IRS Issues Guidelines for Cooperative and Small Charities Pensions

The Internal Revenue Service (IRS) has issued guidance about certain issues relating to the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC Act), which was enacted April 7, 2014. 

The CSEC Act specifies minimum funding requirements and related rules that apply with respect to certain defined benefit pension plans maintained by groups of cooperatives and related entities and groups of charities.

The IRS explains that Section 430 of the Internal Revenue Code (Code), which was added by the Pension Protection Act of 2006 (PPA), specifies the minimum funding requirements that generally apply to single-employer defined benefit pension plans and multiple-employer plans. However, section 104 of the PPA provided that the effective date for the application of the minimum funding rules under Section 430 and the funding-based benefit restrictions under Section 436 of the PPA is delayed for certain plans maintained by more than one employer that are specified types of cooperative organizations and related entities. For those plans, the minimum funding rules and the funding-based benefit restrictions generally do not apply for plan years beginning before January 1, 2017. 

In addition, legislation passed in 2010 amended Section 104 of the PPA to expand the group of plans covered by the delayed effective date to include certain plans (eligible charity plans) that are maintained by employers that are described in Section 501(c)(3) of the Internal Revenue Code.

IRS Notice 2015-58 explains that the CSEC Act added Section 433 to the Internal Revenue Code, which specifies minimum funding rules that apply to CSEC plans for plan years beginning on or after January 1, 2014. The minimum funding rules are similar to rules currently governing these plans; however, they provide that the amortization period for the change in liability resulting from an amendment to a CSEC plan is 15 years instead of 30 years, and Section 433 does not include a requirement to make a deficit reduction contribution as required under pre-PPA rules.

In addition, Section 433 provides special rules that apply to a CSEC plan with a funded percentage of less than 80%. Such a plan is in “funding restoration status.” If a CSEC plan is in funding restoration status, the plan sponsor must establish a funding restoration plan that is designed to bring the plan’s funded percentage to 100% over a period of seven years (or the shortest amount of time practicable to bring the plan’s funded percentage to 100%, if longer).

For the period for which a CSEC plan is in funding restoration status (as certified by the enrolled actuary for the plan), an amount no less than the plan’s normal cost must be contributed for each plan year. If the normal cost is not contributed for the plan year then an accumulated funding deficiency will exist regardless of the size of the plan’s credit balance. A CSEC plan that is in funding restoration status generally cannot be amended to increase benefits or accelerate vesting unless a specified additional contribution is made.

Under the CSEC Act, a number of elections are available to cease to be an eligible charity plan. The IRS also warns that certain eligible charity plans are not CSEC plans, and certain CSEC plans maintained by employers that are Section 501(c)(3) organization employers are not eligible charity plans. The notice answers the question, “What is a CSEC plan?” and describes the elections available.

The guidance applies not only for purposes of the Internal Revenue Code but also for purposes of the parallel provisions of the Employee Retirement Income Security Act (ERISA).