As we draw closer to the time of year that defined benefit (DB) plans start sending out their annual funding notices (AFNs), we wanted to draw attention to SECURE 2.0 changes that will apply to single-employer DB plans beginning with the 2024 plan year AFNs sent out in 2025. None of these changes are required for the AFNs sent out this year (for the 2023 plan year).
DB plans that are covered by the Pension Benefit Guaranty Corporation (PBGC) are required by law1 to send out an AFN summarizing the plan’s funded status. Section 343 of SECURE 2.0 changes what will be disclosed in the AFN for plan years beginning after December 31, 2023. This article reviews the information required to be presented in the notice for single-employer DB plans and highlights the changes SECURE 2.0 made to these requirements since the U.S. Department of Labor (DOL) issued its final rule on the AFN in 2015.
Most plans use the model notice provided by the DOL to satisfy the AFN requirement. We expect the DOL to issue a new model notice to reflect these changes before the 2024 plan year notices are due.
When is the AFN sent and who is it sent to?
In general, the 2015 final rule states that the AFN “must be furnished not later than 120 days after the end of the notice year.” The notice year is defined as “the plan year to which the notice relates.” Plans that had 100 or fewer participants on each day of the preceding plan year (i.e., small plans) must provide the notice by the Form 5500 due date, including extensions.
Example. A plan with a calendar year plan year must provide the 2024 annual funding notice by April 30, 2025. If the plan is a small plan, the 2024 annual funding notice is due by July 31, 2025, the due date of the Form 5500 filing, or October 15, 2025, if the filing is on extension.
The notice is sent to the PBGC and to each plan participant, beneficiary, alternate payee, and each labor organization representing participants and beneficiaries on the last day of the notice year. If a plan’s unfunded liability is less than $50 million, there is no obligation to send the AFN to the PBGC. However, if the PBGC issues a written request for the notice, it must be supplied within 30 days.
What is in the notice and what is changing?
As a reminder, the AFN provides the following information about the plan.
Identifying information
This includes the plan sponsor’s name, employer identification number (EIN), plan number (PN), name of the plan, and contact information of the plan administrator.
Funded percentage
The 2015 final rule requires that the notice include “a statement as to whether the plan’s funding target attainment percentage for the notice year, and for each of the two preceding plan years, is at least 100% (and, if not, the actual percentages).” In addition to the funding percentages, the underlying assets, liabilities, funding standard carryover balance, and prefunding balance must also be disclosed. The plan must separately disclose the fair market value of plan assets and liabilities on the last day of the notice year.
The funding target attainment percentage (FTAP) is calculated as of the valuation date, which is typically the beginning of the plan year. This calculation is based on assets, reduced by any carryover or prefunding balances, and liabilities, disregarding the at-risk rules. When disclosing the liabilities, both the funding target liability and the at-risk liability are shown only if the at-risk liability is greater than the funding target liability.
SECURE 2.0 changes the notice in the following ways:
- The plan’s percentage of plan liabilities funded is calculated as of the end of the notice year and the two preceding years, rather than the plan’s FTAP, which is typically a beginning-of-year measurement.
- Plan assets at the end of the notice year should be based on the fair market value, unreduced by the carryover and prefunding balances. In addition, the carryover and prefunding balances are no longer required to be disclosed.
- Liabilities at the end of the plan year will be calculated based on interest rates used to calculate the standard premium funding target for PBGC variable rate premiums.
- If the figures are presented in a tabular format (as is the case in the current model notice), plans must include a statement that, in the event of plan termination, liabilities calculated using PBGC assumptions may be greater than those shown in this section.
- Plans are also required to state whether the plan’s funded status at the end of the notice year and the two preceding plans years is 100% and, if not, to provide the actual percentages.
Observation. The primary change appears to be a move to end-of-year market-based funded percentages and away from measurements plans may be using for plan funding, such as the actuarial value of assets that reflects asset smoothing, interest rates based on segment rates averaged over a 24-month period, and levels of advanced funding (prefunding and carryover balances). Guidance is needed to clarify whether plans that elect to use the full yield curve must recalculate their liabilities using the segment rates for AFN purposes.
The law also differentiates between the “plan’s percentage of plan liabilities funded” and the “plan’s funded status,” both of which are ratios of the plan’s assets to liabilities. However, the descriptions of these two measurements seem to be identical. Guidance is needed to clarify how these amounts differ and whether at-risk amounts will continue to be disclosed.
Demographic information
The notice must show the number of retired participants in pay status, terminated vested participants who will retire in the future, and the number of active participants.
The 2015 final rule provides that these counts should be as of the valuation date of the notice year, typically the beginning of the plan year.
SECURE 2.0 requires plans to disclose participant counts as of the end of the notice year plus the two prior plan years, in tabular format.
Observation. The shift from beginning to end of the year may seem like a minor change. For example, a calendar year plan would have to show counts as of December 31 for the years 2024, 2023, and 2022 on the 2024 plan year notice. However, if the actuary has traditionally provided these counts, gathering the data as of December 31, 2024, by April 2025 when the notice is due, could be a challenge. Plan sponsors should work with their plan’s professionals to either provide the necessary data to the actuary sooner or decide on an alternative way for obtaining the counts.
Funding policy
A statement about the plan’s funding policy and asset allocation percentages as of the end of the notice year must also be included in the AFN.
The 2015 final rule also requires “a general description of any investment policy of the plan as it relates to the funding policy … and the asset allocation of investments.” When showing the plan’s asset allocation percentages, plans have the option to classify the assets into either the 16 asset categories from Form 5500 Schedule H or the categories from Form 5500 Schedule R. The Internal Revenue Service (IRS), DOL, and PBGC recently updated the Schedule R beginning with the 2023 plan year, expanding the number of asset categories from five to seven.
SECURE 2.0 requires plans to disclose the average return on assets for the notice year.
Observation. Guidance to describe how the average return should be calculated could be helpful.
Material events
If applicable, the 2015 final rule requires plans to disclose an “explanation of any plan amendment, scheduled benefit increase or reduction, or other known event taking effect in the current plan year and having a material effect on plan liabilities or assets for the current plan year”, and the projected impact on plan liabilities at the end of the current plan year.
The 2015 final rule clarifies that the current plan year is the year following the notice year (e.g., for the 2024 plan year notice, the current plan year is the plan year beginning in 2025).
An event is considered to have a material effect if it results “in an increase or decrease of five percent or more in the value of assets or liabilities from the valuation date of the notice year”, or if “in the judgment of the plan’s enrolled actuary, the event is material for purposes of the plan’s funded status” absent the five percent rule. Events that become known within 120 days before the AFN is due are not required to be disclosed on the current year’s AFN but would be reflected on the following year’s notice.
According to the 2015 final rule, other known events include, among other possibilities, “an extension of coverage … to a new group of employees; a plan merger, consolidation, or spinoff; or a shutdown of any facility, plant, store, or such other similar corporate event that creates immediate eligibility for benefits that would not otherwise be immediately payable for participants separating from service.” Market fluctuations are not included in other known events.
Plan termination rules
The notice must contain a summary of the PBGC rules governing plan terminations.
PBGC guarantees
A general description of the PBGC benefit guarantees, explanations of limits on the guarantee, and situations under which the limitations apply are also required to be disclosed.
SECURE 2.0 requires plans to make an additional statement that, “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.” In addition, 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.”
Form 5500 information
The AFN must also provide a statement that a person “may obtain a copy of the [Form 5500] annual report of the plan” by visiting the DOL website or requesting a copy from the plan administrator.
PBGC 4010 disclosure
If applicable, the notice should include a statement that the plan sponsor (or any of its controlled group members) was required to file a PBGC section 4010 filing for the plan year.
Additional information
Plans are permitted to include additional information to help readers understand the mandated information.
Supplement to the AFN for interest rate stabilization
For plans using the 24-month average segment rates, the notice must include information about the impact of interest rate stabilization on the plan’s funded percentage, funding shortfall, and minimum required contribution provided by the Moving Ahead for Progress in the 21st Century Act (MAP-21), as updated and extended most recently by the Infrastructure Investment and Jobs Act of 2021 (IIJA). These required disclosures are currently included in a one-page “temporary supplement” to the AFN.
Observation. Because SECURE 2.0 eliminates the use of the 24-month average segment rates to calculate the plan’s funded percentage reported in the AFN, it would appear that the supplement would no longer be needed. However, the DOL’s 2023 Request for Information (RFI), regarding how certain SECURE 2.0 sections may impact ERISA’s reporting and disclosure requirements, suggests this disclosure may continue, providing notice recipients different measures of the plan’s funding that could potentially be confusing.
AFN cover letter
Because any additional information that can be included in the AFN is limited to explanations of the required information contained in the notice, some plan sponsors have elected to send a separate cover letter with the notice. While not required, it offers an opportunity to highlight any actions taken or events that have or are expected to impact the plan’s projected funding status. It also allows plan sponsors to proactively address any challenges, such as recent market or industry volatility. This extra effort can reassure participants that the plan sponsor is actively committed to ensuring the plan provides secure retirement benefits.
Exceptions to sending the AFN
According to the 2015 final rule, the following plans are not required to send the AFN:
- Plans that have been terminated by the PBGC, “if the due date for the AFN is on or after the date the PBGC is appointed trustee of the plan.”
- Plans that have filed “a standard termination notice, … provided the proposed termination date is on or before the due date of the funding notice and a final distribution of assets in satisfaction of the plan’s benefit liabilities proceeds” according to ERISA 4041(b).
- Plans that have “distributed assets in satisfaction of all benefit liabilities in a distress termination.”
- Plans that have merged or consolidated with a successor plan, legally transferring their assets, will not have to send the AFN in the final plan year in which the transaction takes place. The successor plan is still required to send the AFN along with details about the merger or consolidation.
More changes may be coming
The RFI referenced above focused on certain sections of SECURE 2.0 and their impact on ERISA’s reporting and disclosure requirements. Section 319 of SECURE 2.0 directs the Department of the Treasury, DOL, and PBGC (the federal agencies) to review the reporting and disclosure requirements under ERISA and the Internal Revenue Code (IRC) and make recommendations to Congress by December 29, 2025, to consolidate, simplify, standardize, and improve disclosures so that participants and beneficiaries better understand the information about their plans and receive the information in a timely manner. A second Request for Information was recently issued by the federal agencies to collect information from the public. Additional changes to all plan disclosures could follow this review.
Please contact your Milliman consultant with any questions.
1 ERISA Section 101(f). This article does not cover the requirements for Cooperative and Small Employer Charity (CSEC) plans or plans whose retirement benefits are provided through contracts guaranteed by an insurance carrier.