[Federal Register: August 31, 2007 (Volume 72, Number 169)]
[Proposed Rules]
[Page 50543-50577]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31au07-34]
[[Page 50543]]
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Part V
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Benefit Restrictions for Underfunded Pension Plans; Proposed Rule
[[Page 50544]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-113891-07]
RIN 1545-BG72
Benefit Restrictions for Underfunded Pension Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations providing guidance
regarding the use of certain funding balances maintained for defined
benefit pension plans and regarding benefit restrictions for certain
underfunded defined benefit pension plans. The proposed regulations
reflect changes made by the Pension Protection Act of 2006. These
regulations affect sponsors, administrators, participants, and
beneficiaries of single employer defined benefit pension plans.
DATES: Written or electronic comments and requests for a public hearing
must be received by November 29, 2007.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113891-07), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. to 4 p.m. to CC:PA:LPD:PR (REG-
113891-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-113891-07).
FOR FURTHER INFORMATION CONTACT: Lauson C. Green or Linda S.F. Marshall
at (202) 622-6090; concerning submissions and requests for a public
hearing, contact Kelly Banks at (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collection of information should
be received by October 30, 2007. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in this proposed regulation is in
Sec. 1.430(f)-1(f) and Sec. Sec. 1.436-1(f) and 1.436-1(h). This
information is required in order for a qualified defined benefit plan's
enrolled actuary to provide a timely certification of the plan's AFTAP
for each plan year to avoid certain benefit restrictions. In addition,
these proposed regulations provide for several written elections to be
made by the plan sponsor upon occasion. This information is voluntary
to obtain a benefit. The likely respondents are qualified retirement
plan sponsors and enrolled actuaries.
Estimated total annual reporting burden: 60,000 hours.
Estimated average annual burden hours per respondent: 0.75 hours.
Estimated number of respondents: 80,000.
Estimated annual frequency of responses: occasional.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed Income Tax Regulations (26 CFR part
1) under sections 430(f) and 436, as added to the Code by the Pension
Protection Act of 2006 (PPA '06), Public Law 109-280, 120 Stat. 780.
Section 412 contains minimum funding rules that generally apply to
defined benefit plans.\1\ The minimum funding rules that apply
specifically to single employer defined benefit plans (including
multiple employer plans within the meaning of section 413(c)) are set
forth in new section 430.
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\1\ Section 302 of the Employee Retirement Income Security Act
of 1974, as amended (ERISA) sets forth funding rules that are
parallel to those in section 412 of the Code, section 303 of ERISA
sets forth additional funding rules for defined benefit plans (other
than multiemployer plans) that are parallel to those in section 430
of the Code, and section 206(g) of ERISA sets forth funding-based
limitations for defined benefit plans (other than multiemployer
plans) that are parallel to those in section 436 of the Code. Under
section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and
section 302 of ERISA, the Secretary of the Treasury has interpretive
jurisdiction over the subject matter addressed in these proposed
regulations for purposes of ERISA, as well as the Code. Thus, these
proposed Treasury regulations issued under sections 430(f) and 436
of the Code apply as well for purposes of ERISA sections 303(f) and
206(g), respectively.
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Section 430 generally provides that the minimum required
contribution for a year is the sum of the target normal cost for the
year and the shortfall and waiver amortization charges. Under section
430(f)(3), certain funding balances referred to as the prefunding
balance and the funding standard carryover balance are permitted to be
used to reduce the otherwise applicable minimum required contribution
for a plan year in certain situations. Under section 430(f)(7), the
funding standard carryover balance is based on the funding standard
account credit balance as determined under section 412 for a plan as of
the last day of the last plan year beginning in 2007. Under section
430(f)(6), the prefunding balance represents the accumulation of the
contributions that an employer makes for a plan year that exceed the
minimum required contribution for the year. Thus, an employer that
makes additional contributions for a plan year is permitted in certain
circumstances to use those excess contributions in order to satisfy the
minimum funding requirement in a subsequent plan year.
The treatment of these balances under section 430 reflects
congressional concern with the treatment of a funding standard account
credit balance under the section 412 rules in effect prior to PPA '06.
Accordingly, section 430(f)(3) sets forth new limits on the ability of
a
[[Page 50545]]
poorly funded plan to use the prefunding balance and the funding
standard carryover balance for a plan year. In addition, section
430(f)(4) requires that the prefunding balance and the funding standard
carryover balance be subtracted from the value of plan assets for
certain purposes (including the determination of the plan's funding
target attainment percentage (FTAP), as defined under section
430(d)(2)) and section 430(f)(8) requires that the prefunding balance
and the funding standard carryover balance be adjusted for actual
investment return on the plan assets. In order to give employers the
opportunity to minimize the impact of the requirement to subtract the
prefunding balance and funding standard carryover balance from the plan
assets, section 430(f)(5) permits an employer to elect to reduce the
balances.
Section 401(a)(29) requires that a defined benefit plan (other than
a multiemployer plan) satisfy the requirements of section 436. Section
436 sets forth a series of limitations on the accrual and payment of
benefits under an underfunded plan. Under section 436(g), these
limitations (other than the limitations on accelerated benefit payments
under section 436(d)) do not apply to a plan for the first 5 plan years
of the plan, taking into account any predecessor plan.
Section 436(b) sets forth a limitation on plant shutdown and other
unpredictable contingent event benefits in situations where the plan's
adjusted funding target attainment percentage (AFTAP) for the plan year
is less than 60 percent or would be less than 60 percent taking into
account the occurrence of the event. For this purpose, an
``unpredictable contingent event benefit'' means any benefit payable
solely by reason of (1) a plant shutdown (or a similar event) or (2) an
event other than attainment of age, performance of service, receipt or
derivation of compensation, or the occurrence of death or disability.
Under section 436(b)(2), the limitation does not apply for a plan year
if the plan sponsor makes a specified contribution (in addition to any
minimum required contribution). If the AFTAP for a plan year is less
than 60 percent, then the specified contribution is equal to the amount
of the increase in the plan's funding target for the plan year
attributable to the occurrence of the event. If the AFTAP for a plan
year is 60 percent or more but would be less than 60 percent taking
into account the occurrence of the event, then the specified
contribution is the amount sufficient to result in an AFTAP of 60
percent taking into account the occurrence of the event.
Under section 436(c), a plan amendment that has the effect of
increasing the liabilities of the plan by reason of any increase in
benefits (including changes in vesting) may not take effect if the
plan's AFTAP for the plan year is less than 80 percent or would be less
than 80 percent taking into account the amendment. Under section
436(c)(2), the limitation does not apply for a plan year if the plan
sponsor makes a specified contribution (in addition to any minimum
required contribution). If the plan's AFTAP for the plan year is less
than 80 percent, then the specified contribution is equal to the amount
of the increase in the plan's funding target for the plan year
attributable to the amendment. If the plan's AFTAP for the plan year is
80 percent or more but would be less than 80 percent taking into
account the amendment, then the specified contribution is the amount
sufficient to result in an AFTAP of 80 percent taking into account the
amendment. In addition, under section 436(c)(3), the limitation does
not apply to an amendment that provides for a benefit increase under a
formula not based on compensation, but only if the rate of increase
does not exceed the contemporaneous rate of increase in average wages
of the participants covered by the amendment.
Under section 436(d), a plan is required to set forth certain
limitations on accelerated benefit distributions. If the plan's AFTAP
for a plan year is less than 60 percent, the plan must not make any
prohibited payments after the valuation date for the plan year. If the
plan's AFTAP for a plan year is at least 60 percent but is less than 80
percent, the plan must not pay any prohibited payment to the extent the
payment exceeds the lesser of (1) 50 percent of the amount otherwise
payable under the plan and (2) the present value of the maximum PBGC
guarantee with respect to a participant. In addition, if the plan
sponsor is in bankruptcy proceedings, the plan may not pay any
prohibited payment unless the plan's enrolled actuary certifies that
the AFTAP of the plan is at least 100 percent. However, section 436(d)
does not apply to a plan for a plan year if the terms of the plan
provide for no benefit accruals with respect to any participant for the
period beginning on September 1, 2005, and extending throughout the
plan year.
Under section 436(d)(5), a ``prohibited payment'' is (1) any
payment, in excess of the monthly amount paid under a single life
annuity (plus any social security supplements that are provided under
the plan), to a participant or beneficiary, (2) any payment for the
purchase of an irrevocable commitment from an insurer to pay benefits
(an annuity contract), or (3) any other payment specified by the
Secretary by regulations.
Under section 436(e), a plan is required to provide that if the
plan's AFTAP is less than 60 percent for a plan year, all future
benefit accruals under the plan must cease as of the valuation date for
the plan year. Under section 436(e)(2), the limitation ceases to apply
with respect to any plan year, effective as of the first day of the
plan year, if the plan sponsor makes a contribution (in addition to any
minimum required contribution for the plan year) equal to the amount
sufficient to result in an AFTAP of 60 percent.
Section 436(f) sets forth a series of rules under which the
limitations of section 436 will not apply to a plan. Under section
436(f)(1), an employer is permitted to provide security to the plan (in
the form of a surety bond, cash, or other forms satisfactory to the
Treasury Department and the parties involved) that is treated as an
asset of the plan for purposes of determining the plan's AFTAP. Under
section 436(f)(2), if an employer uses the option in section 436(b)(2),
436(c)(2), or 436(e)(2) to make the specified contribution that would
avoid a limitation under section 436, the specified contribution must
be an actual contribution and the employer may not use a prefunding
balance or funding standard carryover balance in lieu of making the
specified contribution. In addition, a contribution to avoid a benefit
limitation is disregarded in determining whether the minimum required
contribution under section 430 has been made and in determining the
plan's prefunding balance.
Section 436(f)(3) describes certain situations in which an employer
is deemed to have made the election in section 430(f)(5) to reduce the
plan's funding standard carryover balance or prefunding balance. Such
an election has the effect of increasing the plan's FTAP (because the
result of the election is a higher asset value used to determine the
FTAP) and could lead to the plan not being subject to a benefit
limitation under section 436. In particular, if the limitation under
section 436(d) would otherwise apply to a plan, the plan sponsor is
treated as having made an election (a deemed election) to reduce any
prefunding balance or funding standard carryover balance by the amount
necessary to prevent the benefit limitation from applying. A comparable
rule applies to the other benefit limitations under sections 436(b),
[[Page 50546]]
436(c), and 436(e), but only in the case of a plan maintained pursuant
to a collective bargaining agreement. In either case, this deeming rule
applies only if the prefunding balance and funding standard carryover
balances are large enough to avoid the application of a section 436
limitation.
Section 436(h) sets forth a series of presumptions that apply
during the portion of the plan year that is before the plan's enrolled
actuary has certified the plan's AFTAP for the year. Under section
436(h)(1), if a plan was subject to a limitation under section 436(b),
436(c), 436(d), or 436(e) for the plan year preceding the current plan
year, the plan's AFTAP for the current year is presumed to be the same
as for the preceding year until the plan's enrolled actuary certifies
the plan's AFTAP for the current year. Under section 436(h)(3), if any
of these limitations did not apply to the plan for the preceding year,
but the plan's AFTAP for the preceding year was within 10 percentage
points of the limitation's threshold, the plan's AFTAP is presumed to
be reduced by 10 percentage points as of the first day of the 4th month
of the current plan year, unless the plan's enrolled actuary has
certified the plan's AFTAP for the current year by that day (and that
day is deemed to be the plan's valuation date for purposes of applying
the benefit limitations). If the plan's enrolled actuary has not
certified the plan's AFTAP by the first day of the 10th month of the
current plan year, section 436(h)(2) provides that the plan's AFTAP is
conclusively presumed to be less than 60 percent as of that day (and
that day is deemed to be the valuation date for purposes of applying
the benefit limitations).
Under section 436(i), unless the plan provides otherwise, if a
limitation on prohibited payments or future benefit accruals under
section 436(d) or (e) ceases to apply to a plan, all such payments and
benefit accruals resume, effective as of the day following the close of
the limitation period.
Section 436(j) provides definitions that are used under section
436, including the plan's AFTAP. In general, the plan's AFTAP is based
on the plan's FTAP for the plan year. However, the plan's AFTAP is
determined by adding the aggregate amount of purchases of annuities for
employees other than highly compensated employees (within the meaning
of section 414(q)) made by the plan during the two preceding plan years
to the numerator and the denominator of the fraction used to determine
the FTAP.
In addition, section 436(j)(3) provides a special rule which
applies to certain well-funded plans under which the plan's FTAP for
purposes of section 436 (and hence the plan's AFTAP) is determined by
using the plan's assets without reduction for the prefunding balance
and the funding standard carryover balance. Section 436(j)(3)(B) sets
forth a transition rule for determining eligibility for this special
rule.
Section 436(k) provides that, for plan years that begin in 2008,
the determination of the plan's FTAP for the preceding year is to be
made pursuant to guidance issued by the Secretary.
Explanation of Provisions
I. Section 430(f)--Effect of Prefunding Balance and Funding Standard
Carryover Balance
A. Overview
1. In general. The proposed regulations would be the second in a
series of proposed regulations under new section 430.\2\ These
regulations would provide guidance on the application of section
430(f), relating to the establishment and maintenance of a funding
standard carryover balance and a prefunding balance for purposes of
sections 430 and 436. The Treasury Department and the IRS intend to
issue additional proposed regulations relating to other portions of the
rules under section 430 later in 2007.
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\2\ Proposed regulation Sec. Sec. 1.430(h)(3)-1 and
1.430(h)(3)-2, relating to the mortality tables used to determine
liabilities under section 430(h)(3), were issued May 29, 2007 (REG-
143601-06, 72 FR 29456).
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2. Multiple employer plans. The proposed regulations under section
430(f) apply to plans subject to section 412 that are maintained by one
employer or a controlled group of employers and to multiple employer
plans within the meaning of section 413(c). In the case of a multiple
employer plan to which section 413(c)(4)(A) applies, the rules under
the proposed regulations would be applied separately for each employer
under the plan, as if each employer maintained a separate plan. Thus,
each employer under such a multiple employer plan may have a separate
funding standard carryover balance and a prefunding balance for the
plan. In the case of a multiple employer plan to which section
413(c)(4)(A) does not apply (that is, a plan described in section
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to
apply), the proposed regulations under section 430(f) would apply as if
all participants in the plan were employed by a single employer.
B. Establishment of Prefunding Balance and Funding Standard Carryover
Balance
The proposed regulations would provide that an employer is
permitted to establish a prefunding balance for a plan that represents
the accumulation of contributions made for plan years beginning on or
after the effective date of section 430 with respect to the plan (the
first effective plan year) that are in excess of the minimum required
contributions (determined without regard to the prefunding balance and
funding standard carryover balance) for those plan years. Specifically,
for the first effective plan year of a plan, the prefunding balance is
initialized at zero dollars and an employer is permitted to elect to
add some or all of the excess contributions made to a plan for each
plan year to the prefunding balance as of the first day of the next
plan year. For this purpose, the excess contributions are generally
determined as the amount by which the employer contributions to the
plan for the plan year exceed the minimum required contribution for the
plan year, with appropriate adjustments for interest determined at the
effective interest rate under section 430(h)(2)(A). However, the
proposed regulations would provide that any contribution that is made
to avoid the application of a benefit limitation under section 436 is
not taken into account in determining the amount of excess
contributions.
The proposed regulations would also provide that the minimum
required contribution for purposes of determining the amount of excess
contributions for the year is determined without regard to any offset
of the minimum required contribution for the year as a result of the
use of the prefunding or funding standard carryover balances.
Accordingly, an employer would not be permitted to add to the
prefunding balance any amount of contributions that are ``excess'' by
reason of an offset of the minimum required contribution for the year
through the use of the prefunding balance or funding standard carryover
balance. This prohibition precludes an employer from avoiding the
requirement to adjust the prefunding balance and funding standard
carryover balance by the actual rate of return on plan assets in the
situation where the plan assets have experienced a loss (or a rate of
return that is lower than the effective interest rate that is used for
interest adjustments with respect to minimum required contributions for
the plan year).
[[Page 50547]]
The proposed regulations would provide that the funding standard
carryover balance is initialized as the balance in the funding standard
account as of the last day of the last plan year before section 430
applies to a plan (the pre-effective plan year). This is generally the
last plan year beginning in 2007, but could be a later year in the case
of a plan to which a delayed effective date applies under the rules of
sections 104 through 106 of PPA '06.
C. Maintenance of Prefunding Balance and Funding Standard Carryover
Balance
The proposed regulations would provide that a plan's prefunding
balance and funding standard carryover balance as of the beginning of a
plan year are adjusted to reflect the actual rate of return on plan
assets for the plan year. This calculation of the actual rate of return
on plan assets for the plan year is determined on the basis of fair
market value and must take into account the amount and timing of all
contributions, distributions, and other plan payments made during the
year. The adjustment for investment return is applied to the prefunding
balance and funding standard carryover balance after any reductions to
those balances as described under the following two headings in this
preamble. In addition, the proposed regulations would provide special
rules in the case of a plan with a valuation date that is not the first
day of the plan year.
D. Use of Prefunding Balance and Funding Standard Carryover Balance To
Offset Minimum Funding Requirements for a Year
The proposed regulations would provide that the employer may elect
to use some or all of the prefunding balance or funding standard
carryover balance to offset the otherwise applicable minimum required
contribution for a plan year, provided that the plan met a funding
percentage threshold for the preceding plan year. Specifically, an
employer is permitted to make such an election only if the plan's prior
year funding ratio was at least 80 percent. For this purpose, the
plan's prior year funding ratio generally is a fraction (expressed as a
percentage), the numerator of which is the value of plan assets on the
valuation date for the preceding plan year, reduced by the amount of
any prefunding balance (but not the amount of any funding standard
carryover balance), and the denominator of which is the funding target
of the plan for the preceding plan year (determined without regard to
the at-risk rules of section 430(i)(1)).
The proposed regulations would provide a transition rule to
determine a plan's prior year funding ratio for the first effective
plan year. Under this transition rule, the current liability for the
plan for the pre-effective plan year is substituted for the funding
target of the plan for that plan year. In addition, the transition rule
provides that the value of plan assets is determined under section
412(c)(2) as in effect for that pre-effective plan year, except that
the value of plan assets must be limited so that it is not less than 90
percent and not more than 110 percent of the fair market value of plan
assets.
The proposed regulations would reflect the rule in section
430(f)(3)(B) that requires the plan sponsor to have reduced the funding
standard carryover balance in full (either by using the funding
standard carryover balance to offset the minimum required contribution
for a year or through a voluntary reduction under section 430(f)(5))
before the prefunding balance is permitted to be used to offset a
current year minimum funding requirement.
E. Subtraction From Plan Assets and Employer Election To Reduce
Balances
The proposed regulations would reflect the rules under section
430(f)(4) which provide that the prefunding balance and funding
standard carryover balance are subtracted from the plan assets for
certain purposes. These include the determination of the FTAP, which is
also relevant for purposes of applying the benefit limitations of
section 436.
In accordance with section 430(f)(4)(A), the proposed regulations
would provide that the amount of the prefunding balance is subtracted
from the value of plan assets for purposes of determining whether a
plan is exempt from the requirement to establish a new shortfall
amortization base under section 430(c)(5) only if an election to use
the prefunding balance to offset the minimum required contribution is
made for the plan year. In addition, pursuant to section
430(f)(4)(B)(ii), the proposed regulations would provide that the
prefunding balance and funding standard carryover balance are not
subtracted from plan assets for purposes of determining the funding
shortfall under section 430(c)(4) to the extent that there is a binding
written agreement with the Pension Benefit Guaranty Corporation (PBGC)
which provides that all or a portion of those balances cannot be used
to offset the minimum required contribution for a plan year. For this
purpose, an agreement with the PBGC is taken into account with respect
to a plan year only if the agreement was executed prior to the
valuation date for the plan year.
In addition, section 436(j) sets forth an exception from the
requirement to subtract the plan's prefunding balance and funding
standard carryover balance from the value of plan assets in determining
a plan's FTAP for purposes of the benefit limitation rules of section
436 provided that the plan's FTAP would meet certain standards if it
were calculated without subtracting the balances from plan assets.
Section 430(f)(5) provides that an employer may elect to reduce the
amount of the prefunding balance and the funding standard carryover
balance. This will have the effect of increasing the plan assets for
various purposes. For example, the increase in plan assets will
increase the FTAP, which may allow the plan to avoid the application of
section 436 limitations. The proposed regulations would reflect the
rule in section 430(f)(5)(B) that requires the employer to reduce the
funding standard carryover balance in full (either by using the funding
standard carryover balance to offset the minimum required contribution
for a year or through a voluntary reduction under section 430(f)(5))
before any reduction is permitted for the prefunding balance.
F. Elections Under Section 430(f)
The proposed regulations would provide that an election under
section 430(f) is made by the plan sponsor by providing written
notification of the election to the plan's enrolled actuary and the
plan administrator, must be irrevocable when made, and must satisfy
certain timing rules. The written notification must set forth the
relevant details of the election, including the specific amounts
involved in the election with respect to the prefunding balance and
funding standard carryover balance. An election under section 430(f)
generally must be made on or before the due date (with extensions) for
the filing of the plan's Form 5500 ``Annual Return/Report of Employee
Benefit Plan'' for the plan year to which the election relates (or, in
the case of a plan not required to file a Form 5500 for the plan year,
before the last day of the seventh month after the end of the plan year
to which the election relates). For this purpose, an election to add to
the prefunding balance relates to the plan year for which excess
contributions were made. However, the proposed regulations would
require any section 430(f)(5) election to reduce a portion of the
prefunding balance or funding standard carryover balance for a plan
year to be made by the end of the plan
[[Page 50548]]
year to which the election relates. For example, in the case of a
calendar year plan required to file Form 5500, an election to add to
the prefunding balance as of the first day of the 2010 plan year (in an
amount not in excess of the 2009 interest-adjusted excess
contributions), must be made no later than the due date for filing the
2009 Form 5500 (with extensions) while an election to reduce the
prefunding balance as of the first day of the 2010 plan year must be
made by the end of the 2010 plan year. In both cases, the election
would be reported on the 2010 Form 5500 (Schedule SB) that would be
filed in 2011.
The proposed regulations would provide that, for purposes of
elections under section 430(f), any reference in the proposed
regulations to the plan sponsor generally means the employer or
employers responsible for making contributions to the plan. However, in
the case of elections under section 430(f) for multiple employer plans
to which section 413(c)(4)(A) does not apply, any reference in the
proposed regulations to the plan sponsor means the plan administrator
within the meaning of section 414(g).
II. Section 436--Limits on Benefits and Benefit Accruals Under Single
Employer Defined Benefit Plans
A. Overview and General Rules
1. In general. The proposed regulations would set forth the rules
that a defined benefit pension plan that is subject to section 412 and
that is not a multiemployer plan must satisfy in order to comply with
the requirement in section 401(a)(29) that the plan meet the
requirements of section 436. This requirement is a qualification
requirement. A plan satisfies the requirements of section 436 only if
the plan meets the requirements of these regulations.
2. New plans. In accordance with section 436(g), the proposed
regulations would provide that the limitations described in sections
436(b), 436(c), and 436(e) do not apply to a plan for the first five
plan years of the plan. For purposes of applying this new plan rule,
plan years under a plan are aggregated with plan years under a
predecessor plan. Thus, the only benefit limitation that could apply
under a plan that is not a successor plan during the first five years
of its existence is the section 436(d) limitation applicable to
accelerated benefit payments (such as single sum distributions).
3. Multiple employer plans. The proposed regulations under section
436 apply to plans maintained by one employer (including a controlled
group of employers) and to multiple employer plans (within the meaning
of section 413(c)). In the case of a multiple employer plan to which
section 413(c)(4)(A) applies, the rules under the proposed regulations
would be applied separately for each employer under the plan, as if
each employer maintained a separate plan. Thus, the benefit limitations
under section 436 could apply differently to employees of different
employers under such a multiple employer plan. In the case of a
multiple employer plan to which section 413(c)(4)(A) does not apply
(that is, a plan described in section 413(c)(4)(B) that has not made
the election for section 413(c)(4)(A) to apply), the proposed
regulations under section 436 would apply as if all participants in the
plan were employed by a single employer.
4. Treatment of plan as of close of prohibited or cessation period.
The proposed regulations would provide that, if a limitation on
accelerated benefit payments under section 436(d) (such as single sum
distributions) applies to a plan as of a section 436 measurement date,
but that limit subsequently ceases to apply to the plan as of a later
section 436 measurement date, then the limitation does not apply to
benefits with annuity starting dates that are on or after that later
section 436 measurement date. In addition, the proposed regulations
would provide that, if a limitation on benefit accruals under section
436(e) applies to a plan, unless the plan provides otherwise, benefit
accruals under the plan will resume effective as of the section 436
measurement date as of which benefit accruals are no longer restricted.
With respect to a participant who had an annuity starting date
within a period during which the accelerated benefit payment limitation
rules of section 436(d) applied to the plan, once the limitation ceases
to apply, the participant's benefits will continue to be paid in the
form previously elected unless the plan permits the participant to be
offered a new election which would modify the prior election. The
proposed regulations would permit a plan to provide that the
participant will be offered the opportunity to have a new election
under which the form of benefit previously elected may be modified,
subject to applicable qualification requirements, and that new election
will constitute a new annuity starting date for purposes of section
417. Similarly, a plan is permitted to be amended to provide that any
benefit accruals that were limited under the rules of section 436(e)
will be credited under the plan once the limitation no longer applies,
subject to applicable qualification requirements. If a plan provides
for the restoration of benefit accruals for the period of the
limitation under preexisting plan terms, the plan is treated as having
adopted an amendment that has the effect of increasing liabilities
under the plan if the period of the limitation exceeded 12 months.
Whether a plan is amended or is treated as having been amended as
described above, the amendment or pre-existing plan provision is
subject to the limitations of section 436(c).\3\
---------------------------------------------------------------------------
\3\ The PBGC has informed the IRS and the Treasury Department
that it expects similarly to treat such an automatic restoration of
missed benefit accruals as a plan amendment.
---------------------------------------------------------------------------
In addition, the proposed regulations would provide that a plan is
permitted to be amended to provide that any unpredictable contingent
event benefits that were limited under the rules of section 436(b) will
be paid or reinstated when the limitation no longer applies, subject to
applicable qualification requirements. Any such amendment is subject to
the limitations of section 436(c). A plan is not permitted to provide
for restoration of any such unpredictable contingent event benefits
without an amendment that complies with section 436(c).
5. Deemed election to reduce prefunding and funding standard
carryover balances. The proposed regulations would provide that, if a
limitation on accelerated benefit payments under section 436(d) would
otherwise apply to a plan, the plan sponsor is treated as having made
an election under section 430(f) to reduce the prefunding balance or
funding standard carryover balance by such amount as is necessary for
the AFTAP to be at or above the applicable threshold (60, 80, or 100
percent, as the case may be) in order for the benefit limitation not to
apply to the plan. In such a case, the plan sponsor is treated as
having made that election on the section 436 measurement date as of
which the benefit limitation would otherwise apply. This deemed
election applies if the plan provides for accelerated distributions
that would be limited in a plan year, regardless of whether a plan
participant is eligible or elects to receive such a distribution during
the plan year (but does not apply if the plan does not provide for any
accelerated distributions that are subject to the benefit limitation).
However, the deemed reduction applies with respect to this limitation
only if the prefunding and funding standard carryover balances to be
reduced are large enough
[[Page 50549]]
to avoid the application of the limitation. Thus, no reduction of
prefunding and funding standard carryover balances is required if the
limitation would still apply for a year even if those balances were
reduced to zero.
In addition, the proposed regulations would provide that, in the
case of a plan maintained pursuant to one or more collective bargaining
agreements between an employee representative and one or more employers
in which a benefit limitation under section 436(b), 436(c), or 436(e)
would otherwise apply to the plan, the employer is treated for purposes
of section 436 as having made an election under section 430(f) to
reduce the prefunding balance or funding standard carryover balance by
such amount as is necessary for the AFTAP to be at or above the
applicable threshold for the benefit limitation not to apply to the
plan, taking into account the unpredictable contingent event benefits
or plan amendment, as applicable. The proposed regulations would
provide that, in the case of a plan with respect to which collective
bargaining agreements apply to some, but not all, of the plan
participants, the plan is considered a collectively bargained plan for
purposes of this provision if at least 25 percent of the participants
in the plan are members of the collective bargaining units for whom the
benefit levels under the plan are specified under the collective
bargaining agreements. As in the case of the deemed reduction in
funding balances for the accelerated benefit distributions under
section 436(d), the deemed reduction applies only if the prefunding and
funding standard carryover balances to be reduced are large enough to
avoid the application of the limitation under section 436(b), 436(c),
or 436(e), as applicable.
If the mandatory reduction of funding balances applies to a plan,
the employer is treated as having made that election on the date as of
which the applicable benefit restriction would otherwise apply. In
addition, the proposed regulations would provide that, if a plan
(whether or not collectively bargained) is presumed to have an AFTAP of
less than 60 percent under the section 436(h) presumption rules, then
the plan is treated as if the plan's funding standard carryover balance
and prefunding balance are insufficient to increase the plan's AFTAP to
the threshold percentage.
6. Section 436 measurement date. The ``section 436 measurement
date'' is a defined term under the proposed regulations that is used to
describe the date that stops or starts the application of the
limitations of sections 436(d) and 436(e) and is also used for
calculations with respect to applying the limitations of sections
436(b) and 436(c). The regulations would provide that the date of the
enrolled actuary's certification of the AFTAP for the plan year is a
section 436 measurement date if it occurs within the first nine months
of the plan year. If the date of an enrolled actuary's certification of
the AFTAP is between the first day of the 10th month of a plan year and
the last day of that plan year, that date is not a section 436
measurement date for purposes of the limitations of section 436(d) or
436(e) because, in that case, the plan's AFTAP is presumed to be under
60 percent (however, receipt of the enrolled actuary's certification
during that period impacts the plan's presumed ``carryover'' AFTAP for
the following year). The proposed regulations would provide that a
section 436 measurement date occurs where there is a change in the
plan's AFTAP under the presumption rules of section 436(h). In
addition, the proposed regulations would provide a series of rules in
cases where the enrolled actuary's certification of the AFTAP for a
plan year is made after the end of the plan year, as described below
under the heading ``Presumed underfunding for purposes of benefit
limitations.''
B. Limitation on Plant Shutdown and Other Unpredictable Contingent
Event Benefits
In accordance with section 436(b), the proposed regulations would
provide that a plan that provides for any unpredictable contingent
event benefit \4\ must provide that the benefit will not be paid to a
plan participant during a plan year if the AFTAP for the plan year is
less than 60 percent (or is 60 percent or more but would be less than
60 percent if the benefits attributable to the unpredictable contingent
event were taken into account in determining the AFTAP). However, this
prohibition on payment of unpredictable contingent event benefits no
longer applies for a plan year, effective as of the first day of the
plan year, if the employer makes the contribution specified in section
436(b)(2), as described in paragraph F in this preamble.
---------------------------------------------------------------------------
\4\ See also Notice 2007-14, IRB 501, (see Sec. 601.601(d)(2)
of this chapter) requesting comments on the types of benefits that
are permitted to be provided in a qualified defined benefit plan,
including benefits payable in the event of a plant shutdown or
similar event.
---------------------------------------------------------------------------
For this purpose, the proposed regulations would provide that an
``unpredictable contingent event benefit'' means any benefit or
increase in benefits to the extent the benefit or increase would not be
payable but for the occurrence of an unpredictable contingent event,
and an ``unpredictable contingent event'' means a plant shutdown
(whether full or partial) or similar event, or an event other than the
attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability. Thus, for example, if a plan provides for an unreduced
early retirement benefit upon the occurrence of an event other than the
attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability, then that unreduced early retirement benefit is an
unpredictable contingent event benefit to the extent of any portion of
the benefit that would not be payable but for the occurrence of the
event, even if the remainder of the benefit is payable without regard
to the occurrence of the event. Similarly, an unpredictable contingent
event benefit under the proposed regulations includes a benefit payable
upon the presence of circumstances specified in the plan (other than
the attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability), so that a plan that provides those benefits upon a
participant's severance from employment in those circumstances, but not
upon a severance from employment that does not involve those
circumstances, is providing an unpredictable contingent event benefit.
Unpredictable contingent event benefits attributable to a plant
shutdown or other unpredictable contingent event that occurred within a
period during which no limitation under section 436(b) applied to the
plan are not affected by the limitation as it applies in a subsequent
period. For example, if a plant shutdown occurs in 2010 and a plan's
funded status is such that its shutdown benefits are not subject to the
limitation for that plan year, benefits paid pursuant to that shutdown
are permitted to be paid in a later plan year even if the plan's AFTAP
for the subsequent year is less than 60 percent. Conversely, if a plant
shutdown occurs in 2010 and a plan's funded status is such that its
shutdown benefits are subject to the limitation under section 436(b)
for that plan year and cannot be paid, those shutdown benefits related
to the 2010 plant shutdown are not permitted to be paid in a later year
even if the plan's AFTAP for the later year is at or above the 60
percent threshold for the section 436(b) limitation (subject to
[[Page 50550]]
the rules permitting plan amendments to reinstate previously restricted
benefits, including unpredictable contingent event benefits, as
described in paragraph II.A.4 of this preamble).
C. Limitations on Plan Amendments Increasing Liability for Benefits
In accordance with section 436(c), the proposed regulations would
provide that a plan satisfies the limitation on plan amendments
increasing liability for benefits only if the plan provides that no
amendment to the plan that has the effect of increasing liabilities of
the plan by reason of increases in benefits, establishment of new
benefits, changing the rate of benefit accrual, or changing the rate at
which benefits become nonforfeitable is permitted to take effect if the
AFTAP for the plan year is less than 80 percent (or is 80 percent or
more but would be less than 80 percent if the benefits attributable to
the amendment were taken into account in determining the AFTAP).
However, this prohibition on plan amendments no longer applies for a
plan year if the employer makes the contribution specified in section
436(c)(2), as described in paragraph F of this preamble.
In accordance with section 436(c)(3), the limitation on amendments
increasing liabilities does not apply to any amendment that provides
for an increase in benefits under a formula that is not based on a
participant's compensation, but only if the rate of increase in
benefits does not exceed the contemporaneous rate of increase in
average wages of participants covered by the amendment. The proposed
regulations would provide that the determination of the rate of
increase in average wages is made by taking into consideration the net
increase in average wages during the period beginning with the
effective date of the most recent benefit increase applicable to all of
those participants who are covered by the current amendment and ending
on the effective date of the current amendment. If the participants
covered by an amendment include both currently employed participants
and terminated participants (who will have no increase or decrease in
wages for this purpose after severance from employment), all covered
participants must be included in determining the increase in average
wages of the participants covered by the amendment. Alternatively, the
employer could adopt two amendments--one that increases benefits for
currently employed participants and another one that increases benefits
for the terminated participants. In that case, this exception from
application of the section 436(c) limitation generally would apply to
the amendment that increases benefits for currently employed
participants (based solely on the wages of those current employees),
but the amendment that applies only to terminated participants (who
received no increase in wages from the employer during the period over
which the increase in average wages is determined) would not be
eligible for the exception.
In addition, the proposed regulations would provide that, to the
extent that any amendment results in (or is made pursuant to) a
mandatory increase in the vesting of benefits under the Code or ERISA
(such as vesting rate increases pursuant to statute and plan
termination amendments under section 411(d)(3)), that amendment does
not constitute an amendment that changes the rate at which benefits
become nonforfeitable for purposes of section 436(c).
D. Limitations on Accelerated Benefit Distributions
1. Funding percentage less than 60 percent. In accordance with
section 436(d)(1), under the proposed regulations, a plan must provide
that, if the plan's AFTAP for a plan year is less than 60 percent, the
plan will not pay any prohibited payment with an annuity starting date
that is on or after the applicable section 436 measurement date.
However, if a participant requests such a prohibited distribution, the
plan must permit the participant to elect another form of benefit
available under the plan or to defer payment to a later date to the
extent permitted under applicable qualification requirements. Similar
rules apply in any case in which a beneficiary is entitled to a
prohibited payment (for example, where a qualified pre-retirement
survivor annuity is offered in an alternative single sum payment).
2. Bankruptcy. In accordance with section 436(d)(2), under the
proposed regulations, a plan must provide that the plan will not pay
any prohibited payment with an annuity starting date that is during any
period during a plan year in which the plan sponsor is a debtor in a
case under title 11, United States Code, or similar Federal or State
law, until the date on which the enrolled actuary of the plan certifies
that the plan's AFTAP is not less than 100 percent.
3. Limited payment if percentage at least 60 percent but less than
80 percent. In accordance with section 436(d)(3), under the proposed
regulations, a plan must provide that, in any case in which the plan's
AFTAP for a plan year is 60 percent or more but is less than 80
percent, a participant is permitted to elect a prohibited payment only
if the present value of the portion of the payment that is greater than
the amount of the monthly straight life annuity under the plan (and any
social security supplement, if applicable) does not exceed 50 percent
of the present value of the participant's benefits (or if less, 100
percent of the present value of the maximum guarantee with respect to
the participant under section 4022 of ERISA). For this purpose, present
value is determined using the rules of section 417(e) except that, if
the plan provides a single sum distribution that is larger than the
present value of the benefit determined using the rules of section
417(e), then that larger benefit is substituted for the present value
of the participant's benefits before applying the 50 percent factor.
Similar rules apply in any case in which a beneficiary is entitled to a
prohibited payment.
If an optional form of benefit that is otherwise available under
the terms of the plan is not available as of the annuity starting date
because it is a prohibited payment that cannot be paid under the
preceding paragraph, then the plan must provide a participant who
elects such an optional form with the option either to defer payment to
a later date (to the extent permitted under applicable qualification
requirements) or to bifurcate the benefit into unrestricted and
restricted portions. If the participant elects to bifurcate the
benefit, the plan must permit the participant to elect, with respect to
the unrestricted portion, any optional form of benefit otherwise
available under the plan with respect to the participant's entire
benefit (whether or not the optional form of benefit with respect to
the unrestricted portion is a prohibited payment). The unrestricted
portion of the benefit is the lesser of (i) 50 percent of the benefit
and (ii) the benefit that has a present value that does not exceed 100
percent of the present value of the maximum PBGC guarantee with respect
to the participant under section 4022 of ERISA. If the participant
elects payment of the unrestricted portion of the benefit in the form
of a prohibited payment, then the plan must permit the participant to
elect payment of the restricted portion in any optional form of benefit
under the plan that would have been permitted with respect to the
participant's entire benefit other than a prohibited payment. A plan is
also permitted (but not required) to offer optional forms of benefit
that are solely available during the period section 436(d)(3) applies
to the plan, such as an optional form of benefit that provides
[[Page 50551]]
for the current payment of the unrestricted portion of the benefit,
with a delayed commencement for the restricted portion of the benefit,
subject to other applicable qualification requirements.
A participant who receives a prohibited payment (or a series of
prohibited payments under a single optional form of benefit) under the
rule permitting certain prohibited payments cannot receive any
additional payment that would be a prohibited payment until there is a
plan year for which none of the limitations on accelerated
distributions under section 436(d) apply. Benefits provided to a
participant and any beneficiary are aggregated for purposes of
determining the limited distribution under section 436(d)(3). The
proposed regulations would also reflect the rules of section
436(d)(3)(B)(ii), which describes how this limited distribution is
allocated among the beneficiaries of a participant.
4. Exception for certain frozen plans. In accordance with section
436(d)(4), the limitations under section 436(d) will not apply to a
plan for any plan year if the terms of the plan, as in effect for the
period beginning on September 1, 2005, provided for no benefit accruals
with respect to any participants. However, if such a plan provides for
any benefit accruals during a plan year, this exception will cease to
apply for the plan as of the date those accruals start.
5. Prohibited payment. In accordance with section 436(d)(5), the
proposed regulations would provide that the term ``prohibited payment''
means:
(i) Any payment for a month that is in excess of the monthly amount
paid under a single life annuity (plus any social security supplements
described in the last sentence of section 411(a)(9)), to a participant
or beneficiary whose annuity starting date (as defined in section
417(f)(2)) occurs during any period that a limitation on accelerated
benefit payments is in effect;
(ii) Any payment for the purchase of an irrevocable commitment from
an insurer to pay benefits; and
(iii) Any other payment that is identified as a prohibited payment
by the Commissioner in revenue rulings and procedures, notices and
other guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter).
In addition, for purposes of applying the limitations on
accelerated benefit payments under the requirements of section 436(d),
the term annuity starting date means, as applicable--
(a) The first day of the first period for which an amount is
payable as an annuity as described in section 417(f)(2)(A)(i);
(b) In the case of a benefit not payable in the form of an annuity,
the first day on which all events have occurred (including the
participant's election, the participant's severance from employment if
the participant is below normal retirement age, and, if applicable, the
participant's survival to the date as of which payment is made) which
entitle the participant to such benefit as described in section
417(f)(2)(A)(ii);
(c) In the case of an amount payable on a retroactive annuity
starting date, the benefit commencement date; and
(d) The date of any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits under plan.
E. Limitation on Benefit Accruals
In accordance with section 436(e), under the proposed regulations,
a plan must provide that, in any case in which the plan's AFTAP for a
plan year is less than 60 percent, benefit accruals under the plan will
cease as of the applicable section 436 measurement date. If a plan must
cease benefit accruals under this limitation, then the plan is also not
permitted to be amended in a manner that would increase the liabilities
of the plan by reason of an increase in benefits or establishment of
new benefits. This rule applies regardless of whether an amendment
would otherwise be permissible under section 436(c)(3) (involving
certain amendments to increase benefits under a formula not based on a
participant's compensation). This prohibition on additional benefit
accruals will no longer apply for a plan year if the plan sponsor makes
the contribution specified in section 436(e)(2), as described in
paragraph F of this preamble.
F. Rules Relating to Contributions Required To Avoid Benefit
Limitations
The proposed regulations provide rules regarding contributions by
the plan sponsor to avoid benefit limitations under section 436. An
employer sponsoring a plan that would otherwise be subject to the
limitations of section 436 can avoid the application of those limits
through one of four different techniques: 1) reducing the funding
standard carryover balance and prefunding balance; 2) making additional
contributions for a prior plan year that are not added to the
prefunding balance; 3) making the specific contributions described in
sections 436(b)(2), 436(c)(2), and 436(e)(2); and 4) providing
security, as described in section 436(f)(1).
As noted in this preamble, under the first of the techniques, if a
plan sponsor elects to reduce the plan's funding standard carryover
balance or the prefunding balance, this will have the effect of
increasing the plan assets that are taken into account in determining
the plan's FTAP and AFTAP and, thereby, will raise the AFTAP to a level
so that the benefit limitations may no longer apply to the plan.
Alternatively, if the deadline for making prior year contributions has
not passed, the plan sponsor could utilize the second technique--making
additional contributions for the prior plan year. If these additional
contributions are not added to the prefunding balance, then the
additional contributions will also have the effect of increasing the
plan's FTAP and AFTAP.
The third and fourth techniques for avoiding the application of the
benefit limitations of section 436 are described in Sec. 1.436-1(f) of
the proposed regulations. Under the third technique, the plan sponsor
makes additional contributions that are specifically designated at the
time the contribution is used to avoid the application of a limitation
under section 436(b), 436(c), or 436(e). The proposed regulations would
provide for this designation to be provided to the plan's enrolled
actuary and plan administrator in writing. Furthermore, the designation
must be irrevocable, except as described below. If the contributions
are made on a date other than the valuation date for the plan year, the
contributions must be adjusted for interest (using the plan's effective
interest rate, except as provided in the proposed regulations). These
contributions are separate from any minimum required contributions
required by section 430, and no prefunding balance or funding standard
carryover balance under section 430(f) may be used as a contribution to
avoid a section 436 benefit limitation. A plan sponsor that makes such
a current year contribution will nonetheless fail to satisfy the
minimum funding requirements if it does not make the minimum required
contribution under section 430 for the year. In addition, as noted
above, these contributions are not taken into account in determining
whether a plan sponsor is making excess contributions for purposes of
adding to the plan's prefunding balance.
The fourth technique for a plan sponsor to avoid the application of
the benefit limitations of section 436 is for the plan sponsor to
provide security. In such a case, the AFTAP for the plan year is
determined by treating as an asset of the plan any security provided by
a plan sponsor by the valuation date
[[Page 50552]]
for the plan year in a form meeting certain specified requirements.
However, this security is not taken into account for any other purpose,
including section 430. The only security permitted to be provided by a
plan sponsor for this purpose is (i) a bond issued by a corporate
surety company that is an acceptable surety for purposes of section 412
of ERISA, or (ii) cash or United States obligations that mature in
three years or less that are held in escrow by a bank or insurance
company. The regulations would reflect sections 436(f)(1)(C) and (D) in
specifying when the security is to be contributed to the plan and when
it may be released. If the security is turned over to the plan, then
that amount is treated as an employer contribution when it is turned
over to the plan. The proposed regulations would provide that any such
security turned over to the plan pursuant to the enforcement mechanism
cannot be treated as a contribution to avoid or terminate the
application of a section 436 benefit limitation under section
436(b)(2), 436(c)(2), or 436(e)(2).
G. Presumed Underfunding for Purposes of Benefit Limitations
The proposed regulations reflect the rules of section 436(h), which
sets forth a series of presumptions that are used to apply the section
436 benefit limitations in situations where the plan's enrolled actuary
has not yet issued a certification of the plan's AFTAP for the plan
year. In addition, the proposed regulations also set forth rules for
the application of the limitations prior to and during the period those
presumptions apply to a plan, and describe the interaction of those
presumptions with plan operations after the plan's enrolled actuary has
issued a certification of the plan's AFTAP for the plan year. These
rules are designed to encourage plans to obtain certifications in a
timely manner, with a particular emphasis with respect to plans that
have a greater likelihood of having a new section 436 benefit
limitation apply because they had an AFTAP for the prior plan year that
was near a threshold for a benefit limitation to apply.
The proposed regulations would provide that, in any case in which a
plan was subject to a benefit limitation on the last day of the prior
plan year, the first day of the plan year is a section 436 measurement
date and the AFTAP of the plan for the current plan year is presumed to
be equal to the preceding year's certified AFTAP until the plan's
enrolled actuary certifies the AFTAP of the plan for the current plan
year. Because no plan could be subject to a benefit limitation for a
plan year that precedes the plan year that begins in 2008, the section
436(h)(1) presumption generally will not apply to any plan before the
first plan year beginning in 2009.
In accordance with section 436(h)(3), the proposed regulations
would provide that, if the enrolled actuary of the plan has not
certified the AFTAP of the plan for the current plan year by the first
day of the 4th month of the plan year and the AFTAP for the preceding
year was certified to be at least 60 percent but less than 70 percent
or at least 80 percent but less than 90 percent, then the first day of
the 4th month of the current plan year is a section 436 measurement
date, and the AFTAP of the plan is presumed to be equal to 10
percentage points less than the AFTAP of the plan for the preceding
plan year. This presumption will apply until the earlier of the date
the enrolled actuary certifies the AFTAP for the plan year or the first
day of the 10th month of the plan year.
In accordance with section 436(h)(2), the proposed regulations
would provide that, in any case in which no certification of the
specific AFTAP for the current plan year is made before the first day
of the 10th month of such year, that date is a section 436 measurement
date and, as of that date, the plan's AFTAP is conclusively presumed to
be less than 60 percent. In such a case, the presumed AFTAP of under 60
percent for the current plan year will continue to apply under the
rules of section 436(h)(1) for the next plan year, until such time as
the enrolled actuary certifies the AFTAP for either the current plan
year or the next plan year.
The proposed regulations would provide rules that apply the section
436(h) presumptions for the plan year in cases in which the enrolled
actuary's certification for the prior plan year is made on or after the
first day of the 10th month of that prior plan year. If the date of the
enrolled actuary's certification of the specific AFTAP for a plan year
occurs on or after the date the conclusive presumption applies but on
or before the last day of the plan year, the proposed regulations would
provide that the certified percentage is disregarded for that plan year
but is used for purposes of the presumption rule of section 436(h)(1)
starting with the beginning of the following plan year (rather than
continuing to apply the less-than-60 percent presumption that applied
before the first day of that following plan year). If the date of the
enrolled actuary's certification of the specific AFTAP for a plan year
occurs after the end of the plan year but prior to the first day of the
4th month in the following plan year, the proposed regulations would
provide that the certification date is treated as a section 436
measurement date for that following plan year and that, starting on
that date, the plan's AFTAP is presumed to be the certified AFTAP for
the prior year (rather than continuing to apply the less-than-60
percent presumption that applied before the certification). If the date
of the enrolled actuary's certification of the specific AFTAP for a
plan year occurs after the first day of the 4th month in the following
plan year but before the first day of the 10th month, the proposed
regulations would provide that the certification date also is a section
436 measurement date for that following plan year, and the plan's AFTAP
for that following year beginning on that date is presumed to be the
certified AFTAP for the prior year (rather than continuing to apply the
less-than-60 percent presumption that applied before the
certification). However, in such a case, if a 10 percentage point
reduction in the AFTAP would have applied on the first day of the 4th
month of that following plan year if the AFTAP for the prior plan year
had been certified before that day, then the same 10 percentage point
reduction applies on the date of the certification. These presumption
rules based on the prior year AFTAP do not apply once a certification
of the following year's AFTAP is issued by the plan's enrolled actuary.
The enrolled actuary's certification of the AFTAP for a plan year
must be made in writing, must be provided to the plan administrator,
and must certify the plan's AFTAP for the plan year. As an alternative
to certifying a specific number for the plan's AFTAP, the regulations
would provide that the enrolled actuary is permitted to certify during
the first nine months of a plan year that the plan's AFTAP for that
year is within a percentage ``range'' that is either (i) 60 percent or
higher, but less than 80 percent, (ii) 80 percent or higher, or (iii)
100 percent or higher. The proposed regulations would provide that such
a ``range'' certification ends the application of the presumptions
provided that the enrolled actuary follows up with a certification of
the specific AFTAP before the first day of the 10th month of that year
and that the certified specific AFTAP is within the range of the
earlier certification.
If this ``range'' certification alternative is followed, the plan
is treated as having a certified AFTAP at the smallest value within the
applicable range. Thus, for example, if the enrolled actuary certified
that the AFTAP was more than
[[Page 50553]]
60 percent but less than 80 percent, then the plan is treated as having
an AFTAP of 60 percent for purposes of applying the limitations of
section 436(b) until the earlier of the date of the specific AFTAP
certification or the first day of the 10th month of the plan year. In
such a case, if the plan has an unpredictable contingent event or a
plan amendment that increases liability for benefits, unpredictable
contingent event benefits cannot be paid and the plan amendment cannot
take effect unless the plan sponsor makes a contribution described in
section 436(b)(2) or 436(c)(2), as applicable. If the plan sponsor
makes a contribution under section 436(b)(2) or section 436(c)(2), the
proposed regulations would provide that the contribution is
recharacterized as a regular employer contribution that is taken into
account under section 430 for the current plan year to the extent it is
determined that the contribution was not needed to avoid the
application of the benefit limit, based on the subsequent calculation
of the specific AFTAP.
The proposed regulations would specify that the enrolled actuary is
generally not permitted to certify the AFTAP based on a value of assets
that includes contributions receivable for the prior year that have not
actually been made as of the date of the certification. However, this
rule would not apply to certifications that are made for plan years
beginning before January 1, 2009. Thus, for a certification with
respect to 2008, the enrolled actuary is permitted to take in account
contributions for 2007 that are reasonably expected but have not yet
been made by the plan sponsor at the time of the certification.
However, if the plan sponsor does not make those contributions, the
enrolled actuary's certification will be incorrect, which will result
in a failure to satisfy section 401(a)(29) and section 436 if the
difference constitutes a material change.
If the enrolled actuary for the plan provides a certification of
the AFTAP for the plan year (including a range certification) and that
certified percentage is superseded by a subsequent determination of the
AFTAP for that plan year, that later percentage must be applied and a
determination must be made whether the change in the applicable
percentage is a material change or an immaterial change. For this
purpose, the proposed regulations would specify that there is a
material change if plan operations with respect to benefits that are
addressed by section 436, taking into account any actual contributions
and elections under section 430(f) made by the plan sponsor based on
the prior certified percentage, would have been different based on the
subsequent determination of the plan's AFTAP for the plan year. Thus,
for example, if after the actuary certifies the plan's AFTAP for a plan
year, the plan sponsor elects to add excess contributions for the prior
plan year to the plan's prefunding balance, this would have the effect
of reducing the plan's AFTAP, and such a change could be a material
change.
The proposed regulations would specify that an immaterial change is
a change in an AFTAP that is not a material change. In addition, the
proposed regulations would provide that if the difference between the
AFTAP for a plan year and the later revised determination of that
percentage is the result of additional contributions for the preceding
year that are made by the plan sponsor after the date of the enrolled
actuary's certification or results from the plan sponsor's election to
reduce the prefunding or funding standard carryover balance after the
date of the certification, such change is always treated as an
immaterial change (regardless of whether it would otherwise affect the
application of the section 436 benefit limitations).
In the case of a material change where the plan was operated in
accordance with the prior certification of the AFTAP for the plan year,
the plan will not have satisfied the requirements of section 401(a)(29)
and section 436. In the case of a material change where the plan was
operated in accordance with the subsequent certification of the AFTAP
during the period of time the prior certification applied, then the
plan will not have been operated in accordance with its terms. In
addition, in the case of a material change, the rules requiring
application of a presumed AFTAP under section 436(h) continue to apply
from and after the date of the prior certification until the date of
the subsequent certification. In the case of an immaterial change, the
revised percentage applies prospectively but it does not change the
inapplicability of the presumptions under section 436(h) for the plan
year prior to the date of the subsequent certification.
H. Coordination Between Presumptions and Determination of AFTAP
1. Periods during which a presumption applies to the plan. A plan
must provide that, for any period during which a presumption under
section 436(h) applies to the plan, the limitations applicable under
sections 436(b), 436(c), 436(d), and 436(e) apply to the plan as if the
actual AFTAP for the year were the presumed AFTAP. During that period,
the rules relating to the deemed election to reduce the funding
standard carryover balance and the prefunding balance must be applied
based on the presumed percentage with respect to the applicable
limitations. Thus, a plan's prefunding balance and funding standard
carryover balance must be reduced if the reduction would be sufficient
to avoid the applicable limitation. The proposed regulations provide
rules for determining the amount of the reduction in balances.
If the presumed AFTAP for the plan year changes during the year
because of application of the presumption in section 436(h)(3), the
rules regarding the deemed election to reduce funding balances must be
reapplied based on the new presumed AFTAP. This reapplication of the
deemed election may require an additional reduction in funding balances
if the amount of the reduction in funding balances that is necessary to
reach the applicable threshold to avoid the application of the
limitation under section 436(d) or 436(e) is greater than the amount
that was initially reduced.
2. Periods prior to certification where no presumption applies. If
no presumptions under section 436(h) apply to a plan for a period and
the plan's enrolled actuary has not yet issued the certification of the
plan's AFTAP for the plan year, the plan is not permitted to limit the
payment of unpredictable contingent event benefits or the accrual of
benefits based on an expectation that the limitations under section
436(d) or 436(e) will apply to the plan once the enrolled actuary's
certification of the AFTAP is issued. In addition, the proposed
regulations would provide that, if no presumptions under section 436(h)
apply to a plan during a period and the plan's enrolled actuary has not
yet issued a certification of the plan's AFTAP for the plan year, the
limitations under sections 436(b) and 436(c) that apply to
unpredictable contingent event benefits and certain plan amendments,
respectively, during that period must be applied following the special
rules described below in paragraph H.3. of this preamble. Thus, if
after application of those rules the plan would be treated as having an
AFTAP below the applicable threshold under section 436(b) or 436(c),
the limitation will apply unless the plan sponsor makes a contribution
to avoid application of the applicable benefit limitations described in
section 436(b)(2) or 436(c)(2). In such case, following the
certification of the AFTAP for the current plan year by the plan's
enrolled actuary, the proposed regulations would provide that those
[[Page 50554]]
contributions are recharacterized as employer contributions under
section 430 for the current plan year to the extent they exceed the
amount necessary to avoid application of the applicable limitation
under section 436(b) or 436(c) based on the certified percentage.
3. Periods prior to certification--special rules for unpredictable
contingent event benefits and plan amendments that increase liability.
The proposed regulations would provide that, during the pre-
certification period, the rules relating to the deemed election to
reduce the funding standard carryover balance and the prefunding
balance must be applied based on the plan's presumed AFTAP. The
proposed regulations would provide rules for determining the amount of
the reduction in those balances that would apply in such a situation
and provide that, in making such determination, the presumed adjusted
funding target is increased to take into account the benefits
attributable to the unpredictable contingent event or the plan
amendment described in section 436(b) and 436(c), respectively. For
this purpose, if no presumption applies under the rules of section
436(h) (for example, because the plan's actual AFTAP for the prior year
was certified to be at least 80 percent), then that prior year's actual
AFTAP is substituted for the presumed AFTAP for the plan year in
determining the presumed adjusted funding target. In the case of a plan
that is not a collectively bargained plan with a funding standard
account carryover balance or a prefunding balance, the deemed election
rules do not apply for purposes of sections 436(b) and 436(c), and the
plan sponsor is permitted (but not required) to reduce those balances
in order to increase the adjusted plan assets that are compared to the
presumed AFTAP.
If, after application of such funding balance reductions and the
other calculations set forth in the proposed regulations, the plan's
AFTAP (taking into account the additional benefits) is less than the
applicable threshold under section 436(b) or 436(c), as applicable,
then the plan is not permitted to provide any benefits attributable to
the unpredictable contingent event or plan amendment unless the plan
sponsor makes a contribution that would allow payment of unpredictable
contingent event benefits or would permit a plan amendment increasing
benefit liabilities to go into effect under the rules of section
436(b)(2) or 436(c)(2).
If, after application of such funding balance reductions, the
plan's AFTAP (taking into account the additional benefits) is greater
than or equal to the applicable threshold under section 436(b) or
436(c), as applicable, then the plan is not permitted to limit the
payment of unpredictable contingent event benefits under section 436(b)
or to restrict a plan amendment increasing liability for benefits from
taking effect under section 436(c) based on an expectation that those
limitations will apply to the plan once the enrolled actuary's
certification is issued.
4. Limitations based on AFTAP. The proposed regulations would
provide that, on and after the date the enrolled actuary for the plan
issues a certification of the AFTAP for the current plan year, the plan
must apply that certified percentage (however, if the certification is
issued on or after the first day of the 10th month of the current plan
year but before the first day of the following plan year, the certified
percentage applies under the presumption rules beginning on the first
day of that following plan year). For example, the plan sponsor must
apply the certified AFTAP for a plan year to an unpredictable
contingent event that occurs or a plan amendment that is effective on
or after the date of the enrolled actuary's certification during the
plan year. Thus, the plan administrator must determine if the AFTAP is
at or above the applicable threshold, taking into account the increase
in the funding target that would be attributable to the unpredictable
contingent event or plan amendment if the unpredictable contingent
event benefits or the increase in liability attributable to the plan
amendment were taken into account.
After the AFTAP for a plan year is certified by the plan's enrolled
actuary, with respect to the application of limitations under sections
436(d) and 436(e) (accelerated benefit payments and benefit accruals,
respectively) for the plan year, the deemed election to reduce funding
balances must be reapplied based on the actual funding target for the
year (provided the certification is issued by the first day of the 10th
month). This reapplication of the deemed election may require an
additional reduction in funding balances if the amount of the reduction
in funding balances that is necessary to reach the applicable threshold
to avoid the application of those limitations is greater than the
amount of a prior reduction for the plan year. The proposed regulations
would also reflect section 436(d)(2), which provides that no prohibited
payments under section 436(d)(5) are permitted to be paid by a plan
during any period in which the plan sponsor is a debtor in a case under
title 11, United States Code, or any similar Federal or State law, if
the plan's enrolled actuary has not yet certified the plan's AFTAP for
the plan year to be at least 100 percent. Thus, the presumptions do not
apply for purposes of section 436(d)(2).
The proposed regulations would provide that the enrolled actuary's
certification of the AFTAP does not affect the application of the
limitation under section 436(d) for participants with annuity starting
dates before the certification. Similarly, the enrolled actuary's
certification for the plan year does not affect the application of the
limitation under section 436(e) of this section prior to the date of
that certification.
With respect to the impact of the enrolled actuary's certification
of the AFTAP for a plan year on periods prior to the certification, the
proposed regulations would provide that the certification does not
affect the application of limitations under sections 436(b) and 436(c)
for periods prior to the date the certification is issued, regardless
of the extent to which the certified percentage varies from the
presumed percentage. Notwithstanding the foregoing, in the case of a
plan that, for a plan year, did not provide benefits attributable to an
unpredictable contingent event or plan amendment based on the preceding
year's certified AFTAP (and where sufficient contributions under
section 436(b)(2) or 436(c)(2) were not made), the plan must provide
any benefits that were not so provided if those benefits would be
permitted under the rules of section 436 based on the certified AFTAP,
taking into account the increase in the funding target that would be
attributable to the unpredictable contingent event benefits or increase
in liability due to the plan amendment.
A special rule applies if a plan is providing benefits with respect
to one or more unpredictable contingent events occurring within the
plan year or amendments taking effect within the plan year. In such a
case, the restrictions on unpredictable contingent event benefits and
plan amendments are applied with respect to a subsequent unpredictable
contingent event or amendment by treating the increase in the funding
target attributable to the subsequent event or amendment as if it
included the increases in the funding target attributable to all such
earlier events or amendments.
I. Determination of Funding Target Attainment Percentage
For purposes of section 436, the funding target means the funding
target
[[Page 50555]]
under section 430(d) or section 430(i), as applicable to the plan for a
plan year.
For purposes of section 436, the funding target attainment
percentage (FTAP) for any plan year is the fraction (expressed as a
percentage), the numerator of which is the value of net plan assets,
and the denominator of which is the plan's funding target (determined
without regard to the at-risk rules under section 430(i) even in the
case of a plan that is in at-risk status). For this purpose, pursuant
to section 430(f)(4), the value of net plan assets for the plan year is
generally determined by subtracting the plan's funding standard
carryover balance and prefunding balance (if any) for the plan year
from the value of plan assets.
The adjusted funding target attainment percentage (AFTAP) for any
plan year is the fraction (expressed as a percentage), the numerator of
which is the adjusted plan assets and the denominator of which is the
adjusted funding target. The adjusted plan assets equals the net plan
assets, increased by the aggregate amount of purchases of annuities for
employees other than highly compensated employees (as defined in
section 414(q)) which were made by the plan during the preceding 2 plan
years. The proposed regulations would provide that the adjusted funding
target equals the funding target for the plan year (determined without
regard to the at-risk rules under section 430(i)), increased by the
aggregate amount of purchases of annuities for employees other than
highly compensated employees (as defined in section 414(q)) which were
made by the plan during the preceding 2 plan years.
If the FTAP for a plan year, determined without regard to the
section 430(f)(4) subtraction of the funding standard carryover balance
and the prefunding balance from the value of plan assets, would be 100
percent or more, then, for purposes of section 436 (but not section
430(d)), the value of net plan assets used in the determination of the
FTAP and the AFTAP is determined without regard to any subtraction of
funding balances under section 430(f)(4). The proposed regulations
would reflect the transition rule of section 436(j)(3)(B) under which a
plan is permitted to phase up to 100 percent for purposes of the
preceding sentence.
The proposed regulations would also provide that, in the case of
the first plan year beginning in 2008, the FTAP for the preceding plan
year is determined as a fraction (expressed as a percentage), the
numerator of which is the value of net plan assets, and the denominator
of which is the plan's current liability determined pursuant to section
412(l)(7) on the valuation date for the last plan year that begins
before 2008 (the 2007 plan year). For this purpose, the value of plan
assets is determined under section 412(c)(2) as in effect for the 2007
plan year, except that the value of plan assets prior to subtraction of
the plan's funding standard account credit balance described below can
neither be less than 90 percent of the fair market value of plan assets
nor greater than 110 percent of the fair market value of plan assets on
the valuation date for that plan year. If a plan has a funding standard
account credit balance as of the valuation date for the 2007 plan year,
that balance must be subtracted from the asset value described above as
of that date unless the value of plan assets is greater than or equal
to 90 percent of the plan's current liability determined under section
412(l)(7) on the valuation date for the 2007 plan year.
In the case of the first plan year beginning in 2008, for purposes
of determining the AFTAP for the 2007 plan year, the proposed
regulations provide that the adjusted funding target is equal to the
current liability determined pursuant to section 412(l)(7) on the
valuation date for the 2007 plan year, increased by the aggregate
amount of purchases of annuities for employees other than highly
compensated employees (as defined in section 414(q)) which were made by
the plan during the preceding 2 plan years. In any case in which the
plan's enrolled actuary has not issued a certification of the AFTAP of
the plan for the 2007 plan year using this rule, the AFTAP of the plan
for the first plan year beginning in 2008 is presumed to be less than
60 percent until the AFTAP of the plan for the 2007 plan year has been
certified or the AFTAP of the plan for the first plan year beginning in
2008 has been certified. This rule applies for purposes of sections
436(b) and 436(c) at the beginning of the first plan year beginning in
2008 and applies for purposes of sections 436(d) and 436(e) as of the
first day of the 4th month of the first plan year beginning in 2008.
The special rules permitting range certifications for plan years
beginning after 2007 do not apply to the 2007 plan year.
However, if the employer makes an election to reduce some or all of
the funding standard carryover balance as of the first day of the first
plan year beginning in 2008 in accordance with proposed Sec. 1.430(f)-
1(e), then the present value (determined as of the valuation date for
the prior year using the valuation interest rate for that prior year)
of the amount so reduced is not treated as part of the funding standard
account credit balance when that balance is subtracted from the value
of net plan assets. Thus, an employer's election to reduce the funding
standard carryover balance in 2008 will have the effect of reducing the
amount that must be subtracted from the assets in determining the 2007
AFTAP for purposes of applying the presumptions under section 436(h)(3)
as of the first day of the 4th month of the plan year beginning in
2008.
Proposed Legislation
As of the date of issuance of these proposed regulations, bills
have been introduced in the House of Representatives and the Senate
that would exclude mandatory cash-out distributions under section
411(a)(11) from application of the accelerated payments limitation
under section 436(d) and that would provide the Treasury Department
with authority to address application of the presumptions under section
436(h) to plans that have valuation dates that are later than the first
day of the plan year.\5\ Proposed Sec. 1.436-1(d)(6) and Sec. 1.436-
1(h)(5), respectively, are reserved in order to accommodate such
changes.
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\5\ H.R. 3361 (August 3, 2007) and S. 1974 (August 2, 2007), at
sections 2(c)(1)(C), 2(c)(2)(C), 2(c)(1)(F), and 2(c)(2)(F).
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Section 1107 of PPA '06 and Code Section 411(d)(6)
Under section 1107 of PPA '06, a plan sponsor is permitted to delay
adopting a plan amendment pursuant to statutory provisions under PPA
'06 (or pursuant to any regulation issued under PPA '06) until the last
day of the first plan year beginning on or after January 1, 2009
(January 1, 2011 in the case of governmental plans). As described in
Rev. Proc. 2007-44, 2007-28 IRB 54, this amendment deadline applies to
both interim and discretionary amendments that are made pursuant to PPA
'06 statutory provisions or any regulation issued under PPA '06. See
Sec. 601.601(d)(2) of this chapter. If section 1107 of PPA '06 applies
to an amendment of a plan, section 1107 provides that the plan does not
fail to meet the requirements of section 411(d)(6) by reason of such
amendment, except as provided by the Secretary of the Treasury.\6\ For
example, section
[[Page 50556]]
411(d)(6) relief would be available for plan amendments that would
prohibit single sum or other accelerated distributions if the plan's
AFTAP was less than 60 percent, in accordance with section 436(d) and
Sec. 1.436-1(d) of the proposed regulations. Plan sponsors should note
that the IRS and the Treasury Department are reviewing whether sample
plan amendments should be issued with respect to section 436 and the
Sec. 1.436-1 regulations.
---------------------------------------------------------------------------
\6\ Except to the extent permitted under section 411(d)(6) and
the Sec. 1.411(d)-4 regulations, or under a statutory provision
such as section 1107 of PPA '06, section 411(d)(6) prohibits a plan
amendment that decreases a participant's accrued benefits or that
has the effect of eliminating or reducing an early retirement
benefit or retirement-type subsidy, or eliminating an optional form
of benefit, with respect to benefits attributable to service before
the amendment. However, an amendment that eliminates or decreases
benefits that have not yet accrued does not violate section
411(d)(6), provided the amendment is adopted and effective before
the benefits accrue.
---------------------------------------------------------------------------
ERISA Notice to Participants and Beneficiaries
Under section 101(j) of ERISA, as amended by PPA '06, the plan
administrator of a single employer plan is required to provide a
written notice to participants and beneficiaries within 30 days after:
The date the plan has become subject to a restriction
described in the ERISA provisions that are parallel to paragraphs (b)
and (d) of Code section 436;
In the case of a plan that is subject to the ERISA
provisions that are parallel to paragraph (e) of Code section 436, the
valuation date for the plan year for which the plan's AFTAP is less
than 60 percent (or, if earlier, the date the AFTAP is presumed to be
less than 60 percent under the ERISA provisions that parallel the
presumption rules in paragraph (h) of Code section 436); and
At such other time as may be determined by the Secretary
of the Treasury. The notice is required to be provided in writing,
except that the notice may be in electronic or other form to the extent
that such form is reasonably accessible to the recipient.
Effective/Applicability Dates
1. Section 1.430(f)-1
In general, these regulations under section 430(f) are proposed to
apply to plan years beginning on or after January 1, 2008. However, in
the case of a plan for which the effective date of section 430 is
delayed in accordance with sections 104 through 106 of the Pension
Protection Act of 2006, Public Law 109-280, 120 Stat. 780, the
regulations under section 430(f) are proposed to apply to plan years
beginning on or after the effective date of section 430 with respect to
the plan. Unlike section 436, section 430 and the regulations under
section 430(f) do not include a delayed effective date for collectively
bargained plans.
2. Section 1.436-1
In general, the regulations under section 436 are proposed to apply
to plan years beginning on or after January 1, 2008. However, in the
case of a plan for which the effective date of section 436 is delayed
in accordance with sections 104 through 106 of the Pension Protection
Act of 2006, Public Law 109-280, 120 Stat. 780, the regulations under
section 436 are proposed to apply to plan years beginning on or after
the effective date of section 436 with respect to the plan. In
addition, in the case of a collectively bargained plan maintained
pursuant to one or more collective bargaining agreements between
employee representatives and one or more employers ratified before
January 1, 2008, the regulations under section 436 would not apply to
plan years beginning before the earlier of: (1) the later of the date
on which the last collective bargaining agreement relating to the plan
terminates (determined without regard to any extension thereof agreed
to after August 17, 2006), or the first day of the first plan year to
which the proposed regulations under section 436 would otherwise apply,
or (2) January 1, 2010. For this purpose, any plan amendment made
pursuant to a collective bargaining agreement relating to the plan
which amends the plan solely to conform to any requirement under the
proposed regulations would not be treated as a termination of the
collective bargaining agreement. The determination of whether a plan is
a collectively bargained plan is the same as described above in
paragraph II.A.5 of this preamble with respect to a plan sponsor's
deemed election to reduce funding balances.
3. Reliance on Proposed Regulations
For periods following the issuance of these proposed regulations
and before final regulations are issued, these proposed regulations may
be relied upon for plan qualification purposes, provided that such
reliance is on a consistent and reasonable basis.
4. Effect on Plans Subject to Section 402 of PPA '06
The IRS and the Treasury Department are reviewing the applicability
of section 436 and the funding balance rules of section 430(f) to plans
that have made elections under section 402 of PPA '06 (taking into
account the amendments to section 402 of PPA '06 by section 6615 of the
U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq
Accountability Appropriations Act, 2007 (Public Law 110-28)) and any
special rules for such plans will be addressed in future guidance.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information imposed by these proposed
regulations will not have a significant economic impact on a
substantial number of small entities. Accordingly, a regulatory
flexibility analysis is not required. The estimated burden imposed by
the collection of information contained in these proposed regulations
is 0.75 hours per respondent. Moreover, most of this burden is
attributable to the requirement for a qualified defined benefit plan's
enrolled actuary to provide a timely certification of the plan's AFTAP
for each plan year to avoid certain benefit restrictions, which is
imposed by section 436(h) of the Code. In addition, these proposed
regulations provide for several written elections to be made by the
plan sponsor upon occasion; these written elections will require
minimal time to prepare. Pursuant to section 7805(f) of the Code, these
regulations have been submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (one signed and eight (8)
copies) or electronic comments that are submitted timely to the IRS.
The IRS and Treasury Department specifically request comments on the
clarity of the proposed regulations and how they may be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by
any person who timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place of the public hearing
will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Lauson C. Green and
Linda S.F. Marshall, Office of Division Counsel/Associate Chief Counsel
(Tax
[[Page 50557]]
Exempt and Government Entities). However, other personnel from the IRS
and the Treasury Department participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.430(f)-1 is added to read as follows:
Sec. 1.430(f)-1 Effect of prefunding balance and funding standard
carryover balance.
(a) In general--(1) Overview. This section provides rules relating
to the application of prefunding balances and funding standard
carryover balances under section 430(f). Section 430 and this section
apply to single employer defined benefit plans (including multiple
employer plans) that are subject to section 412, but do not apply to
multiemployer plans (as defined in section 414(f)). Paragraph (b) of
this section sets forth rules regarding a plan sponsor's election to
maintain a funding standard carryover balance or a prefunding balance.
Paragraph (c) of this section provides rules under which those balances
must be subtracted from plan assets. Paragraph (d) of this section
describes a plan sponsor's election to use those balances to offset the
minimum required contribution. Paragraph (e) of this section describes
a plan sponsor's election to reduce those balances (which will affect
the determination of the value of plan assets for purposes of sections
430 and 436). Paragraph (f) of this section sets forth rules regarding
elections under this section. Paragraph (g) of this section contains
examples. Paragraph (h) of this section contains effective/
applicability dates and transitional provisions.
(2) Special rules for multiple employer plans. In the case of a
multiple employer plan to which section 413(c)(4)(A) applies, the rules
of this section are applied separately for each employer under the
plan, as if each employer maintained a separate plan. Thus, each
employer under such a multiple employer plan may have a separate
funding standard carryover balance and a prefunding balance for the
plan. In the case of a multiple employer plan to which section
413(c)(4)(A) does not apply (that is, a plan described in section
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to
apply), the rules of this section are applied as if all participants in
the plan were employed by a single employer.
(b) Election to maintain balances--(1) Prefunding balance--(i) In
general. A plan sponsor is permitted to maintain a prefunding balance
for a plan. A prefunding balance maintained for a plan consists of a
beginning balance of zero, increased by the amount of excess
contributions to the extent the employer elects to do so as described
in paragraph (b)(1)(ii) of this section, and decreased to the extent
provided in paragraph (b)(1)(iii) of this section. The prefunding
balance is adjusted further for investment return and interest as
provided in paragraphs (b)(3) and (b)(4) of this section.
(ii) Increases--(A) In general. If the plan sponsor of a plan
elects to add to the plan's prefunding balance, as of the first day of
each plan year following the first effective plan year for the plan,
the prefunding balance is increased by the amount so elected by the
plan sponsor for the plan year. The amount added to the prefunding
balance cannot exceed the interest-adjusted excess contributions for
the preceding plan year determined under paragraph (b)(1)(ii)(B) of
this section.
(B) Interest-adjusted excess contribution. For purposes of this
paragraph (b)(1)(ii), the interest-adjusted excess contribution for the
preceding plan year is the amount, increased with interest in
accordance with the rules of paragraph (b)(1)(iv)(A) of this section,
of the excess, if any, of--
(1) The present value of the employer contributions (other than
contributions to avoid or terminate benefit limitations described in
Sec. 1.436-1(f)(2)) to the plan for the preceding plan year determined
under the rules of paragraph (b)(1)(iv)(B) of this section; over
(2) The minimum required contribution for the preceding plan year
(determined without regard to any election to offset the minimum
required contribution under paragraph (d) of this section for the
preceding plan year).
(iii) Decreases. The prefunding balance of a plan is decreased (but
not below zero) by the sum of--
(A) As of the first day of each plan year after the first effective
plan year for the plan, any amount of the prefunding balance that was
used under paragraph (d) of this section to offset the minimum required
contribution of the plan for the preceding plan year; and
(B) As of the first day of each plan year, any reduction in the
prefunding balance under paragraph (e) of this section for the plan
year.
(iv) Adjustments for interest--(A) Adjustment of excess
contribution. The amount of the excess contribution for the preceding
year (as determined under paragraph (b)(1)(ii)(B) of this section) is
increased for interest accruing for the period between the valuation
date for the preceding plan year and the first day of the current year.
For this purpose, interest is determined by using the plan's effective
interest rate under section 430(h)(2)(A) for the preceding plan year.
(B) Determination of present value. The present value of the
contributions described in paragraph (b)(1)(ii)(B)(1) of this section
is determined as of the valuation date for the preceding plan year,
using the plan's effective interest rate under section 430(h)(2)(A) for
the preceding plan year.
(2) Funding standard carryover balance--(i) In general. A funding
standard carryover balance is only permitted to be maintained by a plan
that had a positive balance in the funding standard account under
section 412(b) as of the end of the pre-effective plan year for the
plan. The funding standard carryover balance as of the beginning of the
first effective plan year for the plan is the positive balance in the
funding standard account under section 412(b) as of the end of the pre-
effective plan year for the plan, decreased to the extent provided in
paragraph (b)(2)(ii) of this section and adjusted further for
investment return and interest as provided in paragraphs (b)(3) and
(b)(4) of this section.
(ii) Decreases. The funding standard carryover balance of a plan is
decreased (but not below zero) by the sum of--
(A) As of the first day of each plan year after the first effective
plan year for the plan, any amount of the funding standard carryover
balance that was used under paragraph (d) of this section to offset the
minimum required contribution of the plan for the preceding plan year;
and
(B) As of the first day of each plan year, any reduction in the
funding standard carryover balance under paragraph (e) of this section
for the plan year.
(3) Adjustments for investment experience. In determining a plan's
prefunding balance under paragraph (b)(1) of this section or a plan's
funding standard carryover balance under paragraph (b)(2) of this
section as of the first day of a plan year, the balance must be
adjusted to reflect the actual rate of return on plan assets for the
preceding
[[Page 50558]]
plan year. This adjustment is applied to the balance after subtracting
amounts used to offset the minimum required contribution for the
preceding plan year pursuant to paragraph (d) of this section and after
any reduction of balances for that preceding plan year under paragraph
(e) of this section. For this purpose, the actual rate of return on
plan assets for the preceding plan year is determined on the basis of
fair market value and must take into account the amount and timing of
all contributions, distributions, and other plan payments made during
that period.
(4) Valuation date other than the first day of the plan year--(i)
In general. If a plan's valuation date is not the first day of the plan
year, solely for purposes of applying paragraphs (c), (d), and (e) of
this section, the plan's prefunding balance and funding standard
carryover balance (if any) determined under this paragraph (b) are
increased to the valuation date using the plan's effective interest
rate under section 430(h)(2)(A) for the plan year.
(ii) Special rule for adjustments for investment experience. For
purposes of applying the rules regarding the adjustments for investment
experience in paragraph (b)(3) of this section, in the case of a plan
with a valuation date that is not the first day of the plan year, the
amount of the funding balances that must be subtracted from plan assets
under paragraph (d) of this section (because they are used to offset
the minimum required contribution for the plan year) must be adjusted
to the first day of the plan year using the effective interest rate
under section 430(h)(2)(A) for that year.
(c) Effect of balances on plan assets--(1) In general. In the case
of any plan with a prefunding balance or a funding standard carryover
balance, the amount of those balances must be subtracted from the value
of plan assets for purposes of sections 430 and 436, except as provided
in paragraphs (c)(2), (c)(3), and (c)(4) of this section.
(2) Subtraction of balances in determining new shortfall
amortization base--(i) Prefunding balance. For purposes of determining
whether a plan is exempt from the requirement to establish a new
shortfall amortization base under section 430(c)(5), the amount of the
prefunding balance is subtracted from the value of plan assets only if
an election under paragraph (d) of this section to use the prefunding
balance to offset the minimum required contribution is made for the
plan year.
(ii) Funding standard carryover balance. For purposes of
determining whether a plan is exempt from the requirement to establish
a new shortfall amortization base under section 430(c)(5), the funding
standard carryover balance is not subtracted from the value of plan
assets regardless of whether any portion of either the funding standard
carryover balance or the prefunding balance is used to offset the
minimum required contribution for the plan year under paragraph (d) of
this section.
(3) Special rule for certain binding agreements with PBGC. If there
is in effect for a plan year a binding written agreement with the
Pension Benefit Guaranty Corporation (PBGC) which provides that all or
a portion of the prefunding balance or funding standard carryover
balance (or both balances) is not available to offset the minimum
required contribution for a plan year, that specified amount is not
subtracted from the value of plan assets for purposes of determining
the funding shortfall under section 430(c)(4). For example, if a PBGC
agreement provides that $5 million of a plan's balances is unavailable
to offset the minimum required contribution for a plan year, the sum of
the plan's prefunding balance and funding standard carryover balance is
$20 million, and the plan's assets are $100 million, the value of plan
assets for purposes of determining the funding shortfall under section
430(c)(4) is reduced by $15 million ($20 million less $5 million) to
$85 million. For purposes of this paragraph (c)(3), an agreement with
the PBGC is taken into account with respect to a plan year only if the
agreement was executed prior to the valuation date for the plan year.
(4) Exception for section 436(j) and (k) special adjustment rules.
See section 436(j) and (k) and Sec. 1.436-1(j)(2)(ii) and (iii) for
exceptions from the requirement to subtract the prefunding and funding
standard carryover balances from plan assets in determining a plan's
funding target attainment percentage for purposes of section 436.
(d) Election to apply balances against minimum required
contribution--(1) In general. Subject to the limitations provided in
paragraphs (d)(2) and (d)(3) of this section, in the case of any plan
year in which the plan sponsor elects to use all or a portion of the
prefunding balance or the funding standard carryover balance to offset
the minimum required contribution for the current plan year, the
minimum required contribution for the plan year (determined after
taking into account any waiver under section 412(c)) is offset as of
the valuation date for the plan year by the amount so used.
(2) Requirement to use funding standard carryover balance before
prefunding balance. To the extent that a plan has a funding standard
carryover balance greater than zero, no amount of the plan's prefunding
balance may be used to offset the minimum required contribution. Thus,
a plan's funding standard carryover balance must be exhausted before
the plan's prefunding balance may be applied under paragraph (d)(1) of
this section to offset the minimum required contribution.
(3) Limitation for underfunded plans. An election to apply a
funding standard carryover balance or a prefunding balance under
paragraph (d)(1) of this section is not available for a plan year if
the plan's prior year funding ratio is less than 80 percent. For
purposes of this paragraph (d)(3), except as provided in paragraph
(h)(5) of this section, the plan's prior year funding ratio is the
fraction (expressed as a percentage)--
(i) The numerator of which is the value of plan assets on the
valuation date for the preceding plan year, reduced by the amount of
any prefunding balance (but not the amount of any funding standard
carryover balance); and
(ii) The denominator of which is the funding target of the plan for
the preceding plan year (determined without regard to section
430(i)(1)).
(e) Election to reduce balances--(1) In general. A plan sponsor may
make an election for a plan year to reduce any portion of a plan's
prefunding balance and funding standard carryover balance under this
paragraph (e). If such an election is made, the amount of those
balances that must be subtracted from plan assets pursuant to paragraph
(c)(1) of this section will be smaller and, accordingly, the plan
assets taken into account for purposes of sections 430 and 436 will be
larger. Thus, this election to reduce a plan's prefunding balance and
funding standard carryover balance is taken into account in the
determination of plan assets for the plan year and applies for all
purposes under sections 430 and 436, including for purposes of
determining the plan's prior year funding ratio under paragraph (d)(3)
of this section for the following plan year. See also section 436(f)(3)
and Sec. 1.436-1(a)(5) for a rule under which the plan sponsor is
deemed to make the election described in this paragraph (e).
(2) Coordination between prefunding balance and funding standard
carryover balance. To the extent that a plan has a funding standard
carryover balance greater than zero, no election under paragraph (e)(1)
of this section is permitted to be made that reduces the plan's
prefunding balance. Thus, a plan must exhaust its funding standard
carryover balance before it is permitted to make an election under
paragraph
[[Page 50559]]
(e)(1) of this section with respect to its prefunding balance.
(f) Elections--(1) Method of making elections. Any election under
this section by the plan sponsor must be made by providing written
notification of the election to the plan's enrolled actuary and the
plan administrator. The written notification must set forth the
relevant details of the election, including the specific amounts
involved in the election with respect to the prefunding balance and
funding standard carryover balance.
(2) Timing of elections--(i) General rule. Except as provided in
paragraph (f)(2)(ii) of this section, any election under this section
must be made on or before the due date (with extensions) for the filing
of the plan's Form 5500 ``Annual Return/Report of Employee Benefit
Plan'' for the plan year to which the election relates (or, in the case
of a plan not required to file a Form 5500 for the plan year, on or
before the last day of the seventh month after the end of the plan year
to which the election relates). For this purpose, an election to add to
the prefunding balance relates to the plan year for which excess
contributions were made. For example, in the case of a plan required to
file a Form 5500, an election to add to the prefunding balance as of
the first day of the 2010 plan year (in an amount not in excess of the
2009 interest-adjusted excess contributions under the rules of
paragraph (b)(1)(ii) of this section) must be made no later than the
due date for filing the 2009 Form 5500 even though the election is
reported on the 2010 Form 5500 (Schedule SB).
(ii) Election to reduce balances. Any election under paragraph (e)
of this section to reduce the prefunding balance or funding standard
carryover balance for a plan year (for example, in order to avoid a
benefit restriction under section 436) must be made by the end of the
plan year to which the election relates.
(3) Irrevocability of elections. A plan sponsor's election under
this section with respect to the plan's funding standard carryover
balance or prefunding balance is irrevocable (and must be
unconditional).
(4) Plan sponsor--(i) In general. For purposes of the elections
described in this section, except as provided in paragraph (f)(4)(ii)
of this section, any reference to the plan sponsor means the employer
or employers responsible for making contributions to or under the plan.
(ii) Certain multiple employer plans. For purposes of the elections
described in this section, in the case of plans that are multiple
employer plans to which section 413(c)(4)(A) does not apply, any
reference to the plan sponsor means the plan administrator within the
meaning of section 414(g).
(g) Examples. The following examples illustrate the application of
this section:
Example 1. (i) Plan P is a defined benefit plan with a plan year
that is the calendar year and a valuation date of January 1. The
funding standard carryover balance of Plan P is $25,000 as of the
beginning of the 2008 plan year. The sponsor of Plan P, Sponsor S,
does not elect in 2008, pursuant to paragraph (e)(1) of this
section, to reduce any portion of the funding standard account
carryover balance prior to the determination of the value of plan
assets. The actual rate of return on plan P's assets in 2008 is 2%.
The effective interest rate in 2008 for plan P is 6%. The minimum
required contribution for Plan P under section 430 for 2008 is
$100,000. The prior year funding ratio for Plan P for 2008, as
determined under paragraph (h)(5) of this section, is not less than
80%.
(ii) Sponsor S makes a contribution to Plan P of $150,000 on
December 1, 2008, for the 2008 plan year and makes no other
contributions for the 2008 plan year. Because this contribution was
made on a date other than the valuation date for the 2008 plan year,
the contribution must be adjusted to reflect interest that would
otherwise have accrued between the valuation date and the date of
the contribution, at the effective rate of interest for the 2008
plan year. The amount of the contribution after adjustment is
$142,198, determined as $150,000 discounted for 11 months of
compound interest at an effective annual interest rate of 6%.
(iii) The excess of employer contributions for 2008 over the
minimum required contribution for 2008, as of the valuation date, is
$42,198 ($142,198 less $100,000). Accordingly, the increase in Plan
P's prefunding balance as of January 1, 2009, cannot exceed $44,730
(which is the excess contribution of $42,198 adjusted for 12 months
of interest at an effective interest rate of 6%).
(iv) Furthermore, if Sponsor S does not elect to apply any
portion of the funding standard carryover balance toward the minimum
contribution in 2008, the funding standard carryover balance as of
January 1, 2009, is $25,500 (which is the funding standard account
balance as of January 1, 2008, adjusted for investment experience at
an effective interest rate of 2%).
Example 2. (i) The facts are the same as in Example 1 except
that the contribution of $150,000 is made on February 1, 2009, for
the 2008 plan year.
(ii) The amount of the contribution after adjustment is
$140,824, which is determined as $150,000 discounted for 13 months
of interest at an effective interest rate of 6%. Accordingly, the
increase in Plan P's prefunding balance as of January 1, 2009,
cannot exceed $43,273 (which is the excess contribution of $40,824
adjusted for 12 months of interest at an effective interest rate of
6%).
Example 3. (i) The facts are the same as in Example 1 except
that Sponsor S contributes $85,000 to Plan P on January 1, 2008, for
the 2008 plan year and makes no other contributions to Plan P for
the 2008 plan year. In addition, Sponsor S elects to use $15,000 of
the funding standard carryover balance to offset P's minimum
required contribution in 2008, pursuant to paragraph (d)(1) of this
section.
(ii) With respect to the 2009 plan year, the adjustment for
investment experience under paragraph (b)(3) of this section for the
funding standard carryover balance for the preceding plan year is
$200, determined as the actual rate of return on plan assets for
2008 as applied to the 2008 funding standard carryover balance after
reduction for the amount of that balance used under paragraph (d)(1)
of this section (that is, $25,000 less $15,000, multiplied by the
actual rate of return of 2%).
(iii) The funding standard carryover balance, as of January 1,
2009, is $10,200, determined as the 2008 funding standard carryover
balance less the amount used to offset the 2008 minimum required
contribution, adjusted for investment experience during the 2008
year ($25,000 less $15,000 plus $200).
Example 4. (i) The facts are the same as in Example 3 except
that Sponsor S contributes $90,000 (instead of $85,000) to Plan P on
January 1, 2008, for the 2008 plan year.
(ii) Notwithstanding the fact that the amount that Sponsor S
contributed to Plan P exceeds the minimum required contribution
($85,000) after it has been offset as a result of the use of the
funding standard carryover balance, the maximum amount that Sponsor
S may add to the prefunding balance as of January 1, 2009, is $0.
This is because the maximum amount that may be added to the
prefunding balance is the excess of $90,000 over $100,000. See
paragraphs (b)(1)(ii)(A) and (B) of this section.
Example 5. (i) Plan Q is a defined benefit plan with a plan year
that is the calendar year and a valuation date of July 1. The
funding standard carryover balance of Plan Q is $50,000 as of
January 1, 2009, the beginning of the 2009 plan year. The prefunding
balance of Plan Q as of the beginning of the 2009 plan year is $0.
The actual rate of return on plan Q's assets in 2009 is 10%. The
effective interest rate for Plan Q for 2009 is 5%. The funding ratio
for Plan Q in 2008 is 85%, as determined under paragraph (d)(3) of
this section. Thus, the prior year funding ratio for 2009 is not
less than 80%.
(ii) Pursuant to paragraph (b)(4) of this section, the funding
standard carryover balance is increased to $51,235 as of July 1,
2009 (that is, an increase to reflect 6 months of interest at an
effective interest rate of 5%). Sponsor T does not elect in 2009 to
reduce any portion of the funding standard carryover balance
pursuant to paragraph (e) of this section. The funding standard
carryover balance ($51,235) is subtracted from the value of plan
assets, as of July 1, 2009, prior to the determination of the
minimum funding contribution and, accordingly, $51,235 is the
maximum amount that may be applied against the minimum required
contribution.
(iii) The minimum required contribution for Plan Q for 2009 is
$200,000. Sponsor T
[[Page 50560]]
makes a contribution to Plan T of $190,000 on July 1, 2009, for the
2009 plan year, and makes no other contributions for the 2009 plan
year. Sponsor T elects to use $10,000 of the funding standard
carryover balance to offset Plan Q's minimum required contribution
in 2009. Accordingly, the value of the funding standard carryover
balance as of July 1, 2009, prior to adjustment for investment
experience, is $41,235 (that is, $51,235 less $10,000).
(iv) The value of the funding standard carryover balance as of
January 1, 2010, is determined by first discounting the value as of
July 1, 2009, after amounts have been used to offset the minimum
required contribution, to January 1, 2009, at the effective interest
rate and then crediting this so determined amount with a full year's
investment experience at a rate equal to the actual rate of return.
Thus, the July 1, 2009, value of $41,235 is discounted for 6 months
of interest, at an effective interest rate of 5%, to obtain a
January 1, 2009, value of $40,241. Accordingly, the value of the
funding standard carryover balance as of January 1, 2010, is $44,265
(that is, $40,241 increased with one year's investment return at a
rate of 10%).
(h) Effective/applicability date and transition rules--(1) General
effective/applicability date. Except as provided in paragraph (h)(2) of
this section, this section applies to plan years beginning on or after
January 1, 2008.
(2) Plans with delayed effective date. In the case of a plan for
which the effective date of section 430 is delayed in accordance with
sections 104 through 106 of the Pension Protection Act of 2006, Public
Law 109-280, 120 Stat. 780, this section applies to plan years
beginning on or after the effective date of section 430 with respect to
the plan.
(3) First effective plan year. For purposes of this section, the
first effective plan year for a plan is the first plan year to which
this section applies under paragraph (h)(1) or (h)(2) of this section.
(4) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before
the first effective date applicable under paragraph (h)(1) or (h)(2) of
this section. Thus, except for plans with a delayed effective date
under paragraph (h)(2) of this section, the pre-effective plan year for
a plan is the last plan year beginning before January 1, 2008.
(5) Special lookback rule for pre-effective plan year's funding
ratio--(i) Plan assets. For purposes of determining a plan's prior year
funding ratio pursuant to paragraph (d)(3) of this section for the
first effective plan year, the value of plan assets on the valuation
date of the preceding plan year is determined under section 412(c)(2)
as in effect for that pre-effective plan year, except that--
(A) If the value of plan assets is less than 90 percent of the fair
market value of plan assets for the pre-effective plan year on that
date, for this purpose such value is considered to be 90 percent of the
fair market value; and
(B) If the value of plan assets is greater than 110 percent of the
fair market value of plan assets on the valuation date for the pre-
effective plan year on that date, for this purpose such value is
considered to be 110 percent of the fair market value.
(ii) Funding target. For purposes of determining a plan's prior
year funding ratio pursuant to paragraph (d)(3) of this section for the
first effective plan year, the funding target of the plan for the
preceding plan year is equal to the plan's current liability under
section 412(l)(7) on the valuation date for the plan's pre-effective
plan year.
Par. 3. Section 1.436-1 is added to read as follows:
Sec. 1.436-1 Limits on benefits and benefit accruals under single
employer defined benefit plans.
(a) General rules--(1) Qualification requirement. Section
401(a)(29) provides that a defined benefit pension plan that is subject
to section 412 and that is not a multiemployer plan (within the meaning
of section 414(f)) is a qualified plan only if it satisfies the
requirements of section 436. This section provides rules relating to
funding-based limitations on certain benefits under section 436, and
the requirements of section 436 are satisfied only if the plan meets
the requirements of this section beginning with the plan's first
effective plan year. This section applies to single employer defined
benefit plans (including multiple employer plans), but does not apply
to multiemployer plans.
(2) Organization of the regulation. Paragraph (b) of this section
describes a limitation on shutdown benefits and other unpredictable
contingent event benefits. Paragraph (c) of this section describes
limitations on plan amendments increasing liabilities. Paragraph (d) of
this section describes limitations on accelerated benefit payments.
Paragraph (e) of this section describes limitations on benefit
accruals. Paragraph (f) of this section provides rules relating to
methods to avoid benefit limitations. Paragraph (g) of this section
provides rules for the operation of the plan in relation to benefit
limitations under section 436. Paragraph (h) of this section describes
related presumptions regarding underfunding that apply for purposes of
the benefit limitations under section 436. Paragraph (j) of this
section contains definitions. Paragraph (k) of this section contains
effective/applicability date provisions.
(3) Special rules for certain plans--(i) New plans. The limitations
described in paragraphs (b), (c), and (e) of this section do not apply
to a plan for the first 5 plan years of the plan. For purposes of
applying this rule, plan years of a plan are aggregated with plan years
of a predecessor plan in accordance with section 414(a) or Sec.
1.415(f)-1(c).
(ii) Multiple employer plans. In the case of a multiple employer
plan to which section 413(c)(4)(A) applies, this section applies
separately with respect to each employer under the plan, as if each
employer maintained a separate plan. Thus, the benefit limitations
under this section 436 could apply differently to participants who are
employees of different employers under such a multiple employer plan.
In the case of a multiple employer plan to which section 413(c)(4)(A)
does not apply (that is, a plan described in section 413(c)(4)(B) that
has not made the election for section 413(c)(4)(A) to apply), this
section applies as if all participants in the plan were employed by a
single employer.
(4) Treatment of plan as of close of prohibited or cessation
period--(i) Resumption of benefit payments and accruals--(A) Resumption
of accelerated payments. If a limitation on accelerated benefit
payments under paragraph (d) of this section applied to a plan as of a
section 436 measurement date, but that limit no longer applies to the
plan as of a later section 436 measurement date, then the prohibition
on paying accelerated benefits under the plan does not apply to
benefits with annuity starting dates that are on or after that later
section 436 measurement date. Any amendment to eliminate the payment of
accelerated benefit payments for periods in which they are not
restricted under section 436 is subject to the rules of section
411(d)(6).
(B) Resumption of benefit accruals. Unless the plan provides
otherwise, benefit accruals under the plan resume effective as of the
section 436 measurement date on which benefit accruals are no longer
restricted under paragraph (e) of this section.
(ii) Missed benefit payments and accruals--(A) Option to amend plan
to restore benefits. A plan is permitted to be amended to provide
participants who had an annuity starting date within a period during
which the rules of paragraph (d) of this section applied to the plan
with the opportunity to have a new election under which the form of
benefit previously elected may be
[[Page 50561]]
modified, subject to applicable qualification requirements. A
participant who makes such a new election is treated as having a new
annuity starting date under section 417. Similarly, a plan is permitted
to be amended to provide that any benefit accruals which were limited
under the rules of paragraph (e) of this section are credited under the
plan when the limitation no longer applies, subject to applicable
qualification requirements. Any such plan amendment with respect to a
new annuity starting date or crediting of benefit accruals is subject
to the requirements of section 436(c) and paragraph (c) of this
section.
(B) Automatic plan provisions to restore benefits. A plan is
permitted to provide that participants who had an annuity starting date
within a period during which the rules of paragraph (d) of this section
applied to the plan are automatically provided with the opportunity to
have a new annuity starting date (which would constitute a new annuity
starting date under section 417) under which the form of benefit
previously elected may be modified, subject to applicable qualification
requirements, once the rules of paragraph (d) of this section cease to
apply. In addition, a plan is permitted to provide for the automatic
restoration of benefit accruals that had been limited under section
436(e) as of the section 436 measurement date that the limitation
ceases to apply, as described in paragraph (a)(4)(ii)(A) of this
section. However, if a plan provides for the automatic restoration of
those benefit accruals and the period of the limitation exceeds 12
months, the plan will be treated as having adopted, effective as of the
section 436 measurement date on which the limitation ceases to apply, a
plan amendment that has the effect of increasing liabilities under the
plan. Such an amendment is subject to the limitations of paragraph (c)
of this section.
(iii) Shutdown and other unpredictable contingent event benefits--
(A) In general. If any unpredictable contingent event benefits under
paragraph (b) of this section are limited with respect to an
unpredictable contingent event, that limitation applies to all such
benefits that otherwise would have been paid to any plan participant
with respect to that unpredictable contingent event.
(B) Benefits not paid. Notwithstanding paragraph (a)(4)(iii)(A) of
this section, a plan is permitted to be amended to provide that any
unpredictable contingent event benefits that were limited under the
rules of paragraph (b) of this section will be paid or reinstated as of
the section 436 measurement date on which the limitation no longer
applies, subject to applicable qualification requirements. Such a plan
amendment is subject to the requirements of section 436(c) and
paragraph (c) of this section. A plan is not permitted to provide for
restoration of any such unpredictable contingent event benefits without
an amendment that complies with section 436(c).
(iv) Example. The following example illustrates the application of
this paragraph (a)(4):
Example. (i) Plan T is a non-collectively bargained defined
benefit plan with a plan year that is the calendar year and a
valuation date of January 1. As of January 1, 2011, Plan T does not
have a funding standard carryover balance or a prefunding balance.
Plan T's sponsor is not in bankruptcy. Beginning January 1, 2011,
Plan T is subject to the restriction on accelerated benefit
distributions under paragraph (d)(3) of this section based on a
presumed adjusted funding target attainment percentage (AFTAP) of
75%, and can therefore only pay a portion (generally 50%) of the
accelerated benefit distributions otherwise payable to participants
who commence benefit payments while the restriction is in effect.
(ii) U is a participant in Plan T. Participant U retires on
February 1, 2011, and elects to receive benefits in the form of a
single sum. However, because U elected a form of payment that is a
prohibited payment that is not permitted to be paid under paragraph
(d)(3)(i) of this section, U elects in accordance with paragraph
(d)(3)(ii) of this section to receive 50% of his benefit in a single
sum and the remainder as an immediately commencing straight life
annuity.
(iii) On March 1, 2011, the enrolled actuary for the Plan
certifies that the AFTAP for 2011 is 80%. Accordingly, beginning
March 1, 2011, Plan T is no longer subject to the restriction under
paragraph (d)(3) of this section.
(iv) Effective March 1, 2011, Plan T is amended to provide that
a participant whose benefits were restricted under paragraph (d)(3)
of this section may elect within a specified period on or after
March 1, 2011, a new annuity starting date and receive the remainder
of his or her pension benefits in an accelerated form of payment.
Plan T's enrolled actuary determines that the AFTAP, taking into
account the amendment, is still 80%. The amendment is permitted to
take effect because Plan T has an AFTAP of 80% taking into account
the amendment, and is therefore neither subject to the restriction
on plan amendments in paragraph (c) of this section nor the
restrictions on accelerated benefit payments under paragraphs (d)(1)
and (d)(3) of this section. Accordingly, Participant U may elect,
subject to otherwise applicable qualification rules, including
spousal consent, to receive the remainder of his benefits in the
form of a single sum on or after March 1, 2011.
(5) Deemed election to reduce funding balances--(i) Limitations on
accelerated benefit payments. If a benefit limitation under paragraph
(d) of this section would (but for this paragraph (a)(5)) apply to a
plan, the employer is treated as having made an election under section
430(f) to reduce the prefunding balance or funding standard carryover
balance by such amount as is necessary for the adjusted funding target
attainment percentage to be at or above the applicable threshold (60,
80, or 100 percent, as the case may be) in order for the benefit
limitation not to apply to the plan. In such a case, the employer is
treated as having made that election on the section 436 measurement
date as of which the benefit limitation would otherwise apply (without
regard to whether a participant is eligible for or requests a payment
that is a prohibited payment described in paragraph (d)(5) of this
section).
(ii) Other limitations for collectively bargained plans--(A)
General rule. In the case of a collectively bargained plan to which a
benefit limitation under paragraph (b), (c), or (e) of this section
would (but for this paragraph (a)(5)) apply, the employer is treated as
having made an election under section 430(f) to reduce the prefunding
balance or funding standard carryover balance by such amount as is
necessary for the adjusted funding target attainment percentage to be
at or above the applicable threshold in order for the benefit
limitation not to apply to the plan, taking into account the
unpredictable contingent event benefits or plan amendment, as
applicable. In such a case, the employer is treated as having made that
election on the date as of which the applicable benefit limitation
would otherwise apply.
(B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to
which collective bargaining agreements apply to some, but not all, of
the plan participants, the plan is considered a collectively bargained
plan for purposes of this paragraph (a)(5)(ii) if at least 25 percent
of the participants in the plan are members of collective bargaining
units for which the benefit levels under the plan are specified under a
collective bargaining agreement.
(iii) Exception for insufficient funding balances--(A) In general.
Paragraphs (a)(5)(i) and (a)(5)(ii) of this section apply with respect
to a benefit limitation for any plan year only if the application of
those paragraphs would result in the corresponding benefit limitation
not applying for such plan year. Thus, if the plan's prefunding and
funding standard carryover balances were reduced to zero and the
resulting
[[Page 50562]]
increase in plan assets taken into account would still not increase the
plan's adjusted funding target attainment percentage enough to reach
the threshold percentage applicable to the benefit limitation, the
deemed election to reduce those balances pursuant to paragraph
(a)(5)(i) or (a)(5)(ii) of this section does not apply.
(B) Presumed adjusted funding target attainment percentage less
than 60 percent. If a plan is presumed to have an adjusted funding
target attainment percentage of less than 60 percent under paragraph
(h)(3) of this section, then the plan is treated as if the funding
standard carryover balance and the prefunding balance are insufficient
to increase the adjusted funding target attainment percentage to the
threshold percentage of 60 percent. Accordingly, paragraphs (a)(5)(i)
and (a)(5)(ii) of this section do not apply to such a plan.
(iv) Example. The following example illustrates the application of
this paragraph (a)(5):
Example. (i) Plan W is a collectively bargained, single-employer
defined benefit plan sponsored by Sponsor X, with a plan year that
is the calendar year and a valuation date of January 1. Sponsor X is
not in bankruptcy.
(ii) The enrolled actuary for Plan W issues a certification on
March 1, 2010, that the 2010 AFTAP is 81%. Sponsor X adopts an
amendment on March 25, 2010, to increase benefits under a formula
based on participant compensation, with an effective date of May 1,
2010. (Because the formula is based on compensation, the exception
in paragraph (c)(3) of this section for increases with respect to a
formula not based on compensation does not apply.) The plan's
enrolled actuary determines that the plan's AFTAP for 2010 would be
75% if the benefits attributable to the plan amendment were taken
into account. This percentage is below the 80% threshold for the
plan amendment limitation under paragraph (c) of this section.
(iii) Because the AFTAP would be below the 80% threshold if the
benefits attributable to the plan amendment were taken into account,
Sponsor X is deemed to have made an election under paragraph
(a)(5)(ii) of this section to reduce Plan W's prefunding balance and
funding standard carryover balance by the amount necessary for the
AFTAP to reach the 80% threshold (reflecting the increase in funding
target attributable to the plan amendment) in order for the
limitation under paragraph (c) of this section not to apply.
(iv) In this case, provided the reduction in funding balances is
sufficient for the limitation not to apply, the plan amendment will
go into effect on its effective date (May 1). See paragraph (f) of
this section for other methods to avoid benefit limitations (where,
for example, the amount necessary for a benefit limitation not to
apply for a plan year exceeds the aggregate funding balances).
(b) Limitation on shutdown benefits and other unpredictable
contingent event benefits--(1) In general. A plan that contains an
unpredictable contingent event benefit satisfies section 436(b) and
this section only if it provides that the benefit will not be paid to a
plan participant during a plan year if the adjusted funding target
attainment percentage for the plan year--
(i) Is less than 60 percent; or
(ii) Is 60 percent or more, but would be less than 60 percent if
the benefits attributable to the unpredictable contingent event were
taken into account in determining the adjusted funding target
attainment percentage.
(2) Exemption--(i) In general. The prohibition on payment of
unpredictable contingent event benefits under paragraph (b)(1) of this
section ceases to apply with respect to a plan year, effective as of
the first day of the plan year, upon payment by the plan sponsor of the
contribution described in paragraph (f)(2) of this section.
(ii) Prior unpredictable contingent event. Unpredictable contingent
event benefits attributable to an unpredictable contingent event that
occurred within a period during which no limitation under this
paragraph (b) applied to the plan are not affected by the limitation
described in this paragraph (b) as it applies in a subsequent period.
For example, if a plant shutdown occurs in 2010 and the plan's funded
status is such that shutdown benefits related to that shutdown are not
subject to the limitation described in this paragraph (b) for that
calendar plan year, this paragraph (b) will not apply to restrict
payment of those shutdown benefits even if another shutdown occurs in
2012 that results in shutdown benefits related to that later shutdown
being restricted under this paragraph (b) (where the plan's adjusted
funding target attainment percentage for 2012 is less than 60 percent
taking into account the liability attributable to those shutdown
benefits).
(3) Unpredictable contingent event. For purposes of this section,
an unpredictable contingent event benefit means any benefit or increase
in benefits to the extent the benefit or increase would not be payable
but for the occurrence of an unpredictable contingent event. For this
purpose, an unpredictable contingent event means a plant shutdown
(whether full or partial) or similar event, or an event other than the
attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability. Thus, for example, if a plan provides for an unreduced
early retirement benefit upon the occurrence of an event other than the
attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability, then that unreduced early retirement benefit is an
unpredictable contingent event benefit to the extent of any portion of
the benefit that would not be payable but for the occurrence of the
event, even if the remainder of the benefit is payable without regard
to the occurrence of the event. Similarly, if a plan includes a benefit
payable upon the presence of circumstances specified in the plan (other
than the attainment of any age, performance of any service, receipt or
derivation of any compensation, or the occurrence of death or
disability), but not upon a severance from employment that does not
include those circumstances, the plan is providing an unpredictable
contingent event benefit.
(c) Limitations on plan amendments increasing liability for
benefits--(1) In general. Except as provided in this paragraph (c), a
plan satisfies section 436(c) and this section only if the plan
provides that no amendment to the plan that has the effect of
increasing liabilities of the plan by reason of increases in benefits,
establishment of new benefits, changing the rate of benefit accrual, or
changing the rate at which benefits become nonforfeitable takes effect
if the adjusted funding target attainment percentage for the plan year
is--
(i) Less than 80 percent; or
(ii) Is 80 percent or more, but would be less than 80 percent if
the benefits attributable to the amendment were taken into account in
determining the adjusted funding target attainment percentage.
(2) Exemption. The limitations on plan amendments in paragraph
(c)(1) of this section cease to apply and the amendment is permitted to
take effect as of the later of the first day of the plan year or the
effective date of the amendment upon payment by the plan sponsor of the
contribution described in paragraph (f)(2) of this section.
(3) Exception for certain benefit increases--(i) In general. The
limitation on plan amendments under paragraph (c)(1) of this section
does not apply to any amendment that provides for an increase in
benefits under a formula that is not based on a participant's
compensation, but only if the rate of increase in benefits does not
exceed the contemporaneous rate of increase in average wages of
participants covered by the amendment. The determination of the rate of
increase in average wages is made by taking into consideration the net
increase in average wages from the period of time beginning with the
[[Page 50563]]
effective date of the most recent benefit increase applicable to all of
those participants who are covered by the current amendment and ending
on the effective date of the current amendment.
(ii) Application to terminated participants. If an amendment
applies to both currently employed and terminated participants, all
such participants must be included in determining the increase in
average wages of the participants covered by the amendment. For this
purpose, terminated participants are treated as having no increase or
decrease in wages for the period after severance from employment.
(iii) Separate amendments for different plan populations. In lieu
of a single amendment that applies to both currently employed
participants and terminated participants as described in paragraph
(c)(3)(ii) of this section, the employer could adopt two amendments--
one that increases benefits for currently employed participants and
another one that increases benefits for terminated participants. In
that case, the two amendments are considered separately in determining
the increase in average wages, and the exception in this paragraph
(c)(3) from application of the section 436(c) limitation would apply
separately to each amendment (so that an amendment providing for
increases in benefits for currently employed participants could go into
effect, but an amendment providing for increases in benefits for
terminated participants who received no increase in wages from the
employer during the period over which the increase in average wages is
determined could not go into effect).
(4) Exception for statutorily required vesting. To the extent that
any amendment results in (or is made pursuant to) a mandatory increase
in the vesting of benefits under the Code or ERISA (such as vesting
rate increases pursuant to statute, plan termination amendments under
section 411(d)(3), and amendments that lead to vesting increases
required by top heavy rules under section 416), that amendment does not
constitute an amendment that changes the rate at which benefits become
nonforfeitable for purposes of section 436(c) and this paragraph (c).
(d) Limitations on accelerated benefit payments--(1) Funding
percentage less than 60 percent--(i) In general. A plan satisfies the
requirements of section 436(d)(1) and this paragraph (d)(1) only if the
plan provides that, if the plan's adjusted funding target attainment
percentage for a plan year is less than 60 percent, the plan will not
pay any prohibited payment with an annuity starting date on or after
the applicable section 436 measurement date.
(ii) Request for prohibited distribution. If a participant or
beneficiary requests a distribution that is prohibited under paragraph
(d)(1)(i) of this section, the plan must permit the participant or
beneficiary to elect another form of benefit available under the plan
or to defer payment to a later date to the extent permitted under
applicable qualification requirements.
(2) Bankruptcy. A plan satisfies the requirements of section
436(d)(2) and this paragraph (d)(2) only if the plan provides that the
plan will not pay any prohibited payment with an annuity starting date
that is during any period in which the plan sponsor is a debtor in a
case under title 11, United States Code, or similar Federal or State
law, except for payments made with an annuity starting date within a
plan year that is on or after the date on which the enrolled actuary of
the plan certifies that the plan's adjusted funding target attainment
percentage for that plan year is not less than 100 percent. The rules
of paragraph (d)(1)(ii) of this section apply if payments are
prohibited under this paragraph (d)(2).
(3) Limited payment if percentage at least 60 percent but less than
80 percent--(i) In general. A plan satisfies the requirements of
section 436(d)(3) and this paragraph (d)(3) only if the plan provides
that, in any case in which the plan's adjusted funding target
attainment percentage for a plan year is 60 percent or more but is less
than 80 percent, a participant or beneficiary is permitted to elect the
payment of a benefit with an annuity starting date on or after the
applicable section 436 measurement date in the form of a prohibited
payment only if the present value, determined in accordance with
section 417(e)(3), of the portion of the payment that is greater than
the amount of the straight life annuity under the plan (as described in
paragraph (d)(5)(i)(A) of this section) does not exceed the lesser of--
(A) 50 percent of the present value of the benefits, determined in
accordance with section 417(e)(3) (or, if greater, 50 percent of the
amount of any single sum that would be payable without regard to this
paragraph (d)); or
(B) 100 percent of the PBGC guarantee amount described in paragraph
(d)(3)(iv) of this section.
(ii) Bifurcation if optional form unavailable--(A) General rule. If
an optional form of benefit that is otherwise available under the terms
of the plan is not available as of the annuity starting date because of
the application of paragraph (d)(3)(i) of this section, then the plan
must provide a participant or beneficiary who elects such an optional
form with the option either to defer payment to a later date (to the
extent permitted under applicable qualification requirements) or to
bifurcate the benefit into unrestricted and restricted portions. If the
participant or beneficiary elects to bifurcate the benefit, the plan
must permit the participant or beneficiary to elect, with respect to
the unrestricted portion, any optional form of benefit otherwise
available under the plan with respect to the participant's or
beneficiary's entire benefit (whether or not the optional form of
benefit with respect to the unrestricted portion is a prohibited
payment). In such a case, if the participant or beneficiary elects
payment of the unrestricted portion of the benefit described in
paragraph (d)(3)(ii)(B) of this section in the form of a prohibited
payment, the plan must permit the participant or beneficiary to elect
payment of the restricted portion described in paragraph (d)(3)(ii)(C)
of this section in any optional form of benefit under the plan that is
not a prohibited payment and that would have been permitted with
respect to the participant's or beneficiary's entire benefit. A plan is
also permitted to offer optional forms of benefit that are solely
available during the period this paragraph (d)(3) applies to the plan,
such as an optional form of benefit that provides for the current
payment of the unrestricted portion of the benefit, with a delayed
commencement for the restricted portion of the benefit, subject to
other applicable qualification requirements.
(B) Unrestricted portion of the benefit. The unrestricted portion
of the benefit is the lesser of--
(1) 50 percent of the benefit; and
(2) The portion of the benefit that has a present value equal to
the PBGC guarantee amount described in paragraph (d)(3)(iv) of this
section.
(C) Restricted portion of the benefit. The restricted portion of
the benefit is the portion of the benefit that is not described in
paragraph (d)(3)(ii)(B) of this section.
(iii) One-time application--(A) In general. A plan satisfies the
requirements of this paragraph (d) only if the plan provides that, in
the case of a participant who receives a prohibited payment (or series
of prohibited payments under a single optional form of benefit)
pursuant to paragraph (d)(3)(i) or (ii) of this section, the
participant cannot thereafter receive any additional prohibited payment
during any period of consecutive plan years to which the limitations
under either this
[[Page 50564]]
paragraph (d)(3), paragraph (d)(1) of this section, or paragraph (d)(2)
of this section apply.
(B) Treatment of beneficiaries. For purposes of this paragraph
(d)(3), benefits provided to a participant and any beneficiary
(including an alternate payee, as defined in section 414(p)(8)) are
aggregated. If the accrued benefit of a participant is allocated to
such an alternate payee and one or more other persons, the unrestricted
amount under paragraphs (d)(3)(i) and (d)(3)(ii) of this section is
allocated among such persons in the same manner as the accrued benefit
is allocated, unless a qualified domestic relations order (as defined
in section 414(p)(1)(A)) with respect to the participant or the
alternate payee provides otherwise.
(iv) Present value of PBGC maximum benefit guarantee. The amount
described in this paragraph (d)(3)(iv) is, with respect to a
participant, the present value (determined under guidance prescribed by
the Pension Benefit Guaranty Corporation, using the interest and
mortality assumptions under section 417(e)) of the maximum benefit
guarantee under section 4022 of the Employee Retirement Income Security
Act of 1974, as amended.
(v) Examples. The following examples illustrate the application of
this paragraph (d)(3):
Example 1. (i) Plan A is subject to the restriction on
accelerated benefit distributions under paragraph (d)(3) of this
section for the 2010 plan year, and can therefore only pay a portion
of the accelerated benefit payments otherwise payable to
participants whose annuity starting date occurs while the
restriction applies.
(ii) Participant P is not married, and retires at age 65 during
2010, while the restriction under paragraph (d)(3) of this section
applies to Plan A. P's accrued benefit is $10,000 per month, payable
commencing at age 65 as a straight life annuity. Plan A provides for
an optional single sum payment (subject to the restrictions under
section 436) equal to the present value of the participant's accrued
benefit using actuarial assumptions under section 417(e). P's single
sum payment, determined without regard to this paragraph (d), is
calculated to be $1,416,000, payable at age 65.
(iii) The PBGC guaranteed monthly benefit for a straight life
annuity payable at age 65 in 2010 (for purposes of this example) is
$4,500. The present value of the PBGC guaranteed benefit using
actuarial assumptions under section 417(e) is $637,200.
(iv) Because Participant P retires during a period when the
restriction in paragraph (d)(3) of this section applies to Plan A,
only a portion of the benefit can be paid in the form of a single
sum. P elects a single sum payment. Because a single sum payment is
a prohibited payment, a determination must be made whether the
payment can be paid under paragraph (d)(3)(i) of this section. In
this case, because the portion of Participant P's benefit that is
greater than a straight life annuity exceeds the lesser of 50% of
the benefit otherwise payable, or the present value of the PBGC
guaranteed benefit, it cannot be paid under paragraph (d)(3)(i) of
this section. Accordingly, the maximum single sum that Participant P
can receive is $637,200 (that is, the lesser of 50% of $1,416,000 or
$637,200).
(v) Pursuant to paragraph (d)(3)(ii) of this section, the plan
must offer P the option to bifurcate the benefit into restricted and
unrestricted portions. The unrestricted portion is a monthly
straight life annuity of $4,500, which can be paid in a single sum
of $637,200. If P elects to receive the unrestricted portion of the
benefit in the form of a single sum, then, with respect to the
$5,500 restricted portion, the plan must permit P to elect any form
of benefit that would otherwise be permitted with respect to the
full $10,000 that is not a prohibited payment. Alternatively, the
plan could permit P to elect to defer commencement of the restricted
portion, subject to applicable qualification rules.
Example 2. (i) The facts are the same as in Example 1. In
addition, Plan A provides an optional form of payment (subject to
any benefit restrictions under section 436) that consists of a
partial payment equal to the total return of employee contributions
to the plan accumulated with interest, with an annuity payment for
the remainder of the participant's benefit.
(ii) Participant Q is not married, and retires at age 65 during
2010, while Plan A is subject to the restriction under paragraph
(d)(3) of this section. Participant Q has an accrued benefit equal
to a straight life annuity of $3,000 per month. Under the optional
form described in paragraph (i) of this Example 2, Q may elect a
partial payment of $99,120 (representing the return of employee
contributions accumulated with interest) plus a straight life
annuity of $2,300 per month. The present value of Participant Q's
accrued benefit, using actuarial assumptions under section 417(e),
is $424,800. The present value of the PBGC guarantee payable at age
65 in the form of a straight life annuity is determined to be
$637,200 for the purposes of this Example 2.
(iii) Under the bifurcation approach of paragraph (d)(3)(ii) of
this section, Q can receive the partial single sum payment available
under the terms of Plan A as long as the amount of the single sum
does not exceed the unrestricted portion of the benefit under
paragraph (d)(3)(ii)(B) of this section. The unrestricted portion of
Q's benefit is the lesser of 50% of the benefit otherwise payable,
or the present value of the PBGC guaranteed benefit. Accordingly,
the maximum single sum that Q can receive is $212,400 (that is, the
lesser of 50% of $424,800, or $637,200).
(iv) Because the present value of the portion of Q's benefit
that is greater than the straight life annuity ($99,120) is less
than the lesser of 50% of the present value of benefits (50% of
$424,800) and $637,200 (100% of the PBGC guaranteed benefit), the
optional form described in paragraph (i) of this Example 2 is
permitted to be paid under paragraph (d)(3)(i) of this section.
(4) Exception for cessation of benefit accruals. This paragraph (d)
does not apply to a plan for a plan year if the terms of the plan, as
in effect for the period beginning on September 1, 2005, provided for
no benefit accruals with respect to any participants. If a plan that is
described in this paragraph (d)(4) provides for benefit accruals during
any time after September 1, 2005, this paragraph (d)(4) ceases to apply
for the plan as of the date any benefits accrue under the plan.
(5) Prohibited payment--(i) In general. For purpose of this
paragraph (d), the term prohibited payment means--
(A) Any payment for a month that is in excess of the monthly amount
paid under a straight life annuity (plus any social security
supplements described in the last sentence of section 411(a)(9)) to a
participant or beneficiary whose annuity starting date occurs during
any period that a limitation under this paragraph (d) is in effect;
(B) Any payment for the purchase of an irrevocable commitment from
an insurer to pay benefits; and
(C) Any other payment that is identified as a prohibited payment by
the Commissioner in revenue rulings and procedures, notices and other
guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter).
(ii) Annuity starting date. Solely for purposes of applying the
limitations on accelerated benefit payments under this paragraph (d),
the term annuity starting date means, as applicable--
(A) The first day of the first period for which an amount is
payable as an annuity as described in section 417(f)(2)(A)(i);
(B) In the case of a benefit not payable in the form of an annuity,
the first day on which all events have occurred (including the
participant's election, the participant's severance from employment if
the participant is below normal retirement age, and, if applicable, the
participant's survival to the date as of which payment is made) which
entitle the participant to such benefit as described in section
417(f)(2)(A)(ii);
(C) In the case of an amount payable on a retroactive annuity
starting date, the benefit commencement date; and
(D) The date of any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits under plan.
(6) Involuntary distributions under section 411(a)(11). [Reserved].
[[Page 50565]]
(e) Limitation on benefit accruals for plans with severe funding
shortfalls--(1) In general. A plan satisfies the requirements of
section 436(e) and this paragraph (e) only if it provides that, in any
case in which the plan's adjusted funding target attainment percentage
for a plan year is less than 60 percent, benefit accruals under the
plan will cease as of the applicable section 436 measurement date. If a
plan is required to cease benefit accruals under this paragraph (e),
then the plan is not permitted to be amended in a manner that would
increase the liabilities of the plan by reason of an increase in
benefits or establishment of new benefits. The preceding sentence
applies regardless of whether an amendment would otherwise be
permissible under paragraph (c)(3) of this section.
(2) Exemption. The prohibition on additional benefit accruals under
a plan described in paragraph (e)(1) of this section ceases to apply
with respect to any plan year, effective as of the first day of the
plan year, upon payment by the plan sponsor of the contribution
described in paragraph (f)(2) of this section.
(f) Methods to avoid benefit limitations--(1) In general. This
paragraph (f) sets forth rules relating to employer contributions and
other methods to avoid the application of section 436 limitations under
a plan for a plan year. In general, there are four methods a plan
sponsor may utilize to avoid or terminate one or more of the benefit
limitations under this section for a plan year. Two of these methods
(where the plan sponsor elects to reduce the prefunding balance or
funding standard carryover balance and where the plan sponsor makes
additional contributions under section 430 for the prior plan year
within the time period provided by section 430(j)(1) which are not
added to the prefunding balance) involve increasing the amount of plan
assets which are taken into account in determining the adjusted funding
target attainment percentage. The other two methods (making a
contribution that is specifically designated as a current year
contribution to avoid application of a benefit limitation under
paragraph (b), (c), or (e) of this section, and providing security
under section 436(f)(1)) are described in paragraphs (f)(2) and (f)(3)
of this section, respectively.
(2) Current year contributions to avoid or terminate benefit
limitations--(i) General rules--(A) Amount of contribution--(1) In
general. This paragraph (f)(2) sets forth rules regarding contributions
to avoid the application of section 436 limitations under a plan for a
plan year that apply to unpredictable contingent event benefits, plan
amendments that increase liabilities for benefits, and benefit
accruals.
(2) Interest adjustment. Any contribution made by a plan sponsor
pursuant to this paragraph (f)(2) on a date other than the valuation
date for the plan year must be adjusted with interest at the plan's
effective interest rate under section 430(h)(2)(A) for the plan year.
If the plan's effective interest rate for the plan year has not been
determined at the time of the contribution, then this interest
adjustment must be made using the highest of the three segment rates as
applicable for the plan year under section 430(h)(2)(C). In such a
case, if the effective interest rate for the year under section
430(h)(2)(A) is subsequently determined to be less than that highest
rate, the excess is recharacterized as a section 430 contribution for
the current plan year.
(B) Prefunding balance or funding standard carryover balance may
not be used. No prefunding balance or funding standard carryover
balance under section 430(f) may be used as a contribution described in
this paragraph (f)(2). However, a plan sponsor is permitted to elect to
reduce the funding standard carryover balance or the prefunding balance
in order to increase the adjusted funding target attainment percentage
for a plan year. See paragraph (a)(5) of this section for a rule
mandating such a reduction in certain situations.
(ii) Section 436 contributions separate from minimum required
contributions--(A) In general. The contributions described in this
paragraph (f)(2) are contributions described in section 436(b)(2),
(c)(2), and (e)(2), and are separate from any minimum required
contributions under section 430. Thus, if a plan sponsor makes a
contribution described in this paragraph (f)(2) for a plan year but
does not make the minimum required contribution for the plan year, the
plan will fail to satisfy the minimum funding requirements under
section 430 for the plan year. In addition, a contribution described in
this paragraph (f)(2) is disregarded in determining the prefunding
balance under section 430(f)(6) and Sec. 1.430(f)-1(b)(1)(i).
(B) Designation requirement. Any contribution made by a plan
sponsor pursuant to this paragraph (f)(2) must be designated as such at
the time the contribution is used to avoid or terminate the limitations
under this paragraph (f)(2) and, except as specifically provided in
paragraph (g) or (h) of this section, cannot subsequently be
recharacterized with respect to any plan year as a contribution to
satisfy a minimum required contribution obligation, or otherwise. The
designation must be made in accordance with the rules and procedures
that otherwise apply to elections under Sec. 1.430(f)-1(f) with
respect to funding balances.
(iii) Contribution for unpredictable contingent event benefits. In
the case of a contribution to avoid the application of the limitation
on benefits attributable to an unpredictable contingent event under
section 436(b)--
(A) If the adjusted funding target attainment percentage for the
plan year determined without taking into account the liability
attributable to the unpredictable contingent event benefits is less
than 60 percent, then the amount of the contribution under section
436(b)(2) is equal to the amount of the increase in the funding target
of the plan for the plan year if the benefits attributable to the
unpredictable contingent event were included in the determination of
the funding target.
(B) If the adjusted funding target attainment percentage for the
plan year determined without taking into account the liability
attributable to the unpredictable contingent event benefits is 60
percent or more, then the amount of the contribution under section
436(b)(2) is the amount that would be sufficient to result in an
adjusted funding target attainment percentage for the plan year of 60
percent if--
(1) The benefits attributable to the unpredictable contingent event
were included in the determination of the funding target; and
(2) The contribution were included as part of the assets of the
plan.
(iv) Contribution for plan amendments increasing liability for
benefits. In the case of a contribution to avoid the application of the
limitation on benefits attributable to a plan amendment under 436(c)--
(A) If the adjusted funding target attainment percentage for the
plan year determined without taking into account the liability
attributable to the plan amendment is less than 80 percent, then the
amount of the contribution under section 436(c)(2) is equal to the
amount of the increase in the funding target of the plan for the plan
year if the liabilities attributable to the amendment were included in
the determination of the funding target.
(B) If the adjusted funding target attainment percentage for the
plan year determined without taking into account the liability
attributable to the plan amendment is 80 percent or more, then the
amount of the contribution under
[[Page 50566]]
section 436(c)(2) is the amount that would be sufficient to result in
an adjusted funding target attainment percentage for the plan year of
80 percent if--
(1) The liabilities attributable to the plan amendment were
included in the determination of the funding target; and
(2) The contribution were included as part of the assets of the
plan.
(v) Contribution required for continued benefit accruals. In the
case of a contribution to avoid the application of the limitation on
accruals under section 436(e), the amount of the contribution under
section 436(e)(2) is equal to the amount sufficient to result in an
adjusted funding target attainment percentage for the plan year of 60
percent if the contribution were included as part of the assets of the
plan.
(3) Security to increase adjusted funding target attainment
percentage--(i) In general. For purposes of avoiding benefit
limitations under section 436, a plan sponsor may provide security in
the form described in paragraph (f)(3)(ii) of this section. In such a
case, the adjusted funding target attainment percentage for the plan
year is determined by treating as an asset of the plan any security
provided by a plan sponsor by the valuation date for the plan year in a
form meeting the requirements of paragraph (f)(3)(ii) of this section.
However, this security is not taken into account as a plan asset for
any other purpose, including section 430.
(ii) Form of security. The forms of security permitted under
paragraph (f)(3)(i) of this section are limited to--
(A) A bond issued by a corporate surety company that is an
acceptable surety for purposes of section 412 of the Employee
Retirement Income Security Act of 1974, as amended; or
(B) Cash, or United States obligations which mature in 3 years or
less, held in escrow by a bank or an insurance company.
(iii) Enforcement. Any form of security provided under paragraph
(f)(3)(i) of this section must provide--
(A) That it will be paid to the plan upon the earliest of--
(1) The plan termination date as defined in section 4048 of ERISA;
(2) If there is a failure to make a payment of the minimum required
contribution for any plan year beginning after the security is
provided, the due date for the payment under section 430(j)(1) or
430(j)(3); or
(3) If the plan's adjusted funding target attainment percentage is
less than 60 percent (without regard to any security provided under
this paragraph (f)(3)) for a consecutive period of 7 years, the
valuation date for the last year in the 7-year period; and
(B) That the plan administrator must notify the surety, bank, or
insurance company that issued or holds the security of any event
described in paragraph (f)(3)(iii)(A) of this section within 10 days of
its occurrence.
(iv) Release of security. The form of security is permitted to
provide that it will be released (and any amounts thereunder will be
refunded together with any interest accrued thereon) as provided in the
agreement governing the escrow, but such release is not permitted until
the plan's enrolled actuary has certified that the plan's adjusted
funding target attainment percentage for a plan year is at least 90
percent (without regard to any security provided under this paragraph
(f)(3)).
(v) Contribution of security to plan. Any amount of security
provided under this paragraph (f)(3) that is subsequently turned over
to the plan (whether pursuant to the enforcement mechanism of paragraph
(f)(3)(iii) of this section or after its release under paragraph
(f)(3)(iv) of this section) is treated as a contribution by the plan
sponsor under section 430 when contributed and, if turned over pursuant
to paragraph (f)(3)(iii) of this section, is not a contribution under
paragraph (f)(2) of this section.
(4) Examples. The following examples illustrate the application of
this paragraph (f):
Example 1. (i) Plan Z is a non-collectively bargained defined
benefit plan with a plan year that is the calendar year and a
valuation date of January 1. Plan Z's sponsor is not in bankruptcy
and did not purchase any annuities in 2009 or 2010. As of January 1,
2011, Plan Z does not have a funding standard carryover balance or a
prefunding balance. As of that date, Plan Z has plan assets (and
adjusted plan assets) of $2,000,000 and a funding target (and an
adjusted funding target) of $2,550,000. On March 1, 2011, the
enrolled actuary for the plan certifies that the AFTAP as of January
1, 2011, is 78.43%. The effective rate of interest for Plan Z for
the 2011 plan year is 5.5%.
(ii) On May 1, 2011, the plan sponsor amends Plan Z to increase
benefits. The enrolled actuary for the plan determines that the
present value, as of January 1, 2011, of the increase in funding
target due to this amendment is $400,000. Because the AFTAP prior to
the plan amendment is less than 80%, Plan Z is subject to the
restriction on plan amendments in paragraph (c) of this section, and
the amendment cannot take effect unless the employer utilizes one of
the methods described in paragraph (f) of this section to avoid
benefit limitations.
(iii) In order for this amendment to be permitted to become
effective, the plan sponsor makes a contribution described in
paragraph (f)(2) of this section. Because the AFTAP prior to the
amendment was less than 80%, the provisions of paragraph
(f)(2)(iv)(A) of this section apply. The amount of the contribution
as of January 1, 2011, needed to avoid the restriction on plan
amendments under paragraph (c) of this section is equal to the
amount of the increase in funding target attributable to the
amendment, or $400,000. Under the provisions of paragraph
(f)(2)(iv)(A) of this section, this contribution is required even
though, if the contribution were included as part of the plan assets
and the liability attributable to the plan amendment were included
in the funding target, the AFTAP would be 81.36% (because the
adjusted plan assets would have been $2,400,000 and the adjusted
funding target would have been $2,950,000 (that is, adjusted plan
assets of $2,000,000 plus the contribution of $400,000 as of January
1, 2011; divided by the adjusted funding target of $2,550,000
increased to reflect the additional $400,000 in the funding target
attributable to the plan amendment)).
(iv) However, because the contribution is not paid until May 1,
2011, the necessary contribution amount must be adjusted to reflect
interest that would otherwise have accrued between the valuation
date and the date of the contribution, at Plan Z's effective rate of
interest for the 2011 plan year. The amount of the required
contribution after adjustment is $407,203, determined as $400,000
increased for 4 months of compound interest at an effective annual
interest rate of 5.5%.
(v) A contribution of $407,203 is made on May 1, 2011, and is
designated as a contribution under paragraph (f)(2) of this section.
Accordingly, the contribution is not applied toward minimum funding
requirements under section 430, and is not eligible for inclusion in
the prefunding balance under Sec. 1.430(f)-1(b)(1). Since this
contribution meets the requirements of paragraph (f)(2) of this
section, the plan amendment can take effect.
Example 2. (i) The facts are the same as in Example 1, except
that the plan is in at-risk status under section 430(i). The funding
target determined under section 430(i) is $2,600,000, and the
funding target determined without regard to section 430(i) is
$2,550,000.
(ii) On May 1, 2011, the plan sponsor amends Plan Z to increase
benefits. The plan's enrolled actuary determines that the present
value as of January 1, 2011 of the increase in the funding target
due to the amendment (taking into account the at-risk status of the
plan) is $440,000. Because the AFTAP prior to the plan amendment is
less than 80%, Plan Z is subject to the restriction on plan
amendments in paragraph (c) of this section, and the amendment
cannot take effect unless the employer utilizes one of the methods
described in paragraph (f) of this section to avoid benefit
limitations.
(iii) In order for this amendment to be permitted to become
effective, the plan sponsor makes a contribution described in
paragraph (f)(2) of this section. Because the AFTAP prior to the
amendment was less than 80%, the provisions of paragraph
(f)(2)(iv)(A)
[[Page 50567]]
of this section apply. The amount of the contribution as of January
1, 2011, needed to avoid the restriction on plan amendments under
paragraph (c) of this section is equal to the amount of the increase
in funding target attributable to the amendment, or $440,000. Under
the provisions of paragraph (f)(2)(iv)(A) of this section, this
contribution is required even though, if the contribution were
included as part of the plan assets and the liability attributable
to the plan amendment were included in the funding target, the AFTAP
would exceed 80%.
(iv) However, because the contribution is not paid until May 1,
2011, the necessary contribution amount must be adjusted to reflect
interest that would otherwise have accrued between the valuation
date and the date of the contribution, at Plan Z's effective rate of
interest for the 2011 plan year. The amount of the required
contribution after adjustment is $447,923, determined as $440,000
increased for 4 months of compound interest at an effective annual
interest rate of 5.5%.
(v) A contribution of $447,923 is made on May 1, 2011, and is
designated as a contribution under paragraph (f)(2) of this section.
Accordingly, the contribution is not applied toward minimum funding
requirements under section 430, and is not eligible for inclusion in
the prefunding balance under Sec. 1.430(f)-1(b)(1). Since this
contribution meets the requirements of paragraph (f)(2) of this
section, the plan amendment can take effect.
Example 3. (i) The facts are the same as in Example 1, except
that the enrolled actuary for the plan does not issue the
certification of the 2011 AFTAP until September 1, 2011. Prior to
October 1, 2010, the enrolled actuary had certified the 2010 AFTAP
to be 82%. The highest of the three segment rates applicable to the
2011 plan year under section 430(h)(2)(C) is 6%.
(ii) Because the enrolled actuary has not certified the actual
AFTAP as of January 1, 2011, and the amendment is scheduled to take
effect after April 1, 2011, the rules of paragraph (h)(2)(ii) of
this section apply. Accordingly, the AFTAP for 2011 (prior to
reflecting the effect of the amendment) is presumed to be 10
percentage points lower than the 2010 AFTAP, or 72%. Because this
presumed AFTAP is less than 80%, the restriction on plan amendments
in paragraph (c) of this section applies, and the plan amendment
cannot take effect.
(iii) In order to allow the plan amendment to take effect, the
plan sponsor decides to make a contribution under paragraph (f)(2)
of this section on May 1, 2011. Because the presumed AFTAP was less
than 80% prior to reflecting the plan amendment, the rules of
section (f)(2)(iv)(A) apply, and the amount of the contribution
under section 436(c)(2) is the amount of the increase in the funding
target for the year if the plan amendment were included in the
determination of the funding target. Accordingly, an additional
contribution of $400,000 is required as of January 1, 2011, to avoid
the restriction on plan amendments under paragraph (c) of this
section.
(iv) However, since the contribution is not made until May 1,
2011, the amount of the required contribution must be adjusted to
reflect interest that would otherwise have accrued between the
valuation date and the date of the contribution. Since the effective
interest rate has not yet been determined, the interest adjustment
is based on the highest of the three segment rates applicable for
the 2011 plan year under section 430(h)(2)(C), or 6%. The amount of
the required contribution after adjustment is $407,845, determined
as $400,000 increased for 4 months of compound interest at the
highest segment interest rate for 2011, or 6%.
(v) Once the plan's effective interest rate has been determined,
if that rate for the year is less than 6%, the amount of excess
interest previously contributed is recharacterized as a section 430
contribution for the current plan year.
(g) Rules of operation for periods prior to and after
certification--(1) In general. Section 436(h) and paragraph (h) of this
section set forth a series of presumptions that apply before the
enrolled actuary for a plan issues a certification of the plan's
adjusted funding target attainment percentage for a plan year. This
paragraph (g) sets forth rules for the application of limitations under
sections 436(b), 436(c), 436(d), and 436(e) prior to and during the
period those presumptions apply to a plan, and describes the
interaction of those presumptions with plan operations after the plan's
enrolled actuary has issued a certification of the plan's adjusted
funding target attainment percentage for the plan year. Paragraph
(g)(2) of this section sets forth rules that apply to periods during
which a presumption under section 436(h) applies. Paragraph (g)(3) of
this section sets forth rules that apply to periods during which no
presumptions under section 436(h) apply but which are prior to the
enrolled actuary's certification of the plan's adjusted funding target
attainment percentage for the plan year. Paragraph (g)(4) of this
section sets forth rules that apply after the enrolled actuary's
certification of the plan's adjusted funding target attainment
percentage for a plan year. Paragraph (g)(5) of this section sets forth
additional rules that apply prior to the enrolled actuary's
certification of the adjusted funding target attainment percentage for
a plan year with respect to the limitations on unpredictable contingent
event benefits and plan amendments that increase liabilities under
paragraphs (b) and (c) of this section, respectively. Paragraph (g)(6)
of this section sets forth rules for multiple unpredictable contingent
events and amendments during a plan year. Paragraph (g)(7) of this
section sets forth examples of the application of this paragraph (g).
(2) Periods prior to certification during which a presumption
applies--(i) Plan must follow presumptions. A plan must provide that,
for any period during which paragraph (h)(1), (2), or (3) of this
section applies to the plan, the limitations applicable under
paragraphs (b), (c), (d), and (e) of this section apply to the plan as
if the actual adjusted funding target attainment percentage for the
year were the presumed adjusted funding target attainment percentage
determined under the rules of paragraph (h) of this section.
(ii) Determination of amount of reduction in balances--(A)
Valuation date adjustment. During the period described in this
paragraph (g)(2), the rules of paragraph (a)(5) of this section
(relating to the deemed election to reduce the funding standard
carryover balance and the prefunding balance) must be applied based on
the presumed percentage with respect to the limitations under
paragraphs (b), (c), (d), and (e) of this section. In order to
determine the amount of the reduction in those balances that would
apply in such a situation, a presumed adjusted funding target must be
established, which is then compared to the interim value of adjusted
plan assets as of the valuation date for the current plan year. For
this purpose, the interim value of adjusted plan assets is equal to the
value of adjusted plan assets as of the valuation date, determined
without regard to future contributions, future elections to add to the
prefunding balance for the prior year, and future elections (including
deemed elections under paragraph (a)(5) of this section) to reduce the
prefunding and funding standard carryover balances for the current plan
year, and the presumed adjusted funding target is equal to the interim
value of adjusted plan assets for the plan year divided by the presumed
adjusted funding target attainment percentage.
(B) Change in presumed percentage in 4th month. If the presumed
adjusted funding target attainment percentage for the plan year changes
during the year because of application of the presumption in paragraph
(h)(2) of this section, the rules regarding the deemed election to
reduce funding balances described in paragraph (a)(5) of this section
must be reapplied based on the new presumed adjusted funding target
attainment percentage. This will typically occur on the first day of
the 4th month of a plan year, but could happen later if the enrolled
actuary's certification of the adjusted funding target attainment
percentage for a plan year occurs after the first day of the 4th month
of the following plan year. In
[[Page 50568]]
order to perform this reapplication, a new adjusted funding target must
be determined based on the new presumed adjusted funding target
attainment percentage and must be compared to an updated interim value
of adjusted plan assets. For this purpose, the new presumed adjusted
funding target is redetermined based on the new presumed adjusted
funding target attainment percentage, and is compared to the adjusted
plan assets updated to take into account the plan sponsor's
contributions made for the prior plan year and section 430(f) elections
with respect to the plan's prefunding and funding standard carryover
balances since the earlier determination of the interim plan assets.
This reapplication of the deemed election may require an additional
reduction in funding balances if the amount of the reduction in funding
balances that is necessary to reach the applicable threshold to avoid
the application of the limitation under paragraph (d) or (e) of this
section is greater than the amount that was initially reduced. Prior
reductions of funding balances continue to apply in accordance with the
rules of paragraph (g)(4)(i)(C) of this section.
(iii) Bankruptcy of plan sponsor. Pursuant to section 436(d)(2),
during any period in which the plan sponsor of a plan is a debtor in a
case under title 11, United States Code, or any similar Federal or
State law (as described in paragraph (d)(2) of this section), if the
plan's enrolled actuary has not yet certified the plan's adjusted
funding target attainment percentage for the plan year to be at least
100 percent, no prohibited payments within the meaning of paragraph
(d)(5) of this section may be paid. Thus, the presumption rules of
paragraph (h) of this section do not apply for purposes of section
436(d)(2) and this paragraph (g)(2)(iii).
(iv) Application to unpredictable contingent events and plan
amendments. For purposes of applying the limitations under paragraphs
(b) and (c) of this section during the period described in this
paragraph (g)(2), the presumed adjusted funding target under paragraph
(g)(2)(ii) of this section is adjusted to reflect the increase in the
funding target that would be attributable to the unpredictable
contingent event or the plan amendment if the unpredictable contingent
event benefits or the increase in liability attributable to the plan
amendment were taken into account. See paragraph (g)(5)(i) of this
section for related rules regarding funding balances that apply in the
case of unpredictable contingent event benefits or plan amendments
increasing benefit liabilities.
(3) Periods prior to certification during which no presumption
applies--(i) Accelerated benefit payments and benefit accruals. If no
presumptions under section 436(h) apply to a plan during a period and
the plan's enrolled actuary has not yet issued the certification of the
plan's actual adjusted funding target attainment percentage for the
plan year, the plan is not permitted to limit the payment of
accelerated benefits under paragraph (d) of this section or the accrual
of benefits under paragraph (e) of this section based on an expectation
that those paragraphs will apply to the plan once an actuarial
certification is issued. However, see paragraph (g)(2)(iii) of this
section for a restriction on prohibited payments during any period in
which the plan sponsor of a plan is a debtor in a case under title 11,
United States Code, or any similar Federal or State law.
(ii) Unpredictable contingent event benefits and plan amendments
increasing benefit liability--(A) In general. If no presumptions under
section 436(h) apply to a plan during a period and the plan's enrolled
actuary has not yet issued a certification of the plan's adjusted
funding target attainment percentage for the plan year, the limitations
on unpredictable contingent event benefits under paragraph (b) of this
section or plan amendments increasing benefit liability under paragraph
(c) of this section during that period must be applied following the
rules of paragraph (g)(5) of this section, based on the preceding
year's certified adjusted funding target attainment percentage. Thus,
if after application of those rules the plan would be treated as having
an adjusted funding target attainment percentage below the applicable
threshold under paragraph (b) or (c) of this section (taking into
account the increase in the funding target attributable to the
unpredictable contingent event benefits or the increase in liability
attributable to the plan amendment), the unpredictable contingent event
benefits are not permitted to be paid, and the plan amendment is not
permitted to go into effect, unless the contribution described in
paragraph (g)(5)(ii) of this section is made.
(B) Recharacterization of contributions to avoid benefit
limitations. If, pursuant to paragraph (g)(3)(ii)(A) of this section,
the plan sponsor makes contributions described in paragraph (g)(5)(ii)
of this section to avoid application of the applicable benefit
limitations, then, after the certification of the adjusted funding
target attainment percentage for the current plan year is issued by the
plan's enrolled actuary, those contributions are recharacterized as
employer contributions under section 430 for the current plan year to
the extent they exceed the amount necessary to avoid application of the
applicable limitation under paragraph (b) or (c) of this section based
on the certified percentage.
(4) Periods after certification of adjusted funding target
attainment percentage--(i) Plan must follow certified percentage--(A)
In general. The rules of paragraphs (g)(2) and (g)(3) of this section
no longer apply for a plan year on and after the date the enrolled
actuary for the plan issues a certification of the adjusted funding
target attainment percentage of the plan for the current plan year,
provided that the certification is issued before the first day of the
10th month of the plan year. Thus, for example, the plan must provide
that paragraph (d) of this section applies for distributions with
annuity starting dates on and after the date of that certification
using the certified adjusted funding target attainment percentage of
the plan for the plan year. Similarly, the plan must provide that any
prohibition on accruals under paragraph (e) of this section as a result
of the enrolled actuary's certification that the adjusted funding
target attainment percentage of the plan for the plan year is less than
60 percent is effective as of the date of the certification and that
any prohibition on accruals ceases to be effective on the date the
enrolled actuary issues a certification that the adjusted funding
target attainment percentage of the plan for the plan year is at least
60 percent. In addition, in the case of a plan that has been issued a
certification of the plan's adjusted funding target attainment
percentage for a plan year by the plan's enrolled actuary, the plan
sponsor must comply with the requirements of paragraphs (b) and (c) of
this section for an unpredictable contingent event that occurs or a
plan amendment that is effective on or after the date of the enrolled
actuary's certification. Thus, the plan administrator must determine if
the adjusted funding target attainment percentage is at or above the
applicable threshold, taking into account the increase in the funding
target that would be attributable to the unpredictable contingent event
or plan amendment if the unpredictable contingent event benefits or the
increase in liability attributable to the plan amendment were taken
into account.
(B) Application of rule for deemed election to reduce funding
balances. After the adjusted funding target
[[Page 50569]]
attainment percentage for a plan year is certified by the plan's
enrolled actuary, the deemed election to reduce funding balances under
paragraph (a)(5) of this section must be reapplied based on the actual
funding target for the year (provided the certification is issued
before the first day of the 10th month of the plan year). This
reapplication of the deemed election may require an additional
reduction in funding balances if the amount of the reduction in funding
balances that is necessary to reach the applicable threshold to avoid
the application of the limitations under paragraph (d) or (e) of this
section is greater than the amount that was reduced under paragraph
(g)(2) or (g)(3) of this section.
(C) Prior reductions continue to apply. If the amount of the
reduction in funding balances that is necessary to reach the applicable
threshold to avoid the application of the benefit limitation is less
than the amount that was reduced under paragraph (g)(2) or (g)(3) of
this section, then the prior reduction continues to apply. Similarly,
if the amount of the reduction in funding balances that is necessary to
reach the applicable threshold to avoid the application of the
corresponding benefit limitation exceeds the amount of the funding
balances, then the prior reduction continues to apply and no further
reduction under paragraph (a)(5) of this section is provided.
(ii) Applicability to prior periods--(A) In general. Except as
provided in paragraph (g)(4)(ii)(B) of this section, the enrolled
actuary's certification of the adjusted funding target attainment
percentage for the plan for the plan year does not affect the
application of the limitation under paragraph (b) of this section with
respect to unpredictable contingent events that occur during the
periods to which paragraphs (g)(2) and (g)(3) of this section apply.
Except as provided in paragraph (g)(4)(ii)(B) of this section, the
enrolled actuary's certification of the adjusted funding target
attainment percentage for the plan for the plan year does not affect
the application of the limitation under paragraph (c) of this section
to a plan amendment that increases liability for benefits where the
amendment is first effective during the periods to which paragraphs
(g)(2) and (g)(3) apply. The enrolled actuary's certification of the
adjusted funding target attainment percentage for the plan for the plan
year does not affect the application of the limitation under paragraph
(d) of this section for distributions with annuity starting dates
before the certification. Similarly, the enrolled actuary's
certification of the adjusted funding target attainment percentage for
the plan for the plan year does not affect the application of the
limitation under paragraph (e) of this section prior to the date of
that certification. See paragraph (a)(4) of this section for rules
relating to the period of time after benefits cease to be limited.
(B) Special rule for unpredictable contingent event benefits and
plan amendments that increase liability. If a plan does not pay
benefits attributable to an unpredictable contingent event or plan
amendment because of the application of paragraph (g)(5)(ii) of this
section, the plan must provide for benefits that were not previously
paid (or accrued) if such benefits would be permitted under the rules
of section 436 based on the certified actual adjusted funding target
attainment percentage, taking into account the increase in the funding
target that would be attributable to the unpredictable contingent event
benefits or increase in liability due to the plan amendment.
(5) Additional rules regarding limitations on unpredictable
contingent event benefits and certain plan amendments based on presumed
adjusted funding target prior to certification--(i) Reduction in
funding balances--(A) Mandatory reduction for collectively bargained
plans. During the period described in paragraph (g)(2) or (g)(3) of
this section, the rules of paragraph (a)(5) of this section (relating
to the deemed election to reduce the funding standard carryover balance
and the prefunding balance) must be applied based on the presumed
percentage. In order to determine the amount of the reduction in those
balances that would apply to a collectively bargained plan during that
period with respect to an unpredictable contingent event or a plan
amendment that increases liability for benefits, the rules of paragraph
(g)(2)(ii) of this section are applied, except that the presumed
adjusted funding target is increased to take into account the benefits
attributable to the unpredictable contingent event or the plan
amendment. For this purpose, if no presumption applies under the rules
of paragraph (h) of this section (for example, because the plan's
actual adjusted funding target attainment percentage for the prior year
was certified to be at least 80 percent), then that prior year's actual
adjusted funding target attainment percentage is substituted for the
presumed adjusted funding target attainment percentage for the plan
year in determining the presumed adjusted funding target.
(B) Optional reduction for plans that are not collectively
bargained plans. A plan sponsor of a plan that is not a collectively
bargained plan (and, thus, is not required to reduce the funding
standard account carryover balance and the prefunding balance under the
rules of paragraph (a)(5) of this section) is permitted to reduce those
balances in order to increase the interim value of adjusted plan assets
(as defined in paragraph (g)(2)(ii)(A) of this section) that is
compared to the presumed adjusted funding target determined under this
paragraph (g)(5)(i).
(ii) Plans funded below the threshold. If, after application of
paragraph (g)(5)(i) of this section, the ratio of the interim value of
adjusted plan assets (as defined in paragraph (g)(2)(ii)(A) of this
section) to the presumed adjusted funding target determined under that
paragraph is less than the applicable threshold under section 436(b) or
436(c), as applicable, then the plan is not permitted to provide any
benefits attributable to the unpredictable contingent event or plan
amendment unless the plan sponsor makes a contribution that would allow
payment of unpredictable contingent event benefits or would permit a
plan amendment increasing benefit liabilities to go into effect under
the rules of paragraph (b)(2) or (c)(2) of this section.
(iii) Plans funded at or above the threshold. If, after application
of paragraph (g)(5)(i) of this section, the ratio of the interim value
of adjusted plan assets (as defined in paragraph (g)(2)(ii)(A) of this
section) to the presumed adjusted funding target is greater than or
equal to the applicable threshold under section 436(b) or 436(c), as
applicable, then the plan is not permitted to limit the payment of
unpredictable contingent event benefits described in paragraph (b) of
this section nor is the plan permitted to restrict a plan amendment
increasing benefit liability described in paragraph (c) of this section
from becoming effective based on an expectation that the limitations
under paragraph (b) or (c) of this section will apply to the plan once
an actuarial certification is received.
(6) Application to multiple events and amendments. For purposes of
this paragraph (g), if a plan is providing benefits with respect to one
or more unpredictable contingent events occurring within the plan year
or amendments taking effect within the plan year, then paragraphs (b)
and (c) of this section are applied with respect to a subsequent
unpredictable contingent event or amendment by treating the increase in
the funding target attributable to the subsequent event or amendment as
if it included the increases in the funding target
[[Page 50570]]
attributable to all such earlier events or amendments.
(7) Examples. The following examples illustrate the application of
this paragraph (g). Unless otherwise indicated, these examples are
based on the following facts: each plan has a plan year that is the
calendar year and a valuation date of January 1; the first effective
plan year is 2008; the plan sponsor is not in bankruptcy; and no
annuity purchases have been made from the plan. No plan is in at-risk
status for the years discussed in the examples.
Example 1. (i) As of January 1, 2011, Plan A has assets of
$3,300,000 and a prefunding balance of $300,000. Plan A has no
funding standard carryover balance. Beginning on January 1, 2011,
Plan A's AFTAP for 2011 is presumed to be 75%, under the rules of
paragraph (h) of this section and based on the certified AFTAP for
2010.
(ii) Based on Plan A's presumed AFTAP of 75%, Plan A would be
subject to the restriction on prohibited payments in paragraph
(d)(3) of this section as of January 1, 2011. However, under the
provisions of paragraph (a)(5) of this section, if the prefunding
balance is large enough, Plan A's sponsor is deemed to elect to
reduce the prefunding balance to the extent needed to avoid this
restriction.
(iii) The amount needed to avoid the restriction in paragraph
(d)(3) of this section is determined by comparing the presumed
adjusted funding target for Plan A with the interim value of
adjusted plan assets as of the valuation date. The interim value of
plan assets for Plan A is $3,000,000 (that is, the asset value of
$3,300,000 reduced by the prefunding balance of $300,000). The
presumed adjusted funding target for Plan A is the interim value of
the adjusted plan assets divided by the presumed AFTAP, or
$4,000,000 (that is, $3,000,000 divided by 75%).
(iv) In order to avoid the restriction on prohibited payments in
paragraph (d)(3) of this section, Plan A's presumed AFTAP must be
increased to 80%. This requires an increase in Plan A's adjusted
plan assets of $200,000 (that is, 80% of the presumed adjusted
funding target of $4,000,000, minus the interim value of the
adjusted plan assets of $3,000,000). Plan A's prefunding balance as
of January 1, 2011, is reduced by $200,000 under the deemed election
provisions of paragraph (a)(5) of this section. Accordingly, Plan
A's prefunding balance is $100,000 (that is, $300,000 minus
$200,000) and the interim value of adjusted plan assets is increased
to $3,200,000 (that is, $3,300,000 minus the reduced prefunding
balance of $100,000). Plan A must pay the full amount of the
accelerated benefit distributions elected by participants with an
annuity starting date of January 1, 2011, or later.
Example 2. (i) The facts are the same as in Example 1. As of
April 1, 2011, the enrolled actuary for Plan A has not certified the
2011 AFTAP. Therefore, beginning April 1, 2011, Plan A's AFTAP is
presumed to be 65%, 10 percentage points lower than the 2010 AFTAP,
in accordance with paragraph (h)(2) of this section. Under the
provisions of paragraph (g)(2)(ii)(B) of this section, the deemed
election to reduce funding balances described in paragraph (a)(5) of
this section must be reapplied based on the new presumed AFTAP.
(ii) In accordance with paragraph (g)(2)(ii)(B) of this section,
a new adjusted funding target must be determined based on the new
presumed AFTAP and must be compared to an updated interim value of
adjusted plan assets. The new presumed AFTAP is equal to the interim
value of adjusted plan assets as of the valuation date of
$3,000,000, without reflecting the deemed election to reduce the
prefunding balance that was made under paragraph (a)(5) of this
section. The new presumed adjusted funding target is $3,000,000
divided by the presumed AFTAP of 65%, or $4,615,385.
(iii) In order to avoid the restriction on prohibited payments
in paragraph (d)(3) of this section, Plan A's presumed AFTAP must be
increased to 80%. This requires an additional increase in Plan A's
adjusted plan assets of $492,308 (that is, 80% of the new presumed
adjusted funding target of $4,615,385, minus the updated interim
value of the adjusted plan assets of $3,200,000, reflecting the
deemed reduction in Plan A's prefunding balance).
(iv) Plan A's remaining prefunding balance as of January 1,
2011, is only $100,000, which is not enough to avoid the restriction
on prohibited payments under paragraph (d)(3) of this section.
Accordingly, unless Plan A's sponsor utilizes one of the methods
described in paragraph (f) of this section to avoid the restriction,
Plan A is subject to the restriction on prohibited payments in
paragraph (d)(3) of this section and cannot pay accelerated benefit
distributions elected by participants with an annuity starting date
of April 1, 2011, or later.
(v) Plan A's prefunding balance remains at $100,000 because,
under paragraph (a)(5)(iii) of this section, the deemed reduction
rules do not apply if the prefunding balance is not large enough to
increase the adjusted value of plan assets enough to avoid the
restriction. However, the earlier deemed reduction of $200,000
continues to apply because all elections (including deemed
elections) to reduce a plan's funding standard carryover balance or
prefunding balance are irrevocable and must be unconditional.
Example 3. (i) The facts are the same as in Example 2. On July
1, 2011, the enrolled actuary for Plan A calculates the actual
adjusted funding target as $3,700,000 as of January 1, 2011.
Therefore, the 2011 AFTAP would have been 81.08% without reducing
the prefunding balance (that is, plan assets of $3,300,000 minus the
prefunding balance of $300,000, divided by the adjusted funding
target of $3,700,000), and Plan A would not have been subject to the
restrictions under paragraph (d)(3) of this section.
(ii) However, paragraph (g)(4)(i)(C) of this section requires
that any prior reductions in the prefunding or funding standard
carryover balances continue to apply, and so Plan A's prefunding
balance remains at the reduced amount of $100,000 as of January 1,
2011. The enrolled actuary certifies that the 2011 AFTAP is 86.49%
(that is, plan assets of $3,300,000 reduced by the prefunding
balance of $100,000, divided by the adjusted funding target of
$3,700,000).
Example 4. (i) Plan B is a collectively bargained plan with
assets of $2,500,000 and a prefunding balance of $150,000 as of
January 1, 2011. Plan B has no funding standard carryover balance.
Beginning on January 1, 2011, Plan B's AFTAP for 2011 is presumed to
be 83% under the rules of paragraph (g)(3) of this section and based
on the certified AFTAP for 2010.
(ii) On January 10, 2011, Plan B's sponsor amends the plan to
increase benefits effective on February 1, 2011. The amendment would
increase Plan B's funding target by $350,000. Under the rules of
paragraph (g)(5) of this section, the presumed adjusted funding
target is calculated, and then the presumed adjusted funding target
is increased to take into account the benefits attributable to the
plan amendment.
(iii) Plan B's interim value of adjusted plan assets as of the
valuation date is $2,350,000 (that is, $2,500,000 minus the
prefunding balance of $150,000). Prior to reflecting the amendment,
Plan B's presumed adjusted funding target as of January 1, 2011, is
$2,831,325, which is equal to the interim value of adjusted plan
assets as of the valuation date of $2,350,000, divided by the
presumed AFTAP of 83%. Increasing Plan B's presumed adjusted funding
target by $350,000 to reflect the amendment results in a presumed
adjusted funding target of $3,181,325 and a presumed AFTAP of 73.87%
(that is, the interim value of adjusted plan assets as of the
valuation date of $2,350,000 divided by the presumed adjusted
funding target of $3,181,325).
(iv) Because Plan B's presumed AFTAP was over 80% prior to
taking the amendment into account but less than 80% when the
amendment is reflected, section 436(c) and paragraph (c) of this
section prohibit the plan amendment from taking effect unless the
adjusted plan assets are increased so that the presumed AFTAP
(reflecting the increase due to the amendment) is increased to 80%.
This would require an additional amount of $195,060 (that is, 80% of
the presumed adjusted funding target of $3,181,325 less the interim
value of adjusted plan assets of $2,350,000).
(v) Plan B's prefunding balance of $150,000 is not large enough
for Plan B to avoid the restriction on plan amendments, and
therefore the deemed election to reduce the prefunding balance under
paragraph (a)(5) of this section does not apply and the amendment
cannot take effect.
Example 5. (i) The facts are the same as in Example 4, except
that Plan B's sponsor decides to make a contribution on February 1,
2011, to avoid the benefit limitation as provided in paragraph
(f)(2) of this section. Pursuant to paragraph (f)(2)(i)(A)(2) of
this section, Plan B's effective rate of interest for 2011 is
treated as 5.25%.
(ii) The amount of the contribution as of January 1, 2011,
needed to avoid the restriction on plan amendments under paragraph
(c) of this section is $195,060. However, because the contribution
is not paid until February 1, 2011, the necessary contribution
amount must be adjusted to
[[Page 50571]]
reflect interest that would otherwise have accrued between the
valuation date and the date of the contribution, at Plan B's
effective rate of interest for the 2011 plan year. The amount of the
required contribution after adjustment is $195,894, determined as
$195,060 increased for one month of compound interest at an
effective annual interest rate of 5.25%.
(iii) As of April 1, 2011, the enrolled actuary for the plan has
not certified the 2011 AFTAP. Therefore, beginning April 1, 2011,
Plan A's presumed AFTAP is presumed to be 73%, 10 percentage points
lower than the 2010 AFTAP, in accordance with paragraph (h)(2) of
this section. However, paragraph (g)(2)(ii)(B) of this section does
not require reapplication of the deemed election if necessary to
avoid the application of benefit restrictions under paragraph (c) of
this section. Therefore, since the effective date of the plan
amendment occurred prior to April 1, 2011, no additional reduction
in the prefunding balance is required and no additional contribution
is required for the plan amendment to remain in effect.
(iv) On July 1, 2011, the enrolled actuary for the plan
calculates the actual adjusted funding target, prior to taking the
plan amendment into account, as $2,700,000 and certifies the actual
AFTAP for 2011 (prior to taking the amendment into account) as
87.04% (that is, adjusted assets of $2,350,000 divided by the
adjusted funding target of $2,700,000). Reflecting the $350,000
increase in funding target due to the plan amendment would increase
the adjusted funding target to $3,050,000 and would decrease Plan
B's AFTAP to 77.05%.
(v) Based on the certified AFTAP, the amount necessary to avoid
the benefit restriction under paragraph (c) of this section is
$90,000 (that is, 80% of the adjusted funding target reflecting the
plan amendment (or $3,050,000), minus the adjusted value of plan
assets of $2,350,000). This amount must be adjusted for interest
between the valuation date and the date the contribution was made
using the effective interest rate for Plan B. Therefore, the amount
required on the payment date of February 1, 2011, is $90,385 (that
is, $90,000 adjusted for compound interest for one month at Plan B's
effective interest rate of 5.25% per year).
(vi) Under paragraph (g)(3)(ii)(B) of this section, the
contribution made under paragraph (g)(5)(ii) of this section is
recharacterized as an employer contribution under section 430 to the
extent that it exceeds the amount necessary to avoid application of
the restriction on plan amendments under paragraph (c) of this
section. Therefore, $105,509 (that is, the $195,894 actual
contribution paid on February 1, 2011, minus the $90,385 required
contribution based on the actual certified AFTAP) is recharacterized
as an employer contribution under section 430 for the 2011 plan
year. As such, it may be applied toward the minimum required
contribution for 2011, or the plan sponsor can elect to credit the
contribution to Plan B's prefunding balance to the extent that the
contributions for the 2011 plan year exceed the minimum required
contribution.
Example 6. (i) The facts are the same as in Example 5, except
that on July 1, 2011, the enrolled actuary for Plan B calculates the
actual adjusted funding target (before reflecting the plan
amendment) as $3,000,000 and certifies the actual AFTAP as 78.33%
prior to reflecting the plan amendment (that is, adjusted plan
assets of $2,350,000 divided by the actual adjusted funding target
of $3,000,000). Based on the provisions of paragraph (c) of this
section, because the AFTAP prior to reflecting the amendment is less
than 80%, the contribution required to avoid the restriction on plan
amendments would have been the amount equal to the increase in
funding target due to the plan amendment, or $350,000.
(ii) However, according to paragraph (g)(4)(ii)(A) of this
section, the enrolled actuary's certification of the 2011 AFTAP does
not affect the application of the limitation under paragraph (c) of
this section regardless of the extent to which the certified
percentage varies from the presumed percentage, because the
amendment to Plan B was effective prior to the date of the
certification. Therefore, it is not necessary for Plan B's sponsor
to contribute an additional amount in order for the plan amendment
to remain in effect.
(h) Presumed underfunding for purposes of benefit limitations--(1)
Presumption of continued underfunding--(i) In general. This paragraph
(h)(1) applies to a plan for which a limitation under paragraph (b),
(c), (d), or (e) of this section applied to the plan on the last day of
the plan year preceding the current plan year. If this paragraph (h)(1)
applies to a plan, the first day of the plan year is a section 436
measurement date and the presumed adjusted funding target attainment
percentage for the plan is the percentage under paragraph (h)(1)(ii) or
(iii) of this section, whichever applies to the plan, beginning on that
first day until it is changed under this paragraph (h).
(ii) Rule where preceding year certification issued during
preceding year. In any case in which the plan's enrolled actuary has
issued a certification under paragraph (h)(4) of this section of the
adjusted funding target attainment percentage for the plan year
preceding the current year before the first day of the current year,
the adjusted funding target attainment percentage of the plan for the
current plan year is presumed to be equal to the preceding year's
actual adjusted funding target attainment percentage until the plan's
enrolled actuary issues a certification of the adjusted funding target
attainment percentage of the plan for the current plan year under
paragraph (h)(4) of this section or until changed under paragraph
(h)(2) or (h)(3) of this section.
(iii) No certification for preceding year issued during preceding
year--(A) Deemed percentage under 60 percent. In any case in which the
plan's enrolled actuary has not issued a certification under paragraph
(h)(4) of this section of the adjusted funding target attainment
percentage of the plan for the plan year preceding the current year
during that prior plan year, the adjusted funding target attainment
percentage of the plan for the current plan year is presumed to be less
than 60 percent until changed under paragraph (h)(1)(iii)(B) of this
section or where the plan's enrolled actuary issues the certification
of the adjusted funding target attainment percentage for the current
year under paragraph (h)(4) of this section.
(B) Enrolled actuary's certification in first 3 months of following
year. In any case in which the plan's enrolled actuary has issued the
certification under paragraph (h)(4) of this section of the adjusted
funding target attainment percentage of the plan for the plan year
preceding the current year on or after the first day of the current
year but before the first day of the 4th month of that year, the date
of that prior year certification is a new section 436 measurement date
for the plan year. In such a case, until it is changed by a
certification of the current year's adjusted funding target attainment
percentage under paragraph (h)(4) of this section or otherwise changed
under paragraph (h)(2) or (h)(3) of this section, the presumed
percentage for the current year beginning on the date of certification
is equal to the certified percentage for the preceding year.
(2) Presumption of underfunding after first day of 4th month for
nearly underfunded plans--(i) In general. This paragraph (h)(2) applies
to a plan for which the actual adjusted funding target attainment
percentage for the plan year preceding the current plan year was
certified for that prior plan year to be at least 60 percent but less
than 70 percent, or was certified for that prior plan year to be at
least 80 percent but less than 90 percent, and where the enrolled
actuary for the plan has not issued a certification of the adjusted
funding target attainment percentage for the plan year by the first day
of the 4th month of the plan year. If this paragraph (h)(2) applies to
a plan, the presumed adjusted funding target attainment percentage for
the plan is the percentage under paragraph (h)(2)(ii) or (iii) of this
section, as applicable.
(ii) Presumed adjusted funding target attainment percentage. If
this paragraph (h)(2) applies to a plan, and the date of the enrolled
actuary's certification under paragraph (h)(4) of this section for the
plan year preceding the current year occurred before the first day of
the 4th month of the current plan year, then, commencing on the first
day of the 4th
[[Page 50572]]
month of the current plan year and continuing until the earlier of the
date the enrolled actuary issues a certification under paragraph (h)(4)
of this section of the adjusted funding target attainment percentage
for the plan year or the first day of the 10th month of the plan year
as described in paragraph (h)(3) of this section--
(A) The adjusted funding target attainment percentage of the plan
as of the valuation date for the plan year is presumed to be equal to
10 percentage points less than the actual adjusted funding target
attainment percentage of the plan for the preceding plan year; and
(B) The first day of the 4th month of the plan year is treated as a
section 436 measurement date.
(iii) Certification for prior year. If this paragraph (h)(2)
applies to a plan, and the date of the enrolled actuary's certification
under paragraph (h)(4) of this section of the actual adjusted funding
target attainment percentage for the plan year preceding the current
year occurs on or after the first day of the 4th month of the current
plan year, then, commencing on the date of that prior year
certification and continuing until the earlier of the date the enrolled
actuary issues a certification under paragraph (h)(4) of this section
of the adjusted funding target attainment percentage for the plan year
or the first day of the 10th month of the plan year as described in
paragraph (h)(3) of this section--
(A) The adjusted funding target attainment percentage of the plan
as of the valuation date for the plan year is presumed to be equal to
10 percentage points less than the actual adjusted funding target
attainment percentage of the plan for the preceding plan year; and
(B) The date of the prior year certification is treated as a
section 436 measurement date.
(3) Presumption of underfunding on and after first day of 10th
month--(i) Section 436 measurement date. In any case in which no
certification of the specific adjusted funding target attainment
percentage for the current plan year under paragraph (h)(4) of this
section is made with respect to the plan before the first day of the
10th month of the plan year, then that first day is treated as a
section 436 measurement date.
(ii) Presumed percentage under 60 percent. In any case in which no
certification of the specific adjusted funding target attainment
percentage for the current plan year under paragraph (h)(4) of this
section is made with respect to the plan before the first day of the
10th month of the plan year, the plan's adjusted funding target
attainment percentage is presumed to be less than 60 percent beginning
on that date and continuing through the remainder of the plan year.
(4) Certification of adjusted funding target attainment
percentage--(i) Rules generally applicable to certifications--(A) In
general. The enrolled actuary's certification referred to in this
section must be made in writing, must be provided to the plan
administrator, and, except as provided in paragraph (h)(4)(ii) of this
section, must certify the plan's adjusted funding target attainment
percentage for the plan year (including setting forth the aggregate
amount of annuity purchases taken into account under paragraph
(j)(3)(ii) of this section).
(B) Determination of plan assets. For purposes of making any
determination of the adjusted funding target attainment percentage
under this section, the determination is not permitted to take into
account assets that have not been contributed to the plan by the
certification date. For example, the enrolled actuary's certification
of the adjusted funding target attainment percentage for a plan year
cannot take into account contributions that are expected to be made
after the certification date. Notwithstanding the foregoing, for plan
years beginning before January 1, 2009, the enrolled actuary's
certification of the adjusted funding target attainment percentage is
permitted to take into account employer contributions for the prior
plan year that are reasonably expected to be made for that prior plan
year but have not been contributed by the date of the enrolled
actuary's certification. See paragraph (h)(4)(iii) of this section for
rules relating to changes in the certified percentage.
(ii) Special rules for certification within range--(A) In general.
Under this paragraph (h)(4)(ii), the plan's enrolled actuary is
permitted to certify during the first nine months of a plan year that
the plan's adjusted funding target attainment percentage for that plan
year either is 60 percent or higher (but is less than 80 percent), is
80 percent or higher, or is 100 percent or higher. If the enrolled
actuary has issued such a range certification for a plan year and the
enrolled actuary subsequently issues a certification of the specific
adjusted funding target attainment percentage for the plan before the
first day of the 10th month of that plan year, the certification of the
specific adjusted funding target attainment percentage is treated as a
change in the applicable percentage to which paragraph (h)(4)(iii) of
this section applies. If the enrolled actuary has issued a range
certification for a plan year but no specific certification of the
adjusted funding target attainment percentage of the plan for the plan
year is issued by the plan's enrolled actuary before the first day of
the 10th month of that plan year, then the rules of paragraph (h)(3) of
this section apply and the change in the applicable percentage to under
60 percent on that date is treated as a change in the applicable
percentage which is subject to the rules of paragraph (h)(4)(iii) of
this section.
(B) Effect of range certification--(1) Before certification of
specific percentage. If a plan's enrolled actuary issues a range
certification pursuant to this paragraph (h)(4)(ii), then, for all
purposes under this section (for example, applying the limitations of
sections 436(b) and (c), making contributions described in sections
436(b)(2), 436(c)(2), and 436(e)(2), and the mandatory reduction of
funding balances under paragraph (a)(5) of this section), the plan is
treated as having a certified percentage at the smallest value within
the applicable range.
(2) On and after certification of specific percentage. Once the
certification of the specific adjusted funding target attainment
percentage is issued by the plan's enrolled actuary (before the first
day of the 10th month of the plan year), that certified percentage
applies for all purposes of this section on and after the date of that
certification. If the plan sponsor made section 436 contributions to
avoid application of a benefit limitation during the period a range
certification was in effect, those section 436 contributions will be
recharacterized as employer contributions under section 430 to the
extent the contributions exceed the amount necessary to avoid
application of a limitation based on the specific adjusted funding
target attainment percentage as certified by the plan's enrolled
actuary before the first day of the 10th month of the plan year.
(iii) Change of certified percentage--(A) Application of new
percentage. If the enrolled actuary for the plan provides a
certification of the adjusted funding target attainment percentage of
the plan for the plan year under this paragraph (h)(4) (including a
range certification) and that certified percentage is superseded by a
subsequent determination of the adjusted funding target attainment
percentage for that plan year, that later percentage must be applied.
(B) Determination of materiality--(1) In general. With respect to
the effect of that subsequent determination of the
[[Page 50573]]
adjusted funding target attainment percentage on the plan for the
period during which the plan's operation was based on the prior
percentage, a determination must be made whether the change in the
applicable percentage is a material change or an immaterial change.
(2) Definition of material change. For this purpose, there is a
material change in a plan's certified adjusted funding target
attainment percentage if plan operations with respect to benefits that
are addressed by section 436, taking into account any actual
contributions and elections under section 430(f) made by the plan
sponsor based on the prior certified percentage, would have been
different based on the subsequent determination of the plan's adjusted
funding target attainment percentage for the plan year. However, if the
difference between the adjusted funding target attainment percentage
for a plan year and the later revised determination of that percentage
is the result of additional contributions for the preceding year that
are made by the plan sponsor after the date of the enrolled actuary's
certification or results from the plan sponsor's election to reduce the
prefunding balance or funding standard carryover balance after the date
of the certification, such change is not treated as a material change.
(3) Definition of immaterial change. An immaterial change is any
change in an adjusted funding target attainment percentage for a plan
year that is not a material change.
(C) Effect of change in percentage--(1) Material change. In the
case of a material change where the plan was operated in accordance
with the prior certification of the adjusted funding target attainment
percentage for the plan year, the plan will not have satisfied the
requirements of section 401(a)(29) and section 436. In the case of a
material change where the plan was operated in accordance with the
subsequent certification of the adjusted funding target attainment
percentage during the period of time the prior certification applied,
then the plan will not have been operated in accordance with its terms.
In addition, in the case of a material change, the rules requiring
application of a presumed adjusted funding target attainment percentage
under paragraphs (h)(1) through (h)(3) of this section continue to
apply from and after the date of the prior certification until the date
of the subsequent certification.
(2) Effect of immaterial change. If the enrolled actuary for a plan
provides a certification of the adjusted funding target attainment
percentage of the plan for the plan year under this paragraph (h)(4)
and that certified percentage is superseded by a subsequent
determination of the adjusted funding target attainment percentage for
that plan year that does not result in a material change under
paragraph (h)(4)(iii)(B) of this section, the revised percentage does
not change the inapplicability of the presumptions under paragraphs
(h)(1), (2), and (3) of this section prior to the date of the later
certification.
(5) Application to plan with valuation date after first day of plan
year. [Reserved].
(6) Examples of application of paragraphs (h)(1), (h)(2), and
(h)(3) of this section. The following examples illustrate the
application of paragraphs (h)(1), (h)(2), and (h)(3) of this section.
Unless otherwise indicated, the examples in this section are based on
the information in this paragraph. Each plan is a non-collectively
bargained defined benefit plan with a plan year that is the calendar
year and a valuation date of January 1. The first effective plan year
is 2008. The plan does not have a funding standard carryover balance or
a carryforward balance as of any of the dates mentioned, and the plan
sponsor does not elect to utilize any of the methods in paragraph (f)
of this section to avoid applicable benefit restrictions. No range
certification under paragraph (h)(4) of this section has been issued.
The plan sponsor is not in bankruptcy.
Example 1. (i) On July 15, 2010, the adjusted funding target
attainment percentage (``AFTAP'') for Plan T is certified to be 65%.
Based on this AFTAP, Plan T is subject to the restriction on
prohibited payments in paragraph (d)(3) of this section for the
remainder of 2010.
(ii) Beginning January 1, 2011, Plan T's AFTAP for 2011 is
presumed to be equal to the AFTAP for 2010, or 65%, under the
provisions of paragraph (h)(1)(ii) of this section. Accordingly, the
restriction on accelerated benefit distributions in paragraph (d)(3)
of this section continues to apply.
(iii) On March 1, 2011, the enrolled actuary for the plan
certifies that the actual AFTAP for 2011 is 80%. Therefore,
beginning March 1, 2011, Plan T is no longer subject to the
restriction under paragraph (d)(3) of this section, and so Plan T
resumes paying the full amount of any accelerated benefit
distributions elected by participants with an annuity starting date
of March 1, 2011, or later.
Example 2. (i) The facts are the same as in Example 1, except
that the enrolled actuary for the plan does not certify the AFTAP
for 2011 until June 1, 2011. Accordingly, Plan T's AFTAP for 2011 is
presumed to be equal to the AFTAP for 2010 of 65% from January 1,
2011, through March 31, 2011, and Plan T is subject to the
restriction on accelerated benefit distributions under paragraph
(d)(3) of this section during this period.
(ii) Beginning April 1, 2011, the provisions of paragraph
(h)(2)(ii) of this section apply because the enrolled actuary for
the plan still has not certified the actual AFTAP as of January 1,
2011. Under the provisions of paragraph (h)(2)(ii) of this section,
the AFTAP for Plan T is presumed to be 10 percentage points lower,
or 55%, beginning April 1, 2011. Accordingly, Plan T is now subject
to the restriction in paragraph (d)(1) of this section, and so
cannot pay any accelerated benefit distributions otherwise payable
to plan participants who have annuity starting dates on or after
April 1, 2011.
(iii) On June 1, 2011, the enrolled actuary for the plan
certifies that the AFTAP for 2011 for Plan T is 66%. Accordingly,
Plan T is no longer subject to the restriction under paragraph
(d)(1) of this section, but it is subject to the restriction under
paragraph (d)(3) of this section.
(iv) Since Plan T is no longer subject to the restriction on
payment of accelerated benefit distributions under paragraph (d)(1)
of this section, Plan T must resume paying the accelerated benefit
distributions, as restricted under paragraph (d)(3) of this section,
for participants who elect benefits in accelerated forms of payment
and who have an annuity starting date of June 1, 2011, or later.
Example 3. (i) The facts are the same as in Example 1, except
that the enrolled actuary for the plan does not certify the 2011
AFTAP until November 15, 2011. Beginning October 1, 2011, Plan T is
conclusively presumed to have an AFTAP of less than 60%, in
accordance with the provisions of paragraph (h)(3) of this section.
Accordingly, Plan T is subject to the restriction in paragraph
(d)(1) of this section, and cannot pay any accelerated benefit
distributions to participants whose annuity starting date occurs on
or after October 1, 2011.
(ii) On November 15, 2011, the enrolled actuary for the plan
certifies that the AFTAP for 2011 is 72%. However, because the
certification occurred after October 1, 2011, the certification does
not constitute a new section 436 measurement date, and Plan T
continues to be subject to the restrictions on accelerated benefit
distributions and benefit accruals under paragraphs (d)(1) and (e)
of this section.
(iii) Beginning January 1, 2012, the 2012 AFTAP for Plan T is
presumed to be equal to the 2011 AFTAP of 72%. Because the presumed
2012 AFTAP is between 70% and 80% and, therefore, paragraph (h)(2)
of this section (which provides for a 10 percentage point reduction
in a plan's AFTAP in certain cases) will not apply, the presumed
AFTAP will remain at 72% until the plan's enrolled actuary certifies
the AFTAP for 2012 or until paragraph (h)(3) of this section applies
on the first day of the 10th month of the plan year. Because the
presumed AFTAP is 72%, Plan T is no longer subject to the
restrictions on accelerated benefit distributions under paragraph
(d)(1) of this section, and Plan T must resume paying accelerated
benefit distributions, as restricted under paragraph (d)(3) of this
section, that are elected by participants with annuity starting
dates on or after January 1, 2012. Similarly, Plan T is no longer
subject to the restriction on benefit
[[Page 50574]]
accruals under paragraph (e) of this section, and benefit accruals
resume under Plan T beginning January 1, 2012, unless Plan T
provides otherwise.
Example 4. (i) The facts are the same as in Example 3, except
that the enrolled actuary for the plan does not issue a
certification of the AFTAP for 2011 for Plan T until February 1,
2012.
(ii) Beginning on January 1, 2012, the presumptions in paragraph
(h)(1)(iii) of this section apply for the 2012 plan year. Because
the enrolled actuary for the plan has not certified the AFTAP for
2011, the presumed AFTAP as of October 1, 2011, continues to apply
for the period beginning January 1, 2012. Therefore, the AFTAP as of
January 1, 2012, is presumed to be less than 60%, and Plan T
continues to be subject to the restriction on accelerated benefit
distributions in paragraph (d)(1) and the restriction on benefit
accruals under paragraph (e) of this section.
(iii) On February 1, 2012, the enrolled actuary for the plan
certifies that the AFTAP for 2011 for Plan T is 65%. Because the
enrolled actuary for the plan has not issued a certification of the
AFTAP for 2012, the provisions of paragraph (h)(1)(iii)(B) of this
section apply. Accordingly, the certification date for the 2011
AFTAP (February 1, 2012) is a section 436 measurement date and 65%
is the presumed AFTAP for 2012 beginning on that date.
(iv) Because the presumed AFTAP is over 60% but less than 80%,
the full restriction on accelerated benefit distributions under
paragraph (d)(1) of this section no longer applies; however the
partial restriction on accelerated benefit distributions under
paragraph (d)(3) of this section applies beginning on February 1,
2012. Therefore, Plan T must pay a portion of accelerated benefit
distributions elected by participants with annuity starting dates on
or after February 1, 2012. Furthermore, based on the presumed AFTAP
of 65%, the restriction on benefit accruals under paragraph (e) of
this section no longer applies, and unless Plan T provides
otherwise, benefit accruals will resume as of February 1, 2012.
Example 5. (i) The facts are the same as in Example 3, except
that the enrolled actuary for the plan does not issue a
certification of the actual AFTAP for Plan T as of January 1, 2011,
until May 1, 2012.
(ii) Beginning on January 1, 2012, the presumptions in paragraph
(h)(1)(iii) of this section apply for the 2012 plan year. Because
the enrolled actuary for the plan has not certified the actual AFTAP
as of January 1, 2011, the presumed AFTAP as of October 1, 2011,
continues to apply for the period beginning January 1, 2012.
Therefore, the AFTAP as of January 1, 2012, is presumed to be less
than 60%, and Plan T continues to be subject to the restriction on
accelerated benefit distributions in paragraph (d)(1) of this
section and the restriction on benefit accruals under paragraph (e)
of this section.
(iii) Since the enrolled actuary for the plan has not issued a
certification of the actual AFTAP as of January 1, 2011, the rules
of paragraph (h)(2)(iii) of this section apply beginning April 1,
2012, and the AFTAP is presumed to remain less than 60%. Plan T
continues to be subject to the restriction on accelerated benefit
distributions and benefit accruals under paragraphs (d)(1) and (e)
of this section.
(iv) On May 1, 2012, the enrolled actuary for the plan certifies
that the actual AFTAP for 2011 for Plan T is 65%. Because the
enrolled actuary for the plan has not issued a certification of the
actual AFTAP as of January 1, 2012, the provisions of paragraph
(h)(2)(ii) of this section apply. Accordingly, on May 1, 2012, the
2012 AFTAP is presumed to be 10 percentage points less than the 2011
AFTAP, or 55%, so that the restrictions under paragraphs (d) and (e)
of this section continue to apply.
Example 6. (i) The enrolled actuary for Plan V certifies the
plan's AFTAP for 2010 to be 69%. Based on this AFTAP, Plan V is
subject to the restriction in paragraph (d)(3) of this section, and
can only pay a portion (generally 50%) of accelerated benefit
distributions otherwise due to plan participants who commence
benefits while the restriction is in effect. The enrolled actuary
for the plan does not issue a certification of the AFTAP for 2011
until June 1, 2011.
(ii) Beginning January 1, 2011, Plan V's 2011 AFTAP is presumed
to be equal to the 2010 AFTAP, or 69%, under the provisions of
paragraph (h)(1)(ii) of this section. Accordingly, the restriction
on accelerated benefit distributions in paragraph (d)(3) of this
section continues to apply from January 1, 2011, through March 31,
2011, and Plan T may only pay a portion of accelerated benefit
distributions otherwise due to participants who commence benefit
payments during this period.
(iii) Beginning April 1, 2011, the provisions of paragraph
(h)(2)(ii) of this section apply. Under those provisions, the AFTAP
beginning April 1, 2011, is presumed to be 10 percentage points
lower than the presumed 2011 AFTAP, or 59%. Because Plan V's
presumed AFTAP for 2011 is less than 60%, the restriction on the
payment of accelerated benefit distributions under paragraph (d)(1)
of this section and the restriction on benefit accruals under
paragraph (e) of this section apply. Accordingly, Plan V cannot pay
any accelerated benefit distributions to participants with an
annuity starting date on or after April 1, 2011, and benefit
accruals cease as of March 31, 2011.
(iv) On June 1, 2011, Plan V's enrolled actuary certifies that
the plan's AFTAP for 2011 is 71%. Therefore, the restrictions on
accelerated benefit distributions and benefit accruals in paragraphs
(d)(1) and (e) of this section no longer apply, but the partial
restriction on benefit payments in paragraph (d)(3) of this section
does apply. Accordingly, Plan V begins paying a portion of the
accelerated benefit distributions elected by participants with an
annuity starting date on or after June 1, 2011, and benefit accruals
previously restricted under paragraph (e) of this section resume
effective June 1, 2011, unless Plan V provides otherwise.
(v) Participants who were not able to elect an accelerated form
of payment during the period from April 1, 2011, through May 31,
2011, would be able to elect a new starting date with a partial
distribution of accelerated benefits effective June 1, 2011, if Plan
V contained a preexisting provision permitting such an election
after the restriction in paragraph (d)(1) of this section no longer
applies. This is permitted because, under paragraph (a)(4)(ii)(A) of
this section, a preexisting provision of this type is not considered
a plan amendment and is therefore not subject to the plan amendment
restriction in paragraph (c) of this section even though Plan V's
AFTAP for 2011 is less than 80%.
(vi) Benefit accruals for the period beginning April 1, 2011,
through May 31, 2011, would be automatically restored if Plan V
contained a preexisting provision to retroactively restore benefit
accruals restricted under paragraph (e) of this section after the
restriction no longer applies. This is permitted because under
paragraph (a)(4)(ii)(A) of this section, a preexisting provision of
this type is not considered to be a plan amendment and is therefore
not subject to the plan amendment restriction in paragraph (c) of
this section even though Plan V's AFTAP for 2011 is less than 80%,
because the period of the restriction did not exceed 12 months.
(7) Examples of application of paragraph (h)(4) of this section.
The following examples illustrate the application of paragraph (h)(4)
of this section:
Example 1. (i) Plan Y is a non-collectively bargained defined
benefit plan with a plan year that is the calendar year and a
valuation date of January 1. Plan Y does not have a funding standard
carryover balance or a prefunding balance. Plan Y's sponsor is not
in bankruptcy. In June of 2010, the actual AFTAP for 2010 for Plan Y
is certified as 65%. On the last day of the 2010 plan year, Plan Y
is subject to the restrictions in paragraph (d)(3) of this section.
(ii) The enrolled actuary for the plan issues a range
certification on March 21, 2011, certifying that the AFTAP for 2011
is at least 60% and less than 80%. Because the certification was
issued before the first day of the 4th month of the plan year, the
10 percentage point reduction in the presumed AFTAP under paragraph
(h)(2) of this section does not apply. In addition, because the
enrolled actuary for the plan has certified that the AFTAP is within
this range, Plan Y is not subject to the full restriction on
accelerated benefit payments in paragraph (d)(1) of this section or
the restriction on benefit accruals under paragraph (e) of this
section.
(iii) On August 1, 2011, the enrolled actuary for the plan
certifies that the actual AFTAP as of January 1, 2011, is 75.86%.
This AFTAP falls within the previously certified range. Thus, the
change is immaterial under paragraph (h)(4)(iii) of this section and
the new certification does not change the applicability or
inapplicability of the restrictions in this section.
Example 2. (i) The facts are the same as in Example 1, except
that the plan sponsor makes an additional contribution for the 2010
plan year on September 1, 2011, that is not added to the prefunding
balance.
[[Page 50575]]
Reflecting this contribution, the enrolled actuary for the plan
issues a revised certification stating that the AFTAP for 2011 is
81%, and Plan Y is no longer subject to the restriction on
accelerated benefit payments under paragraph (d)(3) of this section
on that date.
(ii) Although the revised certification changes the
applicability of the restriction under paragraph (d)(3) of this
section, the change is not a material change under paragraph
(h)(4)(iii)(B)(2) of this section because it changed only because of
additional contributions for the preceding year made by the plan
sponsor after the date of the enrolled actuary's initial
certification.
(i) [Reserved].
(j) Definitions. For purposes of this section--
(1) Funding target. For purposes of section 436, the funding target
means the funding target under section 430(d) or 430(i), as applicable
to the plan for the plan year.
(2) Funding target attainment percentage--(i) In general. For
purposes of section 436, the funding target attainment percentage for
any plan year is the fraction (expressed as a percentage), the
numerator of which is the value of net plan assets for the plan year,
and the denominator of which is the plan's funding target for the plan
year (but determined without regard to the at-risk rules under section
430(i) even in the case of a plan that is in at-risk status). For this
purpose, pursuant to section 430(f)(4), the value of net plan assets
for the plan year is generally determined by subtracting the plan's
funding standard carryover balance and prefunding balance (if any) for
the plan year from the value of plan assets. A plan with a value of net
plan assets for a plan year of zero is treated as having a funding
target attainment percentage of zero, regardless of the amount of the
plan's funding target.
(ii) Application to plans that are fully funded without regard to
subtraction of funding balances from plan assets--(A) In general. If
the funding target attainment percentage for a plan year, determined
without regard to the section 430(f)(4) subtraction of the funding
standard carryover balance and the prefunding balance from the value of
plan assets, would be 100 percent or more, then, solely for purposes of
section 436 and this section (but not section 430(d)), the value of net
plan assets used in the determination of the funding target attainment
percentage described in this paragraph (j)(2) (and the adjusted funding
target attainment percentage described in paragraph (j)(3) of this
section) is determined without regard to any subtraction of funding
balances under section 430(f)(4).
(B) Transition rule. Paragraph (j)(2)(ii)(A) of this section is
applied to plan years beginning after 2007 and before 2011 by
substituting for ``100 percent'' the applicable percentage determined
in accordance with the following table:
------------------------------------------------------------------------
In the case of a plan year beginning in calendar The applicable
year: percentage is:
------------------------------------------------------------------------
2008................................................. 92
2009................................................. 94
2010................................................. 96
------------------------------------------------------------------------
(C) Limitation. Paragraph (j)(2)(ii)(B) of this section does not
apply with respect to any plan year after 2008 unless the funding
target attainment percentage (determined without regard to the section
430(f)(4) subtraction of the funding standard carryover balance and the
prefunding balance from the value of plan assets) of the plan for each
preceding plan year (after 2007) was not less than the applicable
percentage with respect to such preceding plan year determined under
paragraph (j)(2)(ii)(B) of this section.
(iii) Special rules for first effective plan year--(A) In general.
In the case of the plan's first effective plan year, the funding target
attainment percentage under section 436 for the plan's pre-effective
plan year is determined as the fraction (expressed as a percentage),
the numerator of which is the net plan assets determined under
paragraph (j)(2)(iii)(B) of this section, and the denominator of which
is the plan's current liability determined pursuant to section
412(l)(7) on the valuation date for the plan's pre-effective plan year.
(B) General determination of value of net plan assets--(1) In
general. The value of net plan assets for purposes of this paragraph
(j)(2)(iii) is determined under section 412(c)(2) as in effect for the
plan's pre-effective plan year, except that the value of plan assets
prior to subtracting the plan's funding standard account credit balance
described in paragraph (j)(2)(iii)(B)(2) of this section can neither be
less than 90 percent of the fair market value of plan assets nor
greater than 110 percent of the fair market value of plan assets on the
valuation date for that plan year.
(2) Subtraction of credit balance. If a plan has a funding standard
account credit balance as of the valuation date for the plan's pre-
effective plan year, that balance is subtracted from the net asset
value described in paragraph (j)(2)(iii)(B)(1) of this section as of
that valuation date. However, the subtraction does not apply if the
value of plan assets determined in paragraph (j)(2)(iii)(B)(1) of this
section is greater than or equal to 90 percent of the plan's current
liability as of the valuation date for the plan determined under
paragraph (j)(2)(iii)(A) of this section.
(3) Effect of funding standard carryover balance reduction for
first effective plan year. Notwithstanding paragraph (j)(2)(iii)(B)(2)
of this section, if, for the first effective plan year, the employer
has made an election to reduce some or all of the funding standard
carryover balance as of the first day of that year in accordance with
Sec. 1.430(f)-1(e), then the present value (determined as of the
valuation date for the pre-effective plan year using the valuation
interest rate for that pre-effective plan year) of the amount so
reduced is not treated as part of the funding standard account credit
balance when that balance is subtracted from the asset value under
paragraph (j)(2)(iii)(B)(2) of this section.
(3) Adjusted funding target attainment percentage--(i) In general.
The adjusted funding target attainment percentage for any plan year is
the fraction (expressed as a percentage), the numerator of which is the
adjusted plan assets described in paragraph (j)(3)(ii) of this section
and the denominator of which is the adjusted funding target described
in paragraph (j)(3)(iii) of this section.
(ii) Adjusted plan assets. The adjusted plan assets equals the net
plan assets (determined under paragraph (j)(2) of this section),
increased by the aggregate amount of purchases of annuities for
employees other than highly compensated employees (as defined in
section 414(q)) which were made by the plan during the preceding 2 plan
years.
(iii) Adjusted funding target--(A) In general. The adjusted funding
target equals the funding target for the plan year (determined in
accordance with paragraph (j)(1) of this section but without regard to
the at-risk rules under section 430(i)), increased by the aggregate
amount of purchases of annuities for employees other than highly
compensated employees (as defined in section 414(q)) which were made by
the plan during the preceding 2 plan years.
(B) Special rule for first effective plan year. In the case of the
plan's first effective plan year, for purposes of determining the
adjusted funding target attainment percentage for the pre-effective
plan year, the adjusted funding target is equal to the current
liability determined pursuant to section 412(l)(7) as of the plan's
valuation date for the pre-effective plan year, increased by the
aggregate amount of purchases of annuities for employees other than
highly compensated employees (as
[[Page 50576]]
defined in section 414(q)) which were made by the plan during the
preceding 2 plan years.
(iv) Special rule where current liability not certified for pre-
effective plan year. In any case in which the plan's enrolled actuary
has not issued a certification under paragraph (h)(4)(i) of this
section of the adjusted funding target attainment percentage of the
plan for the pre-effective plan year, the adjusted funding target
attainment percentage of the plan for the first effective plan year is
presumed to be less than 60 percent until the adjusted funding target
attainment percentage of the plan for the pre-effective plan year has
been certified. The preceding sentence applies for purposes of
paragraphs (b) and (c) of this section at the beginning of the first
effective plan year and applies for purposes of paragraphs (d) and (e)
of this section as of the first day of the 4th month of the first
effective plan year. See paragraph (h) of this section for rules that
apply after the adjusted funding target percentage for the plan has
been certified for either the pre-effective plan year or the first
effective plan year.
(4) Section 436 measurement date. The section 436 measurement date
is the date that is used to stop or start the application of the
limitations of sections 436(d) and 436(e), and is also used for
calculations with respect to applying the limitations of paragraphs (b)
and (c) of this section. See paragraph (h) of this section regarding
section 436 measurement dates that result from application of the
presumptions under that paragraph (h) of this section.
(5) Examples. The following examples illustrate the application of
this paragraph (j):
Example 1. (i) Plan S is a non-collectively bargained defined
benefit plan with a plan year that is the calendar year and a
valuation date of January 1. The first effective plan year is 2008.
(ii) As of January 1, 2008, Plan S has a value of plan assets
(equal to the market value of assets) of $2,100,000 and a funding
standard carryover balance of $200,000. During 2006, assets from
Plan S were used to purchase a total of $100,000 in annuities for
employees other than highly compensated employees. No annuities were
purchased during 2007. On May 1, 2008, the enrolled actuary for the
plan determines that the funding target as of January 1, 2008, is
$2,500,000.
(iii) The adjusted value of assets for Plan S as of January 1,
2008, is $2,000,000 (that is, plan assets of $2,100,000 plus annuity
purchases of $100,000 minus the funding standard carryover balance
of $200,000). The adjusted funding target is $2,600,000 (that is,
the funding target of $2,500,000, increased by the annuity purchases
of $100,000).
(iv) Based on the above adjusted plan assets and adjusted
funding target, the AFTAP as of January 1, 2008, would be 76.92%.
Since the AFTAP is less than 80% but is at least 60%, Plan S is
subject to the restrictions in paragraph (d)(3) of this section.
Example 2. (i) The facts are the same as in Example 1, except
that it is reasonable to expect that the plan sponsor will make a
contribution of $80,000 to Plan S for the 2007 plan year by
September 15, 2008. This amount is in excess of the minimum required
contribution for 2007. The plan sponsor elects to reduce the funding
standard carryover balance by $80,000.
(ii) Because it is reasonable to expect that the $80,000 will be
contributed by the plan sponsor, that amount is taken into account
when the enrolled actuary certifies the 2008 AFTAP under the special
rule in paragraph (h)(4)(i)(B) of this section for plan years
beginning before 2009. Accordingly, the enrolled actuary for the
plan certifies the 2008 AFTAP as 80% (that is, adjusted plan assets
of $2,080,000, reflecting the $80,000 in contributions receivable,
divided by the adjusted funding target of $2,600,000).
(iii) The ability to take contributions into account before they
are actually paid to the plan is available only for plan years
beginning before 2009. Furthermore, if the employer does not
actually make the contribution and the difference between the
incorrect certification and the corrected AFTAP constitutes a
material change, the plan will have violated section 401(a)(29) or
will not have been operated in accordance with its terms.
Example 3. (i) Plan R is a defined benefit plan with a plan year
that is the calendar year and a valuation date of January 1. The
first effective plan year for Plan R is 2008. The valuation interest
rate for the 2007 plan year for Plan R is 7%. The fair market value
of assets of Plan R as of January 1, 2007, is $1,000,000. The
actuarial value of assets of Plan R as of January 1, 2007, is
$1,200,000. The current liability of Plan R as of January 1, 2007,
is $1,500,000. The funding standard account credit balance as of
January 1, 2007, is $80,000. The funding standard carryover balance
of Plan R is $50,000 as of the beginning of the 2008 plan year. The
sponsor of Plan R, Sponsor T, elects in 2008 to reduce the funding
standard carryover balance in accordance with Sec. 1.430(f)-1 by
$45,000.
(ii) Pursuant to paragraph (j)(2)(iii)(B)(1) of this section,
the asset value used to determine the funding target attainment
percentage (FTAP) for the 2007 plan year is limited to 110% of the
fair market value of assets on January 1, 2007, or $1,100,000 (110%
of $1,000,000).
(iii) Pursuant to paragraph (j)(2)(iii)(B)(2) of this section,
the funding standard account credit balance as of January 1, 2007,
is subtracted from the asset value used to determine the FTAP for
the 2007 plan year. However, pursuant to paragraph (j)(2)(iii)(B)(3)
of this section, the present value of the amount by which Sponsor T
elected to reduce the funding standard carryover balance in 2008 is
not subtracted.
(iv) The present value, determined at an interest rate of 7%, of
the $45,000 reduction in the funding standard account carryover
balance elected by Sponsor T in 2008 is $42,056. Thus, $42,056 is
not subtracted from the 2007 plan year asset value. Accordingly, the
funding standard account credit balance that is subtracted from the
2007 plan year asset value is $37,944 (that is, $80,000 less
$42,056).
(v) Thus, the asset value that is used to determine the FTAP for
the 2007 plan year is $1,100,000 less $37,944, or $1,062,056.
Accordingly, for purposes of this section, the FTAP for the 2007
plan year for Plan R is 70.8% (that is, $1,062,056 divided by
$1,500,000).
(k) Effective/applicability dates--(1) In general. In general, this
section applies to plan years beginning on or after January 1, 2008.
(2) Plans with delayed effective/applicability date. In the case of
a plan for which the effective date of section 436 is delayed in
accordance with sections 104 through 106 of the Pension Protection Act
of 2006, Public Law 109-280, 120 Stat. 780, this section applies to
plan years beginning on or after the effective date of section 436 with
respect to the plan.
(3) Collective bargaining exception--(i) In general. In the case of
a collectively bargained plan that is maintained pursuant to one or
more collective bargaining agreements between employee representatives
and one or more employers ratified before January 1, 2008, this section
does not apply to plan years beginning before the earlier of--
(A) The date described in paragraph (k)(3)(ii) of this section; or
(B) January 1, 2010.
(ii) Termination of collective bargaining agreement. The date
described in this paragraph (k)(3)(ii) is the later of--
(A) The date on which the last collective bargaining agreement
relating to the plan terminates (determined in accordance with
paragraph (k)(3)(iii) of this section and without regard to any
extension thereof agreed to after August 17, 2006); or
(B) The first day of the first plan year to which this section
would (but for this paragraph (k)(3)) apply.
(iii) Treatment of certain plan amendments. Any plan amendment made
pursuant to a collective bargaining agreement relating to the plan
which amends the plan solely to conform to any requirement added by
section 436 is not treated as a termination of the collective
bargaining agreement.
(iv) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to
which a collective bargaining agreement applies to some, but not all,
of the plan
[[Page 50577]]
participants, the plan is considered a collectively bargained plan for
purposes of this paragraph (k)(3) if it is considered a collectively
bargained plan under the rules of paragraph (a)(5)(ii)(B) of this
section.
(4) First effective plan year. For purposes of this section, the
first effective plan year for a plan is the first plan year to which
this section applies under paragraph (k)(1), (k)(2), or (k)(3) of this
section.
(5) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before
the first effective date applicable under paragraph (k)(1), (k)(2), or
(k)(3) of this section. Thus, except for plans with a delayed effective
date under paragraph (k)(2) or (k)(3) of this section, the pre-
effective plan year for a plan is the last plan year beginning before
January 1, 2008.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 07-4262 Filed 8-28-07; 8:45 am]
BILLING CODE 4830-01-P