NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
1. Description of Plan
The following description of the J. C. Penney Corporation, Inc. Savings, Profit Sharing and Stock Ownership Plan (the Plan) provides only general information. For more complete information, Participants should refer to the Summary Plan Description for the Plan. If these Notes to Financial Statements or the Summary Plan Description result in any misunderstanding or inconsistency with the Plan document, the Plan document will govern.
(a)General
The Plan is a defined contribution plan available to eligible employees (Associates) of J. C. Penney Corporation, Inc. (the Company, Plan Sponsor or Plan Administrator) and certain subsidiaries, who were hired or rehired prior to January 1, 2007, and have not been subsequently rehired after January 1, 2007. Associates who have attained age 21 are immediately eligible to participate in the Plan upon completing one hour of service. An eligible Associate must be enrolled in the Plan to be a Participant in the Plan (Participant). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The financial statements include all of the funds that comprise the Plan.
The Benefit Plans Investment Committee (BPIC) is the named fiduciary for the control and management of the assets of the Plan except for the J. C. Penney Common Stock Fund (Penney Stock Fund). Effective August 2017, Newport Trust Company (Newport Trust) became the named fiduciary with respect to the management and disposition of the Penney Stock Fund. The BPIC also has the responsibility for selecting investment funds, other than the Penney Stock Fund, to be offered under the Plan. The Benefits Administration Committee (BAC) is the named fiduciary for the review of denied benefit claims and has overall responsibility for the day-to-day administration of the Plan. The Human Resources Committee (HRC) approves the Company’s overall benefit strategy for the Plan and any modifications or amendments to the Plan and is responsible for appointing members of the BAC and the BPIC and appoints the trustee. The HRC has named State Street Bank & Trust Company (State Street Bank or Trustee) as the trustee for the Plan and Alight Solutions LLC as the third party administrator/record keeper for the Plan.
(b)Payment of Benefits
Generally, Participants who have separated from service with account balances over $5,000 remain in the Plan until the Participant elects payment. A Participant will receive an involuntary lump sum distribution if the total vested account balance is $5,000 or less at the time of distribution. If the Participant is under the age of 65 and the Participant does not elect to receive the mandatory lump-sum distribution directly as a cash distribution, as a direct rollover to an eligible retirement Plan, or as a direct rollover to an Individual Retirement Arrangement (IRA), then the Participant’s mandatory lump-sum distribution will be automatically paid as a direct rollover to an IRA in the Participant’s name with Millennium Trust Company. If a cash distribution is elected, applicable taxes and early withdrawal penalties may apply. Certain Participants who have separated from service and who are 100% vested in the Company contributions may request periodic withdrawals, fixed monthly payments of at least $100, or a complete distribution. Minimum required distributions will begin by April 1 of the year following the year of separation for a Participant who has attained age 70½ and will continue each year thereafter to comply with federal law. Hardship withdrawals are permitted provided the requirements for financial hardship under Internal Revenue Service (IRS) rules are met.
(c)Contributions
Participants who are classified as highly compensated in 2019 and 2018 (earning more than $125,000 in 2018 for 2019 and $120,000 in 2017 for 2018) are permitted to contribute from 1% to 8% of their eligible pay (up to a maximum of $280,000 for 2019 and $275,000 for 2018) with a 6% combined maximum in pre-tax and Roth contributions not to exceed 8% including after-tax contributions (pre-tax and Roth contributions were subject to an annual maximum of $19,000 in 2019 and $18,500 in 2018). Participants earning $125,000 or less in the previous year are permitted to contribute from 1% to 50% of their eligible pay (pre-tax and Roth contributions were subject to an annual maximum of $19,000 in 2019 and $18,500 in 2018).
The Plan allows Participants who have attained the age of 50 by the end of the year to make an additional tax-deferred deposit (catch-up contribution) up to a maximum of $6,000 during 2019 and 2018. These catch-up contributions are not eligible for the Company’s matching contribution.
The Plan allows Participants who participated in another employer’s qualified retirement plan before coming to work for the Company to rollover a portion or all of their distributions from the prior employer’s plan. The Participant cannot rollover a loan from another plan. The Plan accepts eligible cash rollovers directly from another qualified retirement plan that meets certain legal requirements within 60 days after receipt of an eligible distribution. If the rollover is not a direct rollover, then only the taxable portion of the prior Roth 401(k) account may be rolled over and the Roth Begin Date doesn’t carryover. The Participant is immediately vested in these contributions to the Plan.
Participants age 21 or older become eligible for the Company matching contributions after completing 1,000 hours of service in an eligibility period. The Company matching contribution is a per pay period Company match of $0.50 per dollar deposited of the first 6% of eligible pay. In some years the Company may choose to make an additional discretionary contribution to the Plan.
During 2019, the Company matching contributions, net of forfeitures, totaled approximately $10.3 million. During 2018, the Company matching contribution totaled approximately $11.3 million.
(d)Participants’ Investment Funds
All Participant contributions and Company matching contributions are invested in the Plan’s investment funds in accordance with the Participant’s investment elections. Participants direct their investments amongst three tiers of funds as follows: Tier 1 funds consist of target date retirement funds managed by Vanguard Fiduciary Trust Company. Tier 2 funds consist of index funds, including the Penney Stock Fund. Tier 3 funds consist of the Participant directed brokerage window. The funds are maintained on a unit-value basis, and, accordingly, the actual earnings and appreciation or depreciation in the underlying securities are reflected in the daily unit value.
(e)Participant Accounts
Each Participant’s account is credited with the Participant’s contributions, the Company’s contributions, Plan earnings and appreciation or depreciation in underlying securities, and is charged with an allocation of administrative expenses. Allocations are based on Participant account balances, as defined. The benefit to which a Participant is entitled is the benefit that can be provided from the Participant’s vested account.
(f)Participants’ Loans
A Participant who has not separated from service may request a loan. The minimum loan amount is $500. The maximum loan amount is the lesser of: the value of a Participant’s before-tax, Roth, Roth rollover, rollover and after-tax deposits on the valuation date, 50% of a Participant’s total vested account value on the valuation date, or $50,000 minus the highest aggregate balance of any other loans owed to the Plan during the previous 12 months. All loans must be adequately secured and bear interest at the prime rate plus 1%. Interest rates on the loans outstanding as of December 31, 2019 ranged from 4.25% to 10.5% and maturities through 2024. Interest rates on the loans outstanding as of December 31, 2018 ranged from 4.25% to 10.5% and maturities through 2023. Loan amounts and the terms of repayment are limited in accordance with Plan provisions.
(g)Vesting
Participants are immediately vested in the value of their deposits and earnings thereon. Company contributions and earnings thereon for Plan years 2007 and later will be 100% cliff vested after three years of service. Participants will also be 100% vested if they separate from service at normal retirement age, death, total disability, or a reduction in force or unit closing. Participants who separate from service prior to full vesting of their rights forfeit the unvested balance of their Company contributions and any related earnings when their employment ends.
(h)Forfeited Accounts
Forfeitures are available to restore forfeited amounts of rehired Participants, offset Company contributions, or pay Plan expenses. There were no forfeitures available as of December 31, 2019, forfeitures available as of December 31, 2018 totaled $0.4 million. During 2019 approximately $0.3m forfeitures were utilized to offset Company contributions and in 2018 no forfeitures were utilized to offset Company contributions. A portion of the forfeiture balance in 2018 and 2019 was reserved for non-cashed checks paid to Participants as part of the Ramirez v. J. C. Penney Corporation, Inc. litigation settlement.
(i)Expenses
Participants’ accounts share in the expenses to administer the Plan. These expenses include trustee, investment management, audit, administrative service provider fees, and other expenses. Administrative expenses not paid by the Plan are paid by the Company.
(j)Transfers to Affiliated Plan
Effective January 1, 2017, the J. C. Penney Corporation, Inc. Safe Harbor 401(k) Savings Plan (Safe Harbor Plan) was made available for active employees hired or rehired on or after January 1, 2007. The Safe Harbor Plan replaced the noncontributory Company retirement account previously provided for in the Plan. During 2019 and 2018 net assets of approximately $6 million and $8 million respectively were transferred to the Safe Harbor Plan for Participants who lost eligibility in the 401(k) Savings Plan and became eligible for the Safe Harbor Plan.
(k)Interest in Master Trust
The Plan participates in the J. C. Penney Corporation, Inc. Savings Plans Master Trust (Master Trust) along with the Safe Harbor Plan. Certain investments of the Plan are maintained through the Master Trust. The value of the Plan's interest in the Master Trust is based on the beginning value of the Plan's interest in the Master Trust plus actual contributions and allocated net investment income (loss) less actual distributions and allocated administrative expenses. The Plan's allocated share of investment activities is based upon each plan's participation in investment options within the Master Trust.
2. Related Party and Party in Interest Transactions
Certain Master Trust investment options are investment products managed by State Street Global Advisors (SSGA), which is the investment management division of State Street Bank, a wholly owned subsidiary of State Street Corporation. State Street Bank is the trustee, as defined by the Plan, and the disbursement agent. The trustee and investment manager fees are paid by the Plan.
As of December 31, 2019, the Master Trust held investments in J.C. Penney Company Inc. common stock totaling $18.1 million. During the year ended December 31, 2019, 4.4 million shares were acquired and 2.4 million were sold by the Master Trust. As of December 31, 2018, the Master Trust held investments in J.C. Penney Company Inc. common stock totaling $14.8 million. During the year ended December 31, 2018, 6.4 million shares were acquired and 5.8 million were sold by the Master Trust. All of these transactions are exempt from the prohibitions against party-in-interest transactions.
Eligible Participants may borrow from their individual account balance in the Plan as discussed in note 1(f), and these transactions qualify as exempt party-in-interest transactions.
Certain administrative functions and services necessary for the operation of the Plan are performed by employees of the Company who may also be Participants in the Plan. The Plan pays reasonable compensation for those services.
3. Summary of Significant Accounting Policies
(a)Basis of Accounting
The financial statements of the Plan are prepared under the accrual method of accounting.
(b)Valuation of Investments and Income Recognition
The Plan’s investments and investments in the Master Trust are stated at fair value, except for synthetic investment contracts, which are stated at contract value because contract value is the amount Participants would receive if they were to initiate permitted transactions under the terms of the Plan.. Purchases and sales of investments are recorded on a trade-date basis. The average cost method is used to calculate gains and losses on the sale of investments. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments bought and sold as well as held during the year.
(c)Notes Receivable From Participants
Participant loans are recorded at amortized costs which represent the unpaid principal balance plus accrued interest.
(d)Payment of Benefits
Benefits are recorded when paid.
(e)Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from these estimates
4. Plan's Interest in Master Trust
As previously discussed, a majority of the investments of the Plan are maintained through the Master Trust at December 31, 2019 and 2018. Use of the Master Trust permits the commingling of Plan assets with the assets of the other plan sponsored by the Company for investment and administrative purposes. Although assets of the plans are commingled in the Master Trust, the record keeper maintains supporting records for the purpose of allocating the net gain or loss of the investment account to the participating plans. The net investment income or loss of the investment assets are allocated by the record keeper to each participating plan based on the relationship of the interest of each plan to the total of the interests of the participating plans.
The following tables present the Master Trust net assets and the Plan's interest in the Master Trust net assets at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2019
|
|
|
|
($ in thousands)
|
Master Trust
|
|
Plan's Interest in
Master Trust
|
|
Investments
|
|
|
|
|
J. C. Penney Company, Inc. common stock
|
$
|
18,108
|
|
|
$
|
13,905
|
|
|
Common and collective trusts, at fair value
|
1,848,059
|
|
|
1,345,206
|
|
|
Synthetic investment contracts:
|
|
|
|
|
Common and collective trusts, at fair value
|
585,601
|
|
|
556,429
|
|
|
Wrapper contracts
|
(4,113)
|
|
|
(3,908)
|
|
|
Synthetic investment contracts, at contract value
|
581,488
|
|
|
552,521
|
|
|
Total investments
|
2,447,655
|
|
|
1,911,632
|
|
|
|
|
|
|
|
Net assets available for benefits
|
$
|
2,447,655
|
|
|
$
|
1,911,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
|
|
($ in thousands)
|
Master Trust
|
|
Plan's Interest in
Master Trust
|
|
Investments
|
|
|
|
|
J. C. Penney Company, Inc. common stock
|
$
|
14,769
|
|
|
$
|
12,086
|
|
|
Common and collective trusts, at fair value
|
1,589,478
|
|
|
1,194,600
|
|
|
Synthetic investment contracts:
|
|
|
|
|
Common and collective trusts, at fair value
|
632,089
|
|
|
603,030
|
|
|
Wrapper contracts
|
9,421
|
|
|
8,987
|
|
|
Synthetic investment contracts, at contract value
|
641,510
|
|
|
612,017
|
|
|
Total investments
|
2,245,757
|
|
|
1,818,703
|
|
|
|
|
|
|
|
Net assets available for benefits
|
$
|
2,245,757
|
|
|
$
|
1,818,703
|
|
The following table presents net investment income (loss) for the Master Trust and the Plan's interest in the Master Trust net investment income (loss) for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
|
Additions and net income (loss) to net assets attributed to:
|
|
|
|
|
Net appreciation (depreciation) in the fair value of investments
|
$
|
343,020
|
|
|
$
|
(132,762)
|
|
|
Interest
|
15,082
|
|
|
18,616
|
|
|
|
358,102
|
|
|
(114,146)
|
|
|
Less investment expenses
|
(739)
|
|
|
(778)
|
|
|
Net investment income (loss)
|
357,363
|
|
|
(114,924)
|
|
|
|
|
|
|
|
Net purchases (sales)
|
(163,510)
|
|
|
(206,266)
|
|
|
Administrative expenses
|
(1,416)
|
|
|
(1,519)
|
|
|
Net decrease in assets
|
192,437
|
|
|
(322,709)
|
|
|
|
|
|
|
|
Net transfers
|
9,461
|
|
|
6,669
|
|
|
|
|
|
|
|
Beginning net assets available for benefits
|
2,245,757
|
|
|
2,561,797
|
|
|
Ending net assets available for benefits
|
$
|
2,447,655
|
|
|
$
|
2,245,757
|
|
|
|
|
|
|
|
Plan's interest in the Master Trust - net investment income (loss):
|
$
|
264,881
|
|
|
$
|
(83,972)
|
|
5. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market Participants at the measurement date. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market Participants.
The following tables present a summary of the Master Trust's investments, the Plan's interest in the Master Trust's investments, and the investments in the self-directed brokerage accounts measured at fair value as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Quoted Prices in Active Market
(Level 1)
|
|
Significant Other Observable Input
(Level 2)
|
|
Total
|
|
Master Trust investments:
|
|
|
|
|
|
|
Common stock (a):
|
|
|
|
|
|
|
J. C. Penney Company, Inc., at fair value
|
$
|
18,108
|
|
|
$
|
—
|
|
|
$
|
18,108
|
|
|
Common and collective trusts (b), at fair value
|
—
|
|
|
1,848,059
|
|
|
1,848,059
|
|
|
Common and collective trusts in synthetic investment contracts, at fair value
|
—
|
|
|
585,601
|
|
|
585,601
|
|
|
Total investments in the Master Trust, at fair value
|
18,108
|
|
|
2,433,660
|
|
|
2,451,768
|
|
|
Synthetic investment contracts, wrapper contracts, at contract value
|
—
|
|
|
—
|
|
|
(4,113)
|
|
|
Total investments in the Master Trust
|
$
|
18,108
|
|
|
$
|
2,433,660
|
|
|
$
|
2,447,655
|
|
|
|
|
|
|
|
|
|
Plan's interest in Master Trust investments:
|
|
|
|
|
|
|
Common stock (a):
|
|
|
|
|
|
|
J. C. Penney Company, Inc., at fair value
|
$
|
13,905
|
|
|
$
|
—
|
|
|
$
|
13,905
|
|
|
Common and collective trusts (b), at fair value
|
—
|
|
|
1,345,206
|
|
|
1,345,206
|
|
|
Common and collective trusts in synthetic investment contracts, at fair value
|
—
|
|
|
556,429
|
|
|
556,429
|
|
|
Total investments in the Master Trust, at fair value
|
13,905
|
|
|
1,901,635
|
|
|
1,915,540
|
|
|
Synthetic investment contracts, wrapper contracts, at contract value
|
—
|
|
|
—
|
|
|
(3,908)
|
|
|
Total investments in the Master Trust
|
$
|
13,905
|
|
|
$
|
1,901,635
|
|
|
$
|
1,911,632
|
|
|
|
|
|
|
|
|
|
Plan investments not in the Master Trust
|
|
|
|
|
|
|
Self-directed brokerage accounts (c):
|
|
|
|
|
|
|
Mutual funds
|
$
|
16,472
|
|
|
$
|
—
|
|
|
$
|
16,472
|
|
|
Common stock
|
21,791
|
|
|
—
|
|
|
21,791
|
|
|
Other:
|
|
|
|
|
|
|
Cash and cash equivalents
|
299
|
|
|
—
|
|
|
299
|
|
|
Preferred stock
|
106
|
|
|
—
|
|
|
106
|
|
|
Total other
|
405
|
|
|
—
|
|
|
405
|
|
|
Total investments not in the Master Trust, at fair value
|
38,668
|
|
|
—
|
|
|
38,668
|
|
|
Total plan investments
|
$
|
52,573
|
|
|
$
|
1,901,635
|
|
|
$
|
1,950,300
|
|
The following table presents a summary of the Plan’s investment assets measured at fair value as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Quoted Prices in Active Market
(Level 1)
|
|
Significant Other Observable Input
(Level 2)
|
|
Total
|
|
Master Trust investments:
|
|
|
|
|
|
|
Common stock (a):
|
|
|
|
|
|
|
J. C. Penney Company, Inc., at fair value
|
$
|
14,769
|
|
|
$
|
—
|
|
|
$
|
14,769
|
|
|
Common and collective trusts (b), at fair value
|
—
|
|
|
1,589,478
|
|
|
1,589,478
|
|
|
Common and collective trusts in synthetic investment contracts, at fair value
|
—
|
|
|
632,089
|
|
|
632,089
|
|
|
Total investments in the Master Trust, at fair value
|
14,769
|
|
|
2,221,567
|
|
|
2,236,336
|
|
|
Synthetic investment contracts, wrapper contracts, at contract value
|
—
|
|
|
—
|
|
|
9,421
|
|
|
Total investments in the Master Trust
|
$
|
14,769
|
|
|
$
|
2,221,567
|
|
|
$
|
2,245,757
|
|
|
|
|
|
|
|
|
|
Plan's interest in Master Trust investments:
|
|
|
|
|
|
|
Common stock (a):
|
|
|
|
|
|
|
J. C. Penney Company, Inc., at fair value
|
$
|
12,086
|
|
|
$
|
—
|
|
|
$
|
12,086
|
|
|
Common and collective trusts (b), at fair value
|
—
|
|
|
1,194,600
|
|
|
1,194,600
|
|
|
Common and collective trusts in synthetic investment contracts, at fair value
|
—
|
|
|
603,030
|
|
|
603,030
|
|
|
Total investments in the Master Trust, at fair value
|
12,086
|
|
|
1,797,630
|
|
|
1,809,716
|
|
|
Synthetic investment contracts, wrapper contracts, at contract value
|
—
|
|
|
—
|
|
|
8,987
|
|
|
Total plan's interest in the Master Trust investments
|
$
|
12,086
|
|
|
$
|
1,797,630
|
|
|
$
|
1,818,703
|
|
|
|
|
|
|
|
|
|
Plan investments not in the Master Trust
|
|
|
|
|
|
|
Self-directed brokerage accounts (c):
|
|
|
|
|
|
|
Mutual funds
|
$
|
15,807
|
|
|
$
|
—
|
|
|
$
|
15,807
|
|
|
Common stock
|
19,465
|
|
|
—
|
|
|
19,465
|
|
|
Other:
|
|
|
|
|
|
|
Cash and cash equivalents
|
563
|
|
|
—
|
|
|
563
|
|
|
Preferred stock
|
102
|
|
|
—
|
|
|
102
|
|
|
Total other
|
665
|
|
|
—
|
|
|
665
|
|
|
Total investments not in the Master Trust, at fair value
|
35,937
|
|
|
—
|
|
|
35,937
|
|
|
Total plan investments
|
$
|
48,023
|
|
|
$
|
1,797,630
|
|
|
$
|
1,854,640
|
|
Actual risk depends on the individual investments which are selected by each applicable Participant.
As of December 31, 2019 and 2018, the Plan’s investments have no future commitments and a daily redemption frequency with one days notice. In addition, the Plan’s investments had no transfers between levels 1 to 3 from December 31, 2018 to December 31, 2019 or from December 31, 2017 to December 31, 2018.
Following is a description of the valuation methodologies used for assets measured at fair value. See also footnote 3(b) for more information.
(a)Common stock: Valued at the closing price reported in the active market in which the individual securities are traded.
(b)Common and collective trusts: Valued at the net asset value (NAV) of shares held by the Plan at year end. The target date funds are comprised of eleven collective trusts, which manage risk and investment return over time. There are three general market risk levels: low to moderate, moderate, and moderate to high. Each fund is a different mix of investments – stocks, bonds and cash. The funds start out with more stock for growth opportunity and end with less
stock. The equity funds are comprised of 3 large cap funds and 2 small cap funds with low to moderate and high risk levels, respectively. The fixed income securities have low general market risk.
There are no known commitments or restrictions on the common and collective trusts except for some withdrawal restrictions as related to liquidation by the Plan Sponsor of the equity funds. The Plan Sponsor has no plans to liquidate these funds.
(c)Self-directed brokerage window includes cash and cash equivalents, common stock, corporate bonds, mutual funds, notes, preferred stock, publicly traded partnerships: Certain U.S. Treasury notes and corporate bonds are valued at the closing price reported in the active market in which the security is traded. Other corporate bonds are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Other investments listed are valued at the closing price reported in the active market in which the individual securities are traded. Actual risk depends on the individual investments which are selected by each applicable Participant.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan Sponsor believes its valuation methods are appropriate and consistent with other market Participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement as of the reporting date.
6. Synthetic Investment Contracts
The Master Trust enters into synthetic investment contracts (SICs), with certain insurance companies and financial institutions (the Contract Issuers). The SICs provide a crediting rate based on the performance of fixed income securities underlying each SIC and held by the Master Trust for the Plan. SICs totaled $581.5 million and $641.5 million in the Master Trust as of December 31, 2019 and 2018, respectively. Additionally, there are no reserves against contract values for credit risk of the Contract Issuer or otherwise.
The SICs include wrapper contracts in order to manage the market risk and return of the investments and securities held by the SICs. The wrapper contracts generally modify the investment characteristics of certain underlying securities such that they perform in a manner similar to guaranteed investment contracts. Each wrapper contract and the related underlying assets comprise the SICs, which are recorded at contract value. Contract value represents contributions made under the contract, plus interest at the contract rate, less withdrawals and contract administrative expenses.
Key factors that could influence future average interest crediting rates include, but are not limited to: Plan cash flows, changes in interest rates, total return performance of the fair market value bond strategies underlying each SIC contract, default or credit failures of any of the securities, investment contracts, or other investments held in the fund, the initiation of an extended termination (immunization) of one or more SIC contracts by the manager or the Contract Issuers.
Specific coverage provided by each SIC may be different for each contract, and can be found in the individual SIC contracts held by the Master Trust. Contract Issuers are not allowed to terminate any of the above SICs and settle at an amount different from contract value unless there is a breach of the contracts terms, which is not corrected within the applicable cure period. Actions that may result in a breach (after any relevant cure period) include, but are not limited to: material misrepresentation; failure to pay SIC fees, or any other payment due under the contract; failure to adhere to investment guidelines; and the bankruptcy or liquidation of the Plan Sponsor.
7. Tax Status
The IRS has determined and informed the Company by a letter (determination letter) dated February 22, 2016 that the Plan and the related trust are designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Plan has been amended since the reliance period specified in the determination letter. The Plan Administrator believes that the Plan is designed and is currently being materially operated in compliance with the applicable requirements of the IRC.
The Plan evaluates the uncertainties of tax positions taken or expected to be taken on a return based on the probability of whether the position taken will be sustained upon examination by tax authorities. The Plan uses a more likely than not threshold for recognition and derecognition of tax positions taken or to be taken in a return. The Plan concluded that it has no material uncertain tax positions to be recognized as of December 31, 2019. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
8. Form 5500 Reconciliation
There were no reconciling items between the net assets available for benefits as disclosed in these financial statements and the Form 5500.
9. Plan Termination
Although the Company has not expressed any intent to do so, the Company has the right to terminate the Plan and the related Trust at any time subject to the provisions of ERISA. In the event of Plan termination, affected Participants will become fully vested in amounts allocated to their accounts as of the date of the termination.
10. Risks and Uncertainties
The Plan and Master Trust invest in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits and Participant accounts.
Market conditions can result in a high degree of volatility and increase the risks and short-term liquidity associated with certain investments held by the Plan, which could impact the value of investments after the date of these financial statements. Due to uncertainties inherent in the estimations and assumptions process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements.
11. Subsequent Events
(a)Freeze and Liquidation of Investments in Penney Stock Fund
•April 6, 2020, Freeze of New Contributions/Transfers Into the Penney Stock Fund
Given the Company’s deteriorating financial results in the wake of a general weakening in the retail sector, its poor stock performance, and the negative impact of the Coronavirus pandemic on the U.S. economy and global markets, Newport Trust, named fiduciary and investment manager of the Plan's investments in the Penney Stock Fund, made the decision that until the financial outlook for the Company improves, the Penney Stock Fund in the Plan would not accept any new contributions or transfers from other investment funds under the Plan. Newport Trust did not, however, decide to liquidate the Plan’s investments in the Penney Stock Fund at that time.
•April 30, 2020, Liquidation and Closure of the Penney Stock Fund in the Plan
Given the Company’s continued deteriorating financial results, its poor stock performance, and the negative impact of the Coronavirus pandemic on the U.S. economy and global markets, Newport Trust made the determination that the Penney Stock Fund is no longer prudent as an investment option under the Plan, and consequently decided to liquidate the Plan’s investments in the Penney Stock Fund and to remove it as an investment option under the Plan. As of April 30, 2020, Participant balances in the Penney Stock Fund in the Plan were fully frozen to all Participant activity, and Newport Trust began the orderly liquidation of the Plan’s shares in the Penney Stock Fund. At the conclusion of the liquidation, the proceeds were deposited in the Vanguard Target Retirement Trust closest to the Participant's assumed retirement age of 65, the default investment option provided under the Plan, until or unless the Participant directed the proceeds into another investment fund offered under the Plan.
(b)May 15, 2020 J. C. Penney Files Chapter 11 Petition to Implement Financial Restructuring Plan
The Plan is a defined contribution tax-qualified plan and funded with assets that are held in a separate trust outside of the Company and are not subject to creditor’s claims through court-supervised proceedings. The Company does not anticipate any change to the balances or any payments provided through the Plan as a result of the Chapter 11 filing.