Code §436 requires benefit limitations for underfunded single-employer defined benefit plans. Whether benefit limitations apply, and if so, which ones, is based on the plan’s adjusted funding target attainment percentage, or AFTAP. Simplistically, the AFTAP is a ratio of the plan’s adjusted assets to its adjusted funding target. If a plan’s AFTAP is less than a certain percentage, (depending on the type of limitation), then a plan must limit the affected benefits. In general, the limitations are applied using the AFTAP for the prior plan year without adjustment until the first day of the 4th month of the plan year (April 1, for calendar-year plans) or until the AFTAP for the current year is certified. Beginning with the first day of the 4th month (April 1, for calendar-year plans), the prior year AFTAP is reduced by 10 percentage points if it is within 10 percentage points of one of the thresholds in the table below. Beginning with the first day of the 10th month (October 1, for calendar-year plans) the AFTAP is presumed to be less than 60% -- triggering all the limitations below for the rest of the plan year if the current-year AFTAP has not been certified by that date, even if the actual AFTAP for the current year is certified later.
Limitations on Benefits... |
...If AFTAP is Less Than |
Plan amendment increasing benefits cannot take effect* |
80%, counting the cost of the amendment |
Shutdown benefit cannot be paid |
60%, counting the cost of the additional benefits |
Only part of a participant's benefit can be paid as a lump sum or other accelerated form of payment** |
80%, but more than 60% |
None of the participant's benefit can be paid as a lump sum or other accelerated form of payment |
60% |
Participant benefits are frozen -- they cannot increase even if the participant continues working |
60% |
*Limited exception for benefits not based on compensation.
**Accelerated benefits are limited to one-half of the participant’s benefit or one-half of the PBGC minimum guaranteed benefit, if greater.
Temporary rules apply for the first plan year beginning on or after January 1, 2008.
The above limitations are applied based on the AFTAP for the current year, as certified by the plan’s enrolled actuary. However, for the period before the current-year AFTAP is certified, the limitations can be based on the AFTAP certified for the prior year, using “presumption” rules outlined in §436(h) of the Code and §1.436-1(h) of the proposed regulations. If the enrolled actuary has not certified the AFTAP for the current year by the first day of the 10th month (October 1, for calendar-year plans), the presumed AFTAP is less than 60% --triggering all the limitations above – beginning on that date. In this case, all the limitations continue to apply through the end of the plan year, even if the actuary certifies the AFTAP before the end of the year.
For example, assume a plan has a calendar-year plan year and is applying the benefit limitations above for the 2009 plan year. Also assume that the AFTAP certified for 2008 is 85% and that the 2009 AFTAP is not certified. The benefit limitations would apply as follows:
Date |
Presumed AFTAP |
Restrictions |
January 1, 2009 - March 31, 2009 |
80%
(2008 AFTAP) |
None, unless a plan amendment would decrease the presumed AFTAP below 80% |
April 1, 2009 - September 30, 2009 |
75%
(2008 AFTAP minus 10%) |
--Plan amendments
--Half lump sums and other
accelerated payments
--Shutdown benefits, if the
additional cost would
increase the presumed
AFTAP below 60%
|
October 1, 2009 and later |
Under 60% |
All restrictions apply |
If the 2009 AFTAP is certified by October 1, 2009, then that AFTAP will be used as soon as it is certified. If the 2009 AFTAP is not certified until October 2, 2009, or later, then all the benefit limitations will apply through the end of the 2009 plan year. The restrictions will continue beyond the end of the 2009 plan year until the 2009 or 2010 AFTAP is certified.
In general, because of the way the presumptions work, either the AFTAP for the prior year or the current year must be certified by the plan’s enrolled actuary before the beginning of the year to avoid triggering full restrictions – including a freeze on the amount of benefits earned under the plan.
However, a special transition rule applies to the first plan year beginning on or after January 1, 2008 – the first effective plan year. For the first three months of this year, the only restrictions that apply are restrictions on plan amendments and shutdown benefits. Starting with the first day of the fourth month of the plan year – April 1, 2008 for calendar-year plans – either the 2008 AFTAP or the 2007 AFTAP must be certified by the plan’s enrolled actuary or all the restrictions in section 436 will apply to the plan.
Section 1.436-1(j)(2)(iii) of the proposed regulations describes how to estimate the AFTAP for the plan year beginning in 2007, since the funding target did not exist for years prior to the Pension Protection Act of 2006 (“PPA”). This calculation is based on the plan’s current liability and valuation assets (but adjusted to the extent necessary to bring the asset value within 90% to 110% of the fair market value of assets).
Notice 2008-21 provided temporary relief for 2008 for plans using a valuation date as of the last day of the plan year, as long as this approach was used for the 2006, 2007 and 2008 plan years. Because it is difficult for the plan’s actuary to calculate and certify the AFTAP in time to avoid the restrictions, Notice 2008-21 allows the plan sponsor to use the year-end AFTAP for the 2006 plan year instead of the year-end 2007 figure until the 2008 certification is available. However, the 2008 certification would still be required by the first day of the 10th month (October 1, 2008, for calendar-year plans) to avoid restrictions. Additional relief may be available if technical corrections are passed that would give the IRS expanded authority to adjust the AFTAP rules for year-end valuations.
These rules are quite complicated, and this summary describes only a limited portion of the rules. Please refer to Code §436 and the proposed regulations for more details.
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