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DOL issues funding notice guidance

Mar 11, 2009

The Pension Protection Act (PPA) added a requirement that defined benefit (DB) plan administrators provide participants, labor organizations and the PBGC an annual funding notice, generally describing the funded status of the plan and providing a variety of other information. With certain exceptions, the first such notice must be provided (for calendar year plans) by April 30, 2009, and must include, among other things, year-end data for the 2008 plan year.

The Department of Labor (DOL) has issued a Field Assistance Bulletin (FAB 2009-01) providing guidance on how to comply with this requirement, pending the issuance of further guidance. In this article we review certain critical elements of the FAB and compliance with the funding notice requirement.

When and to whom

When, and (with the exception noted below) to whom, the notice must be provided are fairly straightforward. Generally, the notice must be provided:

When: no later than 120 days after the close of each plan year; for calendar year plans, the first funding notice is due no later than Thursday, April 30, 2009.

To whom: each plan participant and beneficiary and each labor organization representing such participants or beneficiaries. The guidance, however, like the Summary Annual Report (SAR) it replaces, is not clear on the cutoff date for participants to whom the notice should be sent. Is it January 1, 2008? December 31, 2008? April 30, 2009? We simply don’t know.

While the statute also requires that the notice be provided to the PBGC, the FAB provides that "pending further guidance, the Department will not take any enforcement action regarding the failure to furnish an annual funding notice to the PBGC for a single-employer plan with liabilities that do not exceed plan assets by more than $50 million, provided that the administrator furnishes the latest available annual funding notice to the PBGC within 30 days of receiving a written request from the PBGC."

Good faith; model notice; additional information

The FAB provides "Q&A" guidance on a number of issues concerning the PPA funding notice requirement. With respect to matters not covered by the FAB, a "good faith, reasonable interpretation" standard will apply. In addition, the FAB provides a model notice that administrators may use, but use of the model is not mandatory. Moreover, even where the model is used, "a plan administrator … may elect to add to the model any additional information that is necessary or helpful to understanding the mandatory information and that does not have the effect of misleading or misinforming participants."

Given that (as discussed below) end-of-2008 asset performance may, for some plans, have had a significant impact on funded status, some sponsors may wish to consider whether additional remarks with respect to plan funding may be appropriate. 

Year-end “market value” funded status

Generally, the funding notice must provide plan liability and asset information as of the end of the year (e.g., December 31, 2008). For this purpose, calculation of liabilities generally follows PPA funding rules, except that interest rates for the last month of the year (e.g., December 2008) must be used (you cannot use a 24-month average), segment rates must be used (you cannot use a "full yield curve"), and “plan administrators may, in a reasonable manner, project liabilities to year-end using standard actuarial techniques.”  Assets must be calculated at fair market value (as opposed to a smoothed, “actuarial value of assets”) as of year-end (e.g., December 31, 2008); for this purpose assets are not reduced for credit balances.

It is worth mentioning a couple observations about the disclosure to participants of 2008 year-end funded status. December 2008 "spot" interest rates were, relative to the average for the 24 months ending December 2008, high, and thus will generate (relatively) lower liability numbers. On the other hand, for almost all plans, the fair market value of assets as of December 31, 2008, was significantly lower than the two-year smoothed value permitted to be used for PPA funding purposes. (We discussed the two-year smoothing issue most recently in our article Current pension legislative outlook.)

It is likely that the April 30, 2009, funding notice will be the first information participants receive about the effect of the current market turmoil on plan funded status. Sponsors will want to consider the effect this information will have on participants.

The FAB provides that the disclosed fair market value of assets "may include contributions made after the end of the plan year to which the notice relates and before the date the notice is timely furnished but only if such contributions are attributable to such plan year for funding purposes." Thus, sponsors concerned about the damage to funded status of a 2008 drop in asset value may, if they have the wherewithal, repair some of that damage by making additional contributions before April 30, 2009, improving their funding notice disclosure numbers.

Funding target attainment percentage for three years

In addition to the year-end funded status information discussed above, the notice must include "a statement as to whether the plan's funding target attainment percentage … for the plan year to which the notice relates, and for the 2 preceding plans years, is at least 100 percent (and, if not, the actual percentages)…."

Two observations: first, this information is generally to be provided on the same basis as plan funding information. Thus, it's beginning-of-year rather than end-of-year information. And, depending on the plan's funding method, it will not necessarily be based on spot interest rates and fair market value of assets, and the value of assets generally will be reduced by the value of any credit balances.

Second, notices for both 2008 and 2009 will require a look-back to pre-PPA years, for which there was not a "funding target attainment percentage" concept. In that regard, the FAB states:

For a plan year beginning in 2006, the notice must include the funded current liability percentage (as defined in section 302(d)(8) of ERISA, as in effect prior to the PPA) of the plan for such plan year. … Pending further guidance, for a plan year beginning in 2007, in the case of a single-employer plan, the notice should include the plan’s funding target attainment percentage determined in accordance with [IRS proposed funding regulations] …. [We discuss the latter regulations in our article Preparing for 2008 – IRS proposes 'final' funding rules.]

The FAB provides additional model language for this "transition data."

Funding policy and asset allocation

The notice must also include "a statement setting forth the funding policy of the plan and the asset allocation of investments under the plan." We note in passing that this is yet another advance in "DB asset transparency;" see our article FASB finalizes rules for financial reporting of DB plan assets.

Electronic delivery

As a general matter, the FAB (following the statute) provides that the funding notice may be delivered electronically. The FAB references the DOL's regulatory safe harbor for electronic notification, but goes on to note that:

[T]he safe harbor is not the exclusive means by which plan administrators could, in the absence of other guidance, satisfy their obligation to furnish information to participants and beneficiaries. This guidance does not foreclose the use of other means by which documents may, consistent with ERISA and the E-SIGN Act, be furnished to participants and beneficiaries electronically.

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For many sponsors, this is a particularly difficult time to begin providing participants hard, mark-to-market numbers concerning DB plan funded status. Sponsors will want to review the numbers for their plans, consider the impact on participants and whether additional communications on this issue are appropriate.