Final Rule Streamlines Pension Funding Notices

Regulations make allowances for good faith errors

By Stephen Miller, CEBS Feb 3, 2015
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A final rule to ensure that workers receive annual notification of the funded status of their defined ben​efit pension plans, published in the Federal Register on Feb. 2, 2015, by the Department of Labor (DOL), clarifies what content must be included and provides allowances for good faith errors.

The final rule, Annual Funding Notice for Defined Benefit Plans, requires administrators of defined benefit plans subject to the Employee Retirement Income Security Act (ERISA) to furnish a funding notice every year to each plan participant and beneficiary, as well as to the Pension Benefit Guaranty Corp. (PBGC), labor unions representing participants or beneficiaries, and in the case of a multiemployer plan, each employer that has an obligation to contribute to the plan.

The final rule supersedes the DOL's Field Assistance Bulletin 2013-01 and subsequent guidance that addressed annual funding notices for defined benefit pension plans in the absence of final regulations.


The final rule is effective for plan years beginning on or after Jan. 1, 2015. Funding notices generally must be furnished no later than 120 days after the close of the plan year. Small plans (with 100 or fewer participants) must furnish funding notices no later than the filing of the plan's annual report, including filing extensions.

“Thus, the first affected [annual funding notice] for calendar plan years will be those due for distribution for large plans on April 30, 2016,” explains an alert from Buck Consultants.

What to Report

“DOL’s final regulation offers plan administrators guidance to evaluate with their actuaries in assessing the content of the plan’s [annual funding notice],” noted Buck Consultants. Content required to be in a funding notice includes:

Funding percentage. Annual notices must include the plan's funding percentage. Single-employer plans must report their "funding target attainment percentage" and multiemployer plans must report their "funded percentage." The funding percentage of a plan is a measure of how well the plan is funded on a particular date. In general, the higher the percentage, the better funded the plan. The funding percentage must be reported for the past three plan years.

Assets and liabilities. Annual notices must include information regarding the plan's assets and liabilities. For example, notices must include a statement of the value of the plan's assets and liabilities on the same date used to determine the plan's funding percentage. Notices also must include a description of how the plan's assets are invested as of the last day of the plan year.

Material effect events. Annual notices must disclose amendments, scheduled benefit increases (or reductions), or other known events having a material effect on the plan's assets and liabilities if the event is taken into account for funding purposes for the first time in the year following the notice year. If an event first becomes known to a plan administrator 120 days or less before the due date of a notice, the plan administrator is not required to explain, or project the effect of, the event in that notice.

PBGC guarantees and other Title IV ERISA information. Annual notices must include a general description of the benefits under the plan that are eligible to be guaranteed by the PBGC, along with an explanation of the limitations on the guarantee and the circumstances under which such limitations apply. Single-employer plan notices must include a summary of the rules governing plan termination and multiemployer plan notices must include a summary of the rules governing insolvency.

Investment Policy

According to the final rule:

Even though a particular plan’s investment policy might be lengthy and complex in its totality, the final regulation requires only a ‘general description’ of the policy. Thus, except in rare cases, the Department does not expect that a plan’s entire investment policy would be restated in the annual funding notice.” However, to ensure relevance, the final rule requires that “the general description must relate to the funding policy and asset allocation of investments.

An alert from law firm Kilpatrick Townsend reads: “While ERISA does not explicitly require plans to have a formal investment policy, DOL reaffirmed that it would be ‘rare’ for a plan not to have one, which reflects a de facto requirement to have such an investment policy.”

Good Faith Errors

In the final rule’s preamble, the DOL indicated that when there is a change in the funding percentage due to a good faith error or changes in actuarial assumptions between the annual funding statement and the Form 5500, a plan administrator is not required to reissue the funding notice for that year.

The Kilpatrick Townsend alert noted, “Because this position was expressed in the preamble rather than the regulations, it does not necessarily have the effect of law, but it provides informal guidance to consider should a difference arise between what is reported on the annual funding notice and the Form 5500.”

Buck Consultants pointed out, “The DOL did not include specific guidance on differences between amounts disclosed on an AFN [annual funding notice] and amounts that subsequently appear in the Schedules SB or MB for the plan year. DOL said that there is no obligation to provide a revised AFN in cases where the original AFN was prepared in good faith. An explanation of the difference, if material, could be provided with next year’s AFN.”

Model Notices

The final rule includes two model notices (one for single-employer plans and one for multiemployer plans) to aid plan administrators in meeting their obligations. However, use of one of the model notices is not mandatory.

The new model notices “provide an alternative for reporting the allocation of plan assets to investment categories so that only broad classifications (e.g., stocks or investment grade debt instruments) used for Form 5500 Schedule R could be used rather than more specific ones from Form 5500 Schedule H as provided in previous guidance,” explained Buck Consultants. “So plan administrators interested in improving the communication of this funding information to plan participants may want to consider implementing the new notices earlier [than required], if practicable.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related Resources

Defined Benefit Annual Funding Notice (form), SHRM Templates and Tools, March 2015

Annual Funding Notice for Defined Benefit Plans, Federal Register, February 2015

Final Regulations for Annual Funding Notice, Buck Consultants, February 2015

Final Annual Funding Notice Requirements for Defined Benefit Plans, Kilpatrick Townsend, January 2015

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