Compliance News | August 6, 2021

Rules for Single-Employer DB Plan Funding Elections

New IRS guidance addresses changes to the funding rules for private sector, single-employer DB plans made by the American Rescue Plan (ARP) Act. The guidance explains the implications of retroactive elections on funding requirements, benefit restrictions and plan reporting. It also explains how plans will make the permissible elections and adjustments.

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The ARP Act gives each plan sponsor a choice about whether to apply the new rules retroactively in addition to prospectively. The IRS guidance clarifies those choices and specifies how to make the elections.


The ARP Act made the following changes to the single-employer funding rules:

  • Extended amortization of funding shortfalls from seven to 15 years
  • Revised the interest-rate corridor so plans use higher interest rates to discount benefit payments, which, in turn, lowers the liability

These changes do not apply to Cooperative and Small Employer Charity Pension plans.

The result of the ARP Act changes is to lower required minimum contributions in the future and, if the plan sponsor chooses, the past. We discussed these ARP Act changes in our March 10 insight, “Congress Passes Single-Employer DB Funding Relief.”

Election effective dates

The IRS guidance, Notice 2021-48, clarifies that the ARP amortization change to a 15-year amortization and the fresh start on all prior amortizations are effective for plan years beginning after December 31, 2021. However, plans may retroactively apply the ARP amortization rules starting in plan years beginning after December 31, 2018, December 31, 2019 or December 31, 2020.

The changes to the interest-rate corridor are effective with respect to plan years beginning after December 31, 2019. However, plans may elect not to apply the change for any plan year beginning before January 1, 2022. That election can be made for all purposes or just for determining the funding percentage used for benefit restrictions, such as limiting plan amendments, accruals or lump-sum payments.

For example, for a calendar-year plan, these three allowable options apply separately for 2020 and 2021.

  1. Apply the changes for both minimum funding and benefit restrictions.
  2. Don’t apply the changes for either purpose.
  3. Apply the changes only for minimum funding but not for benefit restrictions.

The plan sponsor makes the above elections by informing the plan actuary and plan administrator of the election, in writing, by December 31, 2021. In some cases, the election can be made using Schedule SB of Form 5500.

Other permissible plan sponsor choices

In addition to the elections for applicable years, the plan sponsor may be able to elect to:

  • Reverse the election to use credit balances (generally, previous contributions in excess of those needed to satisfy minimum contribution requirements) that were used for a prior plan year to the extent that the minimum required contribution was reduced due to the ARP Act.
  • Reverse a previous election to waive credit balances for a plan year for which ARP Act provisions apply.
  • Add excess contributions from a prior year to the following year’s credit balance to the extent that the minimum required contribution was reduced as a result of the ARP Act.
  • Reallocate an excess contribution (as a result of the ARP Act) previously reported for the 2019 or 2020 plan year to the next plan year, assuming it was paid within the allowable contribution dates for that later plan year.
  • Treat a change in the plan’s adjusted funding target attainment percentage resulting from applying ARP as an immaterial change, and apply any resulting change in benefit restrictions on a prospective basis as well as retrospectively.

These elections may involve changes to a previously filed Schedule SB (actuarial statement) to the Form 5500 annual report. The guidance provides instructions for when an amended filing is required and how to carry forward changes in previous reporting to the subsequent year’s filing when an amended filing is not required.

None of the elections discussed in this section or the prior section are permitted if doing them would cause the plan to be subject to new benefit restrictions.

Action items for plan sponsors

Sponsors of calendar-year plans have funding decisions to make by September 15, 2021, which is the Iast day for making contributions and using credit balances for the 2020 plan year. They must file the 2020 Schedule SB by October 15, 2021. In addition, elections may need to be made by December 31, 2021.

The interaction of the various elections are complicated. They are affected by the funding status of the plan and the plan sponsor’s financial health. The plan’s actuary can help the plan sponsor select the optimal ARP strategy for each specific situation.

In addition, if the information reported in a previously filed Schedule SB will be affected by an ARP election, the plan sponsor should consult with their actuaries and legal advisors regarding how changes in prior reporting should be handled.

Additional changes may be coming

As part of the bipartisan infrastructure bill, the Senate is considering additional changes to the single-employer DB funding interest-rate corridor rules. As those provisions would affect the interest-rate corridor in the future (resulting in still lower minimum required contributions), they would not directly affect the elections that can be made under the ARP Act, as detailed in Notice 2021-48.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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