the plan year (the date described in § 436(h)(2) of the Code), or the first day of the fourth month of the plan year (the date described in § 436(h)(3) of the Code), for certification of the adjusted funding target attainment percentage (AFTAP) falls within the period beginning on the Initial Relief Date and ending on Jan. 31, 2018, then the date is postponed to Jan. 31, 2018;
- if the deadline for furnishing a notice required under section 101(j)(1) or (2) of ERISA (notice that funding-based restrictions apply) falls within the period beginning on the Initial Relief Date and ending on Jan. 31, 2018, then the date by which the notice must be furnished is postponed to Jan. 31, 2018; and
- if the date for applying for a waiver of the minimum funding standard (2½ months after the end of the plan year as set forth in § 412(c)(5) of the Code) falls within the period beginning on the Initial Relief Date and ending on Jan. 31, 2018, then that deadline is postponed to Jan. 31, 2018.
Examples of Funding Relief
Each example assumes a single-employer plan (that is not a CSEC plan) that is an Affected Plan with a calendar plan year (unless stated otherwise).
Relief Example 1 – The Sept. 15, 2017 deadline to make the minimum required contribution for 2016 is postponed to Jan. 31, 2018.
Relief Example 2 – The Oct. 1, 2017 deadline by which an AFTAP certification must be made is postponed to Jan. 31, 2018. Thus, if the AFTAP was not certified prior to Oct. 1, 2017, it must be certified prior to Jan. 31, 2018.
Relief Example 3 – A plan with a fiscal plan year from Oct. 1 to Sept. 30 had a timely certified AFTAP of 83% for the plan year ended Sept. 30, 2017. Since Jan. 1, 2018, is the first day of the fourth month of the plan year, the presumed AFTAP will not drop to 73% until Jan. 31, 2018 (absent an AFTAP certification before such date for the plan year commencing Oct. 1, 2017).
Relief Example 4 – The AFTAP for a plan in Florida was certified on Aug. 15, 2017, as 78% triggering restrictions on the lump sums that can be paid. Notice to participants was required by ERISA section 101(j) within 30 days. The notice can be provided as late as Jan. 31, 2018, without penalty.
Relief Example 5 – A plan with a fiscal plan year from Sept. 1 to Aug. 31 has a deadline of Nov. 15, 2017, to apply for a funding waiver for the plan year ended Aug. 31, 2017. The deadline is postponed to Jan. 31, 2018.
PBGC and DOL Relief
Aside from the funding relief in Notice 2017-49, the PBGC and the DOL have provided some other relief. The PBGC has released disaster release notices 17-09 (Harvey in Texas), 17-11 (Irma in Florida) and 17-13 (Irma in Georgia) that provide relief under title IV of ERISA. The PBGC relief relates to “Designated Persons” (e.g., a plan administrator, or contributing sponsor, that is responsible for meeting a PBGC deadline) located in the disaster area for which the IRS has provided relief in connection with filing extensions for the Form 5500 series, or cannot reasonably obtain information or other assistance needed to meet the deadline from a service provider, bank or other person whose operations are directly affected by Harvey or Irma.
Therefore, there are two ways that a plan administrator is a Designated Person. One is that the plan administrator is located in the disaster area. The other is that the plan administrator needs information from someone (service provider, bank or other person) located in the disaster area and cannot reasonably obtain it because operations of that entity or person were directly affected by Harvey or Irma.
With respect to plan administrators, the disaster area for PBGC is broad and tracks the area that receives Form 5500 relief, which may be broader than funding relief. Thus, for example, all 159 counties in Georgia are in the disaster area. While PBGC notices may list some counties at the time they are issued, the notices generally make it clear that if IRS adds to the Form 5500 extension areas (as was done with Harvey in Texas and Irma in Florida), then the PBGC relief is extended to those areas as well.
With respect to service providers, the PBGC relief is potentially narrower than funding relief. For funding relief, the service provider just had to be in an area that qualifies for FEMA individual relief. However, for PBGC relief, the service provider had to be directly affected by Harvey or Irma and reasonably be unable to provide information. The matter is further complicated because whether information can reasonably be obtained is a subjective matter.
The PBGC provides specific relief and case-by-case relief. The specific relief for single-employer plans is:
- Premium filing relief – Any premium filing required to be made beginning on the PBGC Initial Date (Aug. 23, 2017, for Harvey in Texas, Sept. 4, 2017, for Irma in Florida, and Sept. 7, 2017, for Irma in Georgia)x and on or before Jan. 31, 2018, will be treated as timely if the filing is made by Jan. 31, 2018. Accordingly, PBGC will waive any penalty, but interest is not waived and must be included.
- Standard termination relief – If any of the following termination deadlines fall on or after the PBGC Initial Dates and on or before Jan. 31, 2018, are extended to Jan. 31, 2018:
— Standard termination notice (Form 500)
— Deadline for completing the distribution of plan assets
— Deadline for filing the post-distribution certification (Form 501), which automatically extends the deadline for filing missing participant information and for paying missing participants’ designated benefits to PBGC without interest.
- Distress termination relief – If the deadline for filing the distress termination notice falls on or after the PBGC Initial Date and on or before Jan. 31, 2018, then the deadline is extended to Jan. 31, 2018.
- Reportable event post-event notice – If the deadline for filing a reportable event post-event notice falls on or after the PBGC Initial Date and on or before Jan. 31, 2018, then the deadline is extended to Jan. 31, 2018.
- Request for reconsiderations or appeals – If the deadline for requesting review of a PBGC determination (that is filing an appeal or requesting reconsideration) falls on or after the PBGC Initial Date and on or before Jan. 31, 2018, then the deadline is extended to Jan. 31, 2018.
PBGC may provide additional relief on a case-by-case basis. For example, pre-event reportable event notices can receive relief on a case-by-case basis.
Most of the disaster relief provided by the DOL (in addition to the filing relief and notice relief described above) for Harvey and Irma relates to defined contribution plans. However, contributory DB plans receive some relief for timely forwarding employee contributions to the plans. DOL Releases 17-12-1216-NAT (Harvey) and 17-1297-NAT (Irma) provide that the DOL will not, solely on the basis of a failure attributable to Harvey or Irma, seek to enforce provisions of title I of ERISA with respect to a temporary delay in forwarding employee contributions to the plan.
Natural disasters disrupt plan operations. As illustrated by Harvey and Irma, the agencies now have in place mechanisms for providing relief with respect to employee benefit plans. As an actuary and advisor to plans, you need to be aware of the possibilities and limits placed upon the relief. Furthermore, remember that the initial relief is often updated and expanded. That requires some vigilance on your part. However, at least the relief is potentially available.
1. The how, why, etc. of preparing one’s business for disasters of any sort is beyond the scope of this article.
2. It is assumed that actuaries are familiar with the actual and potential penalties with respect to the various failure for activities to take place timely.
3. The impact of the events of Sept. 11, 2001, upon the financial structure has been well documented (try a Google search) and highlighted the need for disaster recovery and offsite back-ups by major institutions.
4. See the Technical Explanation of the “Victims of Terrorism Tax Relief Act of 2001” prepared by the staff of Joint Committee on Taxation (JCX-93-01) for further information and reasons for the changes.
5. The detailed legal trail through the law is being omitted for sake of brevity.
6. Notice 2002-7 provided funding relief for the attacks on 9/11.
8. See §301.7508A-1(c)(1)(vii) of the regulations.
9. For Georgia, the entire state was listed and all 159 counties received relief.