The deadline for the annual funding notice (AFN) for calendar year multiemployer defined benefit (DB) plans is rapidly approaching. This provides a good opportunity for trustees and professionals to review the information required to be included in the notice. We will guide you through the contents of the notice as well as highlight the following changes made to the requirements since the U.S. Department of Labor (DOL) issued its final rule on the AFN in 2015.
- The DOL issued Field Assistance Bulletin No. 2023-01 (FAB 2023-01) on April 25, 2023, which modifies the AFN disclosures for plans that received special financial assistance (SFA) under the American Rescue Plan Act of 2021 (ARP). FAB 2023-01 is in effect now and, pending further guidance, the DOL will treat compliance with it as “constituting a reasonable, good faith interpretation of the annual funding notice disclosure requirements” with respect to the SFA-related items.
- Section 343 of SECURE 2.0 also changed certain disclosures on the AFN, but for plan years beginning after December 31, 2023. These changes must be reflected in the 2024 AFN sent out in 2025.
Most plans use the model notice provided in the DOL’s final rule to satisfy the AFN requirement. We expect the DOL to issue a new model notice to reflect these recent changes before the 2024 plan year notices are sent in 2025.
When is the AFN sent and who is it sent to?
In general, the AFN must be issued within 120 days following the close 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 prior 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 2023 annual funding notice by April 29, 2024 (because 2024 is a leap year). If the plan is a small plan, the 2023 annual funding notice is due by July 31, 2024, the due date of the Form 5500 filing, or by October 15, 2024, if the filing is on extension.
The notice is sent to the Pension Benefit Guaranty Corporation (PBGC) and to each plan participant, beneficiary, alternate payee, each labor organization representing participants and beneficiaries, and each employer that has an obligation to contribute to the plan, as of the last day of the notice year. If the plan has terminated by mass withdrawal, the AFN is only required to be sent to participants, beneficiaries, and alternate payees.
What is in the notice and what has changed?
Generally, multiemployer DB plans covered by the PBGC are required by law1 to send an AFN summarizing the funded status of the plan as well as other plan-related information as described below.
Identifying information
The notice should include 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 plan’s Pension Protection Act (PPA) funded percentage for the notice year and the two prior plan years are shown on the notice, unless the percentages exceed 100%. If more than 100% funded, the AFN only requires a statement that the plan’s funded percentages are more than 100%. In addition, the notice must disclose the plan’s assets and liabilities that are used to calculate the PPA funded percentages for the notice year and two prior plan years.
Observation. PPA funded percentages are calculated as of the beginning of the plan year using the actuarial value of assets, which can either be the same as the market value of assets, or an asset value that smooths market value gains and losses.
FAB 2023-01 provides that the SFA received should be excluded when determining the plan’s PPA funded percentage and actuarial value of assets disclosed on the notice. In addition, FAB 2023-01 contains model language to show what the funded percentages would be if the SFA was reflected.
Market value of assets
The notice must show the plan’s fair market value of assets as of the end of the notice year and the two prior plan years.
FAB 2023-01 provides that the SFA received should be included when disclosing the plan’s market value of assets. In addition, FAB 2023-01 says the notice must include a statement explaining how the SFA is reflected. It contains model language for this purpose.
Zone status
If the plan was in endangered or critical status for the notice year, then the AFN should describe how someone can get a copy of the plan’s funding improvement plan (FIP) or rehabilitation plan (RP), including any modifications made during the notice year, as well as the actuarial and financial data that show any actions taken to improve the plan’s funded status.
Plans that receive SFA are deemed to be in critical status through the plan year ending in 2051. FAB 2023-01 provides model language to describe the plan’s zone status in lieu of the model language in the final rule.
However, if a plan that receives SFA merges with a plan that has not received SFA, and the non-SFA plan is the ongoing plan following the merger, then the AFN disclosure requirement is based on the zone status of the ongoing plan.
If the plan was in critical and declining status, the notice must include the date of projected insolvency, and statements noting whether the trustees have taken actions allowed by law to avoid insolvency and that the insolvency could lead to benefit reductions.
Demographic information
The notice must show the number of active participants, retired participants in pay status, and terminated vested participants who are expected to retire and collect benefits in the future.
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, then gathering the data as of December 31, 2024, by April 2025, when the notice is due, could be a challenge. Trustees should work with their plans’ 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 notice year must also be included in the AFN.
The model notice includes an additional paragraph for plans to describe their investment policy. 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.
FAB 2023-01 provides that the plan’s investment policy must reflect the restrictions and constraints on how the SFA is invested and the condition that “one year of projected benefit payments and administrative expenses [are] to be invested in investment grade fixed income.”
The asset allocation percentages do not need to be separately identified for SFA, just the plan as a whole. Model language was provided to make this clear.
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 2023 plan year notice, the current plan year is the plan year beginning in 2024).
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 5% 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.
FAB 2023-01 states that “receipt of SFA … is an event that has a ’material effect’ on plan assets, regardless of the amount of SFA received.” A material effect explanation must be included in the AFN for the plan year the SFA (or supplemented SFA) is received.
Some plans that receive SFA also reinstated benefits that were suspended under the Multiemployer Pension Reform Act of 2014 (MPRA) or suspended due to insolvency. The reinstated benefits and make-up payments could have a material effect on plan liabilities. However, FAB 2023-01 notes that “because the amount of SFA … is expected to offset the increase in liabilities through at least 2051,” a projection of the liabilities to the end of the current plan year is not necessary.
FAB 2023-01 contains model language to disclose the date and amount of SFA (or supplemented SFA) received, briefly describes the conditions that apply to plans that receive SFA, and provides additional explanations for plans that reinstated suspended benefits. If a plan receives supplemented SFA in a later plan year, the AFN does not need to include the conditions or explanations of reinstated benefits in the later AFN.
Form 5500 information.
The AFN must also include a statement that an individual can retrieve the plan’s Form 5500 annual report from the DOL website or can request a copy from the plan administrator.
Insolvency rules.
The 2015 final rule states that the AFN must contain “a summary of the rules governing insolvency, including limitations on benefit payments.”
FAB 2023-01 provides that a plan receiving SFA should continue to provide this summary of rules because a plan receiving SFA would still “be subject to the current rules and guarantee for insolvent plans” if it becomes insolvent.
PBGC guarantees
The notice should also include a general description of the PBGC benefit guarantees “and an explanation of the limitations on the guarantee and the circumstances under which such limitations apply.”
Requesting more information
The AFN should provide the contact information for the trust office so that notice recipients can request additional information.
AFNs for plans that terminated by mass withdrawal
Plans that terminated by mass withdrawal, i.e., all employers have either withdrawn from the plan or they ceased to have an obligation to contribute to the plan, can satisfy the notice requirements under an alternative method. The alternative notice is different in the following ways:
- Instead of disclosing the plan’s funded percentage and the underlying liabilities, terminated plans are required to show the market value of assets as of the end of the notice year and the two prior years along with the total benefit payments made during each plan year.
- The plan’s zone status will not be disclosed as terminated plans are no longer subject to ERISA minimum funding requirements.
- The plan’s demographic information, funding policy and asset allocation percentages, and the section related to material events are not required to be disclosed.
- If a separate notice has not already been provided, the AFN can include a statement that the plan will have to reduce benefits if its assets are not sufficient to cover the benefits, along with the rules related to such reductions.
Additional information
Plans are permitted to include additional information to help readers understand the mandated information.
FAB 2023-01 provides model language that insolvent plans have the option to use if they qualify for SFA but have not yet applied or have not received approval for SFA by the end of the notice year.
Observation. This language only appears to apply to insolvent plans. There are many other plans that are not insolvent and are currently on the PBGC’s waiting list to apply for SFA. Such plans should consult with plan legal counsel as to whether similar language could be included in their AFN.
In addition, FAB 2023-01 provides model language that plans receiving SFA have the option to use. That language explains that MPRA benefit suspensions cannot be applied for in the future.
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 boards of trustees 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 have an impact on the plan’s projected funding status. It also allows trustees to proactively address any challenges, such as recent market or industry volatility. This extra effort can reassure participants that the trustees are actively committed to ensuring the plan provides secure retirement benefits.
Exceptions for sending the AFN
According to the 2015 final rule, the following plans are not required to send the AFN:
- Insolvent plans that have met the notice requirements for insolvent plans under ERISA sections 4245(e) or 4281(d)(3) before the due date of the AFN for the plan year.
- Plans that have terminated by mass withdrawal of all employers of the plan, if the due date for the AFN is “on or after the date the plan has distributed assets in satisfaction of all nonforfeitable benefit liabilities.”
Observation. Most plans that terminate by mass withdrawal typically are underfunded at the time of termination and continue operating without expectation that they will be sufficiently funded to close out the plan. Many will ultimately require PBGC financial assistance to pay benefits when due. In these situations, the AFN will continue to be required for years prior to the year of insolvency. - Plans that have merged or consolidated with another plan will not have to send an AFN for the plan year in which the transaction takes place. The successor plan will be required to send the AFN along with details about the merger or consolidation. For example, if two calendar year plans merge in 2024, the AFNs applicable to the 2023 plan year will be sent out by each plan in 2024, but the AFN for the 2024 plan year will only be sent by the successor plan in 2025.
More changes may be coming
Section 319 of SECURE 2.0 directs the U.S. 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 to 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 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.