Defined Benefit Pension Plans’ Annual Funding Notices Will Look Different in 2025
Most SECURE 2.0 articles focus on the changes applicable to defined contribution plans, such as 401(k) plans, and rightly so, since those plans were the most impacted by the law. However, SECURE 2.0 did make a handful of changes impacting defined benefit pension plans (DB plans). This article focuses on the changes made by SECURE 2.0 to the content requirement for a DB plan’s annual funding notice (or AFN), which impacts what AFNs will look like starting in 2025.
Background of AFNs
Most DB plans are required to issue an AFN for each plan year to its participants (including beneficiaries and alternate payees), the Pension Benefit Guaranty Corporation (PBGC), and unions representing plan participants within 120 days after the plan year-end, or for a small plan (which is a plan with 100 or fewer participants on each day in the relevant plan year), by the Form 5500 deadline for the plan year, including extensions.
The purpose of the AFN is to provide the recipients with information about the plan’s funding status, investments, and the benefit payments guaranteed by the PBGC.
SECURE 2.0 changes some of the information that must be included in the AFN for plan years starting after December 31, 2023. So, if you sponsor a DB plan that has a calendar year plan year and has more than 100 participants, your AFN for the 2024 plan year, to be issued by April 30, 2025, must include this new information.
What Has Changed?
Information About the Plans’ Funded Status. Historically, the AFN showed how the DB plan’s “funding target attainment percentage” was calculated for each of the prior three plan years. The funding target attainment percentage was determined by dividing the plan’s net assets by its liabilities, generally determined as of the first day of each of the three plan years shown. The plan’s net assets were determined by reducing the plan’s asset values by any funding standard carryover balance or prefunding balance. In addition, the plan’s asset values shown were the “actuarial value” of the assets, which were asset values determined after certain smoothing was applied (the plan’s actual asset values as of year-end were separately noted in the AFN). Finally, the DB plan’s liabilities were determined using certain adjusted rates.
The new AFNs will no longer report the “funding target attainment percentage.” Instead, the AFNs will show the “percentage of plan liabilities funded.” This replacement measure uses year-end information instead of the beginning of the year information, uses the market value for assets rather than actuarial value, disregards prefunding and funding carryover balances, and determines liabilities using unadjusted spot segment rates.
Information About Plan Participants. In the past, the AFN was required to disclose the number of plan participants, broken out by active employees, retirees receiving benefits, terminated employees entitled to benefits in the future, and beneficiaries, all as determined on the first day of the plan year for which the AFN was provided.
The new AFNs must disclose that same information, but now as determined as of the last day of each of the three prior plan years (the same period for which the funding information discussed above is disclosed), and the information must be disclosed in a tabular format.
Information About the PBGC Benefit Guarantees. AFNs are required to include a discussion of the circumstances in which the PBGC will guarantee benefits in the event of a plan termination, a general description of those PBGC benefit guarantees, including their limits, and the situations under which the limitations will apply.
The same requirements continue to apply with two new additions; AFNs must also state that (1) “if plan assets are determined to be sufficient to pay vested benefits that are not guaranteed by the PBGC, participants and beneficiaries may receive benefits in excess of the guaranteed amount” and (2) the determination of whether assets are sufficient is based on assumptions prescribed by the PBGC, which generally “result in a plan having a lower funded status as compared to the plan’s funded status disclosed in this notice.”
Information About the Plan’s Funding Policy. AFNs are required to include a table showing what percentage of the plan’s assets were allocated among various categories of asset classes for the plan year covered by the AFN.
The new AFNs retain this requirement and now must also include the average return on the plan’s investments for the preceding plan year.
Model Notice
When AFNs were first required, the Department of Labor (DOL) issued a model notice which most DB plans widely utilize as the basis for preparing their notices. To date, the DOL has not issued a new model AFN to reflect the new SECURE 2.0 requirements listed above. We are hopeful that the DOL will do so soon since the April 30 deadline for DB plans with calendar year plan years will be upon us in no time.
If the DOL does not issue a model notice, the DB plan’s actuary typically prepares the AFN and so will likely have a form that they feel reflects the new requirements, although we expect that they will recommend that the plan sponsor have ERISA counsel review the notice to ensure compliance with the law. Sponsors of DB plans also will have to consider whether they want to include a cover letter with the AFN to be issued in 2025 that explains the different information being presented as compared to prior years’ AFNs to avoid participant confusion or questions.
