Compliance June 19, 2020

IRS Makes More People Eligible for CARES Act Distributions and Loans

Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers and delayed job start dates.

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The Internal Revenue Service (IRS) has released Notice 2020-50 to help retirement plan participants affected by COVID-19 take advantage of the Coronavirus Aid, Relief and Economic Security (CARES) Act provisions providing enhanced access to plan distributions and plan loans.

With Notice 2020-50, the IRS has expanded the categories of individuals eligible for these types of distributions and loans. Notice 2020-50 also provides guidance and examples for how qualified individuals will reflect the tax treatment of these distributions and loans on their federal income tax filings.

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By way of background, the CARES Act provides that qualified individuals may treat as coronavirus-related distributions (CRDs) up to $100,000 in distributions made from their eligible retirement plans between January 1 and December 30. Such coronavirus-related distributions are not subject to the normal 10% excise tax that otherwise generally applies to distributions made before an individual reaches age 59.5.

The CARES Act further provides that plans may implement relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27 through December 31, and the dollar limit on loans made between March 27 and September 22 is raised from $50,000 to $100,000.

Critically, Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers and delayed job start dates.

Notice 2020-50 also allows individuals to take loans or distributions to address such adverse financial consequences experienced by a spouse or household member. Other qualifying factors noted in Notice 2020-50 include being quarantined, furloughed or laid off; having work hours reduced due to COVID-19; being unable to work due to lack of child care due to COVID-19; closing or reducing hours of a business that an individual owns or operates due to COVID-19; and having pay or self-employment income reduced due to COVID-19.

Beyond these developments, Notice 2020-50 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed. The guidance clarifies that administrators can rely on an individual’s certification that the individual is a qualified individual—providing a sample certification—but it also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment.

Finally, Notice 2020-50 provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.

Compliance June 19, 2020

Second Court Finds Use of Segal Blend Was Improper

A pension fund challenged the use of the Segal Blend to assess its withdrawal liability from a multiemployer plan instead of the interest rate it used to determine funding levels.

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Several members of multiemployer pension plans have filed different lawsuits challenging the use of the so-called “Segal Blend” when calculating the withdrawal liability owed to the plans when a member exits.

Segal Consulting has explained that the method involves two separate liability calculations blended to form the final result. It essentially blends the member’s assumed investment-return rate with lower, risk-free rates published by the Pension Benefit Guaranty Corporation (PBGC).

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Historically, use of this discount rate by multiemployer pension plans has resulted in exiting members paying larger cash amounts than they otherwise would if other methods of setting the rate were used.

In April 2018, a federal district court in New York ruled in the case against the Newspaper and Mail Deliverers’-Publishers’ Pension Fund that use of the Segal Blend to determine the withdrawal liability for The New York Times Co. was improper.

In July of that year, a federal district court in New Jersey found the use of the Segal Blend was proper in a case brought by Manhattan Ford Lincoln against UAW Local 259 Pension Fund. At that time, Segal defended its calculation method and noted that the decision was “consistent with every other decision handed down in similar cases except for one.”

Now, a second federal court has found the use of the Segal Blend to be improper. As reported by PLANSPONSOR’s sister publication CIO, in the case Sofco Erectors Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, the issue arose when the pension fund used the Segal Blend to assess its withdrawal liability against Sofco instead of the interest rate it used to determine funding levels. Citing the Multiemployer Pension Plan Amendments Act (MPPAA), Sofco challenged the withdrawal liability calculations.

The fund’s actuary testified during a deposition that the 7.25% rate the fund uses to determine funding levels is based on “a review of past experience and future expectations taking into account the plan’s asset allocation and expected returns.” But, instead of using that rate, it used the lower Segal Blend, resulting in nearly $1 million in additional withdrawal liability. In its defense, the fund argued that the Segal Blend has long been among the leading “schools of thought among actuaries with respect to the selection of [discount] rate assumptions.”

Under the Employee Retirement Income Security Act (ERISA), the actuarial assumptions and methods used to calculate an employer’s withdrawal liability must in the aggregate be reasonable, taking into account the experience of the plan and reasonable expectations and, in combination, offer the actuary’s best estimate of anticipated experience under the plan.

With this in mind, Chief Judge Algenon L. Marbley of the U.S. District Court for the Southern District of Ohio found the use of the Segal Blend was unlawful. Marbley said in his opinion that although it is not unlawful to use different rates for funding and withdrawal liability, “there are legal grounds to find that the fund’s use of the Segal Blend in this instance was erroneous.”

The court ordered the Ohio Operating Engineers Pension Fund to recalculate the withdrawal liability for Sofco Erectors using the 7.25% funding interest rate assumption, rather than the Segal Blend, and refund the difference to the employer.

Sofco was represented by attorneys at Jackson Lewis P.C. In a publication on the firm’s website, Principal Gary L. Greenberg and Associate Mark B. Gerano wrote, “This case has significant ramifications for numerous employers that are contesting their withdrawal liability or that may do so in the future. Plans that use ‘PBGC Rates’ to calculate withdrawal liability also may be subject to challenge for the same reason as the plans using the Segal Blend. PBGC Rates are published by the PBGC quarterly for the purpose of determining the present value of accrued benefits on a termination basis. Consistent with their intended use in connection with plan termination, PBGC Rates are based upon the rate of return of low- or no-risk assets, such as bonds, and may not be representative of the ‘best estimate of anticipated experience under the plan.’”

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