Measurement of Assets and Liabilities for Pension Funding Purposes; Benefit Restrictions for Underfunded Pension Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9467]

RIN 1545-BG72; RIN 1545-BH07

Measurement of Assets and Liabilities for Pension Funding Purposes; Benefit Restrictions for Underfunded Pension Plans

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document contains final regulations providing guidance regarding the determination of the value of plan assets and benefit liabilities for purposes of the funding requirements that apply to single employer defined benefit plans, regarding the use of certain funding balances maintained for those plans, and regarding benefit restrictions for certain underfunded defined benefit pension plans. These regulations reflect provisions added by the Pension Protection Act of 2006, as amended by the Worker, Retiree, and Employer Recovery Act of 2008. These regulations affect sponsors, administrators, participants, and beneficiaries of single employer defined benefit pension plans.

DATES:

Effective Date:

These regulations are effective on October 15, 2009.

Applicability Date:

These regulations apply to plan years beginning on or after January 1, 2010.

FOR FURTHER INFORMATION CONTACT:

Michael P. Brewer, Lauson C. Green, or Linda S.F. Marshall at (202) 622-6090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2095. The collections of information in this final regulation are in §§ 1.430(f)-1(f), 1.430(h)(2)-1(e), 1.436-1(f), and 1.436-1(h). The information required under § 1.430(f)-1(f) is required in order for plan sponsors to make elections regarding a plan's credit balances upon occasion. The information required under § 1.430(h)(2)-1(e) is required in order for a plan sponsor to make an election to use an alternative interest rate for purposes of determining a plan's funding obligations under § 1.430(h)(2)-1. The information required under §§ 1.436-1(f) and 1.436-1(h) is required in order for a qualified defined benefit plan's enrolled actuary to provide a timely certification of the plan's adjusted funding target attainment percentage (AFTAP) for each plan year to avoid certain benefit restrictions.

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.

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 final Income Tax Regulations (26 CFR part 1) under sections 430(d), 430(f), 430(g), 430(h)(2), 430(i), and 436, as added to the Internal Revenue Code (Code) by the Pension Protection Act of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780), and amended by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA '08), Public Law 110-458 (122 Stat. 5092).

Section 412 provides minimum funding requirements that generally apply for pension plans (including both defined benefit pension plans and money purchase pension plans). PPA '06 makes extensive changes to those minimum funding requirements for defined benefit plans that generally apply for plan years beginning on or after January 1, 2008. Section 430, which was added by PPA '06, specifies the minimum funding requirements that apply to single employer defined benefit pension plans (including multiple employer plans) pursuant to section 412. Section 436, which was also added by PPA '06, sets forth certain limitations on benefits that may apply to a single employer defined benefit plan based on its funded status. Neither section 430 nor section 436 applies to multiemployer plans.

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, and section 303 of ERISA sets forth additional funding rules for single employer plans that are parallel to those in section 430 of the Code. In addition, section 206(g) of ERISA sets forth benefit limitations 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 3002(c) of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of ERISA, as well as the Code. Thus, these final Treasury Department regulations issued under sections 430 and 436 of the Code apply for purposes of sections 206(g) and 303 of ERISA.

If the value of plan assets (less the sum of the plan's prefunding balance and funding standard carryover balance) is less than the funding target, section 430(a)(1) defines the minimum required contribution as the sum of the plan's target normal cost and the shortfall and waiver amortization charges for the plan year. If the value of plan assets (less the sum of the plan's prefunding balance and funding standard carryover balance) equals or exceeds the funding target, section 430(a)(2) defines the minimum required contribution as the plan's target normal cost for the plan year reduced (but not below zero) by the amount of the excess.

Under section 430(d), except as otherwise provided in section 430(i)(1) (regarding at-risk status), a plan's funding target for a plan year is the present value of all benefits accrued or earned under the plan as of the beginning of the plan year.

Prior to amendment by WRERA '08, section 430(b) defined a plan's target normal cost for a plan year as the present value of all benefits expected to accrue or be earned under the plan during the plan year (with any increase in any benefit attributable to services performed in a preceding plan year by reason of a compensation increase during the current plan year treated as having accrued during the current plan year). Section 101(b)(2) of WRERA '08 amended section 430(b) to modify the definition of a plan's target normal cost by adding the amount of plan-related expenses expected to be paid from plan assets during the plan year, and by subtracting the amount of mandatory employee contributions expected to be made during the plan year. This modification applies to plan years beginning after December 31, 2008; however, a plan sponsor is permitted to elect to apply this modification beginning with the first plan year beginning after December 31, 2007.

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)(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. An employer that makes contributions for a plan year that exceed the minimum required contribution for the year is permitted in certain circumstances to use those excess contributions in order to satisfy the minimum funding requirement in a subsequent plan year. However, section 430(f)(6)(iii) provides that contributions required to avoid a benefit restriction under section 436 are disregarded for purposes of determining the extent to which contributions for a plan year exceed the minimum required contribution for the plan year. 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.

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 a new restriction on the ability of a poorly funded plan to use the prefunding balance and the funding standard carryover balance as a credit against the minimum required contribution for a plan year. Under section 430(f)(3)(C), the prefunding balance or funding standard carryover balance can only be used for a plan year if the value of plan assets for the preceding plan year (after subtracting the prefunding balance) was at least 80 percent of the funding target (determined without regard to the at-risk rules of section 430(i)) for that preceding 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 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 plan assets, section 430(f)(5) permits an employer to elect to reduce those balances.

Section 430(g)(1) provides that all determinations made with respect to minimum required contributions for a plan year (such as the value of plan assets and liabilities) are made as of the plan's valuation date. Section 430(g)(2) provides that, other than for plans with 100 or fewer participants (determined as provided in section 430(g)(2)(B) and (C)), the valuation date for a plan year must be the first day of the plan year. Under section 430(g)(2)(B), all defined benefit pension plans (other than multiemployer plans) maintained by the employer, a predecessor employer, or by any member of the employer's controlled group are treated as a single plan for this purpose, but only participants with respect to the employer or member of the controlled group are taken into account.

Section 430(g)(3) provides rules regarding the determination of the value of plan assets for purposes of section 430. Under section 430(g)(3)(A), except as otherwise provided in section 430(g)(3)(B), the fair market value of plan assets must be used for this purpose. As an alternative to the use of fair market value, section 430(g)(3)(B) permits the use of an actuarial value of assets based on the average of fair market values, but only if such method is permitted under regulations prescribed by the Secretary, does not provide for averaging of such values over more than the period beginning on the last day of the 25th month preceding the month in which the valuation date occurs and ending on the valuation date (or a similar period in the case of a valuation date that is not the 1st day of a month), and does not result in a determination of the actuarial value of plan assets that, at any time, is lower than 90 percent or greater than 110 percent of the fair market value of plan assets as of the valuation date.

Under section 430(g)(4), if a contribution made after the valuation date for the current plan year is a contribution for a preceding plan year, the contribution is taken into account in determining the value of plan assets for the current plan year. For 2009 and future plan years, only the present value (determined as of the valuation date for the current plan year, using the plan's effective interest rate for the preceding plan year) of the contributions made for the preceding plan year is taken into account. If any contributions for the current plan year are made before the valuation date (which could only occur for a small plan with a valuation date that is not the first day of the plan year), plan assets as of the valuation date must exclude those contributions and also must exclude interest on those contributions (determined at the plan's effective interest rate for the plan year) for the period between the date of the contribution and the valuation date. Under section 430(h)(2)(A), a plan's effective interest rate for a plan year is defined as the single interest rate that, if used to determine the present value of the benefits taken into account in determining the plan's funding target for the plan year in lieu of the interest rates under section 430(h)(2), would result in an amount equal to the plan's funding target determined for the plan year under section 430(d).

Under section 430(h)(1), the determination of any present value or other computation under section 430 is to be made on the basis of actuarial assumptions and methods each of which is reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best estimate of anticipated experience under the plan.

Section 430(h)(2) specifies the interest rates that must be used in determining a plan's target normal cost and funding target. Under section 430(h)(2)(B), present value is determined using three interest rates (segment rates) for the applicable month, each of which applies to benefit payments expected to be paid during a certain period. The first segment rate applies to benefits reasonably determined to be payable during the 5-year period beginning on the first day of the plan year. The second segment rate applies to benefits reasonably determined to be payable during the 15-year period following the initial 5-year period. The third segment rate applies to benefits reasonably determined to be payable after the end of that 15-year period.

Section 430(h)(2)(C) defines each segment rate as a single interest rate determined for a month by the Treasury Department on the basis of the corporate bond yield curve for the month. Under section 430(h)(2)(D), the corporate bond yield curve for a month is to be prescribed by the Treasury Department and is to reflect the average, for the 24-month period ending with the preceding month, of yields on investment grade corporate bonds with varying maturities that are in the top three quality levels available. Section 430(h)(2)(D)(ii) provides an alternative to the use of the three segment rates, under which the corporate bond yield curve (determined without regard to the 24 month average) is substituted for the segment rates.

Section 430(h)(2)(G) provides a transition rule for plan years beginning in 2008 and 2009 (other than for plans where the first plan year begins on or after January 1, 2008). Under this transition rule, the interest rates to be used in the valuation are based on a blend of the segment rates and the long-term corporate bond rates used for plan

years prior to the effective date of PPA '06. Under section 430(h)(2)(G)(iv), a plan sponsor may elect to have this transition rule not apply.

Section 430(i) sets forth special rules that apply to a plan that is in at-risk status. If a plan is in at-risk status, then special assumptions must be used in determining the plan's funding target and target normal cost, a loading factor is applied to the plan's liabilities in certain cases, and, under section 409A(b)(3), restrictions apply to the employer's ability to set aside assets for purposes of paying deferred compensation to a covered employee under a nonqualified deferred compensation plan.

Under section 430(i)(4), a plan is in at-risk status for a year if, for the preceding year: (1) The plan's FTAP, determined without regard to the at-risk assumptions, was less than 80 percent (with a transition rule discussed in the next sentence); and (2) the plan's FTAP, determined using the at-risk assumptions (without regard to whether the plan was in at-risk status for the preceding year), was less than 70 percent. Under a transition rule, reduced percentages apply for plan years beginning before 2011 instead of 80 percent in the first part of the test for determining at-risk status. Under section 430(i)(4), in the case of plan years beginning in 2008, the plan's FTAP for the preceding plan year is to be determined under rules provided by the Treasury Department.

Under section 430(i)(6), the at-risk rules do not apply if a plan had 500 or fewer participants on each day during the preceding plan year. For this purpose, the number of participants is determined using the same rules as apply for determining whether a plan is a small plan for purposes of eligibility for the use of a valuation date other than the first day of the plan year. If a plan is in at-risk status, the plan's funding target and target normal cost are determined (under section 430(i)(1) and (2)) using special actuarial assumptions. Under these assumptions, all employees who are not otherwise assumed to retire as of the valuation date, but who will be eligible to elect to commence benefits in the current and 10 succeeding plan years, are assumed to retire at the earliest retirement date under the plan, but not before the end of the current plan year. In addition, all employees are assumed to elect the form of retirement benefit available under the plan for each assumed retirement age that results in the highest present value.

The funding target of a plan in at-risk status for a plan year is generally the sum of: (1) The present value of all benefits accrued or earned as of the beginning of the plan year determined using the special assumptions described in this preamble; and (2) in the case of a plan that has been in at-risk status for at least 2 of the 4 preceding plan years, a loading factor. That loading factor is equal to the sum of: (1) $700 multiplied by the number of participants in the plan; plus (2) 4 percent of the funding target determined as if the plan were not in at-risk status. The target normal cost of a plan in at-risk status for a plan year is generally the sum of: (1) The present value of benefits expected to accrue or be earned under the plan during the plan year; determined using the special assumptions described in this preamble; and (2) in the case of a plan that has been in at-risk status for at least 2 of the 4 preceding plans years, a loading factor of 4 percent of the present value of all benefits under the plan that accrue, are earned, or are otherwise allocated to service for the plan year (determined as if the plan were not in at-risk status). The target normal cost of a plan in at-risk status is adjusted for plan-related expenses expected to be paid from plan assets during the plan year and mandatory employee contributions expected to be made during the plan year under the same rules that apply to plans that are not in at-risk status.

Under section 430(i)(3), the funding target of a plan in at-risk status and the target normal cost of a plan in at-risk status are never less than the respective funding target and target normal cost determined without regard to the at-risk rules. In addition, if a plan has been in at-risk status for fewer than 5 consecutive plan years, a phase-in rule applies to the determination of the funding target and the target normal cost under section 430(i)(5).

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 that is not based on compensation, but only if the rate of increase does not exceed the contemporaneous rate of increase in average wages of 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, 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 benefit accruals under the plan must cease as of the valuation date for the plan year.

1

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.

1

Pursuant to section 203 of WRERA, for the first plan year beginning during the period beginning on October 1, 2008, and ending on September 30, 2009, section 436(e)(1) is applied by substituting the plan's adjusted funding target attainment percentage for the preceding plan year for such percentage for such plan year but only if the adjusted funding target attainment percentage for the preceding plan year is greater.

Section 436(f) sets forth a series of rules relating to contributions required to avoid benefit restrictions. Under section 436(f)(1), an employer is permitted to provide security to the plan (in the form of a surety bond, cash, United States obligations that mature in 3 years or less, or other form 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.

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 AFTAP to avoid a benefit limitation under section 436 (because the result of the election is a higher asset value used to determine the AFTAP). 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), 436(c), and 436(e), but only in the case of a plan maintained pursuant to a collective bargaining agreement. In any of these cases (the election with respect to the limitations under section 436(d) or a deemed election in the case of a plan maintained pursuant to a collective bargaining agreement), the deeming rule applies only if the prefunding balance and funding standard carryover balances are large enough to avoid the application of the 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 (or until the first day of the 10th month, if earlier). Under section 436(h)(3), if any of these limitations did not apply to the plan for the preceding year, but would have applied if the plan's AFTAP for the preceding year was 10 percentage points lower, the plan's AFTAP is presumed to be 10 percentage points lower than the AFTAP for the prior plan year as of the first day of the 4th month of the current plan year (and that day is deemed to be the plan's valuation date for purposes of applying the benefit limitations), unless the plan's enrolled actuary has certified the plan's AFTAP for the current year by that day. 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, those 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 definition of AFTAP. In general, a 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), as added by WRERA '08, provides the Secretary with authority to issue special rules for the application of section 436 in the case of a plan that uses a valuation date other than the first day of the plan year.

Section 436(m) (designated section 436(k) prior to amendment by WRERA '08) 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.

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 certain specified dates. These dates include the date the plan has become subject to a restriction described in the ERISA provisions that are parallel to Code sections 436(b) and 436(d) and, in the case of a plan that is subject to the ERISA provisions that are parallel to Code section 436(e), 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 Code section 436(h)). Under section 101(j) of ERISA, the Secretary of the Treasury can specify other dates under which notice is to be provided. Any notice under section 101(j) of ERISA must 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.

Sections 430 and 436 generally apply to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution and the application of section 436 is delayed for certain plans in accordance with sections 104 through 106 of PPA ’06.

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). 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 anti-cutback requirements of section 411(d)(6) by reason of such amendment, except as otherwise provided by the Secretary of the Treasury.

Proposed regulations regarding the rules for funding balances under section 430(f) and the benefit restrictions for underfunded plans under section 436 were published on August 31, 2007 (REG-113891-07, 72 FR 50544). The regulations were proposed to apply to plan years beginning on or after January 1, 2008. Comments were received regarding the regulations, and a public hearing was held on January 28, 2008.

Proposed regulations regarding the measurement of assets and liabilities for pension funding purposes (generally covering the rules of sections 430(d), (g), (h)(2), and (i)) were published on December 31, 2007 (REG-139236-07, 72 FR 74215). The regulations were proposed to apply to plan years beginning on or after January 1, 2009. Comments were received regarding the regulations, and a public hearing was held on May 29, 2008.

Notice 2008-21 (2008-1 CB 431) provides that the regulations under section 430(f) and 436 will not apply to plan years beginning before January 1, 2009. See § 601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. Notice 2008-21 also provides that the IRS will not challenge a reasonable interpretation of an applicable provision under section 430 or 436 for a plan year beginning in 2008 and provides transitional guidance with respect to years before the regulations are effective.

On December 23, 2008, WRERA ’08 was enacted. WRERA ’08 contains technical corrections and other changes to the rules of sections 430 and 436, including a modification to the asset valuation method set forth in section 430(g)(3)(B). Notice 2009-22 (2009-14 IRB 741) provides interim rules regarding the asset valuation method as modified by WRERA ’08.

Explanation of Provisions

I. Overview

These regulations finalize the rules proposed in REG-113891-07 (published August 31, 2007), regarding funding balances and benefit restrictions for underfunded plans, and the rules proposed in REG-139236-07 (published December 31, 2007), regarding measurement of assets and liabilities for pension funding purposes, with certain revisions. The Treasury Department and the IRS published proposed regulations relating to other portions of the rules under section 430 (including sections 430(a), (c), and (j)) on April 15, 2008 (REG-108508-08, 72 FR 20203). Those regulations will be finalized separately.

II. Section 1.430(d)-1 Determination of Funding Target and Target Normal Cost

Section 1.430(d)-1 generally adopts the rules set forth in the proposed regulations for determining the funding target and the target normal cost under sections 430(b) and 430(d) for a plan that is not in at-risk status, including rules relating to the application of actuarial assumptions described in sections 430(h)(1) and 430(h)(4).

The final regulations generally adopt the definition of target normal cost for a plan that is not in at-risk status that was set forth in the proposed regulations. However, the final regulations contain modifications to this definition to reflect amendments made by WRERA ’08. Under the proposed regulations, plan administrative expenses would not have been taken into account in determining a plan's target normal cost or funding target for the plan year. Under the final regulations, the target normal cost of a plan for the plan year is the present value (determined as of the valuation date) of all benefits under the plan that accrue during, are earned during, or are otherwise allocated to service for the plan year, subject to certain special adjustments as added by section 101(b)(2) of WRERA ’08. These special adjustments are optional for plan years beginning during 2008, but are required to be made for later plan years.

Under the special adjustments, the target normal cost of the plan for the plan year is adjusted (not below zero) by adding the amount of plan-related expenses expected to be paid from plan assets during the plan year, and by subtracting the amount of any mandatory employee contributions expected to be made during the plan year. For this purpose, the final regulations reserve the issue of the definition of plan-related expenses, which is expected to be addressed in forthcoming proposed regulations.

The regulations clarify that the benefits taken into account in determining target normal cost are the benefits that are accrued, earned, or otherwise allocated to service beginning with the first day of the plan year through the valuation date, plus benefits that are expected to accrue, be earned, or otherwise allocated to service during the remainder of the plan year. Thus, for a plan with a valuation date other than the first day of the plan year, the actual benefits earned during the part of the year before the valuation date must be included in the target normal cost. The final regulations generally adopt the definition of the funding target for a plan that is not in at-risk status as set forth in the proposed regulations, but with a few clarifications that take into account comments received on the proposed regulations. Under the regulations, the funding target of a plan for the plan year is the present value (determined as of the valuation date) of all benefits under the plan that have been accrued, earned, or are otherwise allocated to years of service prior to the first day of the plan year.

Under the proposed regulations, the definition of a plan's FTAP was set forth in proposed § 1.430(i)-1. These final regulations include this definition in § 1.430(d)-1, and the definition is cross-referenced in §§ 1.430(i)-1 and 1.436-1. Under the final regulations, except as otherwise provided in a transition rule, the FTAP of a plan for a plan year is a fraction (expressed as a percentage), the numerator of which is the value of plan assets for the plan year after subtraction of the plan's funding balances under section 430(f)(4)(B) and § 1.430(f)-1, and the denominator of which is the funding target of the plan for the plan year (determined without regard to the at-risk rules under section 430(i) and § 1.430(i)-1).

The regulations provide transition rules for determining a plan's FTAP for the 2007 plan year. These rules are generally the same as the rules set forth in the proposed regulations under section 430(i) for determining a plan's FTAP for the last plan year before section 430 applies to the plan. However, the final regulations differ from the proposed regulations in the transition rules that apply for the determination of a plan's FTAP for a plan year that begins on or after January 1, 2008, but for which section 430 does not apply for purposes of determining the plan's minimum required contribution. In such a case, the FTAP is determined for that plan year in the same manner as for a plan to which section 430 applies to determine the plan's minimum required contribution, except that the value of plan assets that forms the FTAP numerator is determined without subtraction of the funding standard carryover balance or the credit balance under the funding standard account. These rules are needed to enable a plan described in sections 104 through 106 of PPA '06 to disclose its FTAP for purposes of the annual funding notice under section 101(f) of ERISA.

2

2

Section 430(i)(4) provides for special rules to apply in determining a plan's FTAP only for plan years beginning during 2008. Accordingly, the regulations limit the use of the special rule under which the plan's FTAP is determined based on the plan's current liability to the determination of the plan's FTAP for the 2007 plan year, even for a plan described in sections 104 through 106 of PPA '06 for which section 430 does not apply for purposes of determining a plan's minimum required contribution until a plan year after the 2008 plan year.

The regulations adopt the special rule set forth in the proposed regulations for determining the FTAP for a new plan. Under the final regulations, if the funding target of the plan is equal to zero for the plan year, the FTAP is equal to 100 percent for the plan year. Unlike the proposed regulations, the final regulations do not limit the application of this rule to a plan that has no predecessor plan because of concerns that it is not always appropriate to carry over the FTAP from the predecessor plan.

The final regulations contain rules regarding the determination of present value in order to clarify the application of various rules that were set forth in the proposed regulations. Under the regulations, the present value of a benefit with respect to a participant that is taken into account under the regulations is determined as of the valuation date by multiplying the amount of that benefit by the probability that the benefit will be paid at a future date and then discounting the resulting product using the appropriate interest rate. The probability that the benefit will be paid with respect to the participant at that future date is determined using actuarial assumptions as to the probability of future service, advancement in age, and other events (such as death, disability, termination of employment, and selection of an optional form of benefit) that affect whether the participant or beneficiary will be eligible for the benefit and whether the benefit will be paid at that future date.

As under the proposed regulations, these regulations provide that the benefits taken into account in determining the funding target and the target normal cost are all benefits earned or accrued under the plan that have not yet been paid as of the valuation date, including retirement-type and ancillary benefits. The benefits taken into account are based on the participant's or beneficiary's status (such as active employee, vested or partially vested terminated employee, or disabled participant) as of the valuation date, and those benefits are allocated to funding target or target normal cost.

In order to determine a plan's funding target and target normal cost, the future benefits to be paid from the plan must be allocated among prior plan years (in which case they will be taken into account in determining the funding target for the current plan year), the current plan year (in which case they will be taken into account in determining the target normal cost for the current plan year), and future plan years (in which case they will not be taken into account in determining either the funding target or the target normal cost for the current plan year). The final regulations adopt the rules set forth in the proposed regulations for this allocation of benefits where benefits are a function of the accrued benefit and where benefits are a function of service, but the final regulations modify those rules for benefits in other circumstances.

To the extent that the amount of a benefit that is expected to be paid is a function of the accrued benefit, the amount of the benefit taken into account in determining the funding target for a plan year under the final regulations is determined by applying that function to the accrued benefit as of the first day of the plan year, and the portion of the benefit that is taken into account in the target normal cost for the plan year is determined by applying that function to the increase in the accrued benefit during the plan year. To the extent that the amount of a benefit that is expected to be paid is not a function of the accrued benefit but is a function of the participant's service, the portion of the benefit that is taken into account in determining the funding target for the plan year under the final regulations is determined by applying that function to the participant's service as of the first day of the plan year, and the portion of the benefit that is taken into account in determining the target normal cost for the plan year is determined by applying that function to the increase in the participant's years of service during the plan year. For a benefit that is determined as the excess of a function of the participant's service over a function of the participant's accrued benefit, the amount of the funding target and the target normal cost attributable to the portion of the benefit that is a function of the accrued benefit is determined pursuant to the rules that apply to such benefits and the amount of the funding target and the target normal cost attributable to the net benefit (the excess of the benefit that is a function of service over the benefit that is a function of accrued benefit) is determined pursuant to the rules that apply to a benefit that is a function of service.

The proposed regulations included rules for allocating benefits where the amount of a benefit that is expected to be paid is neither a function of the accrued benefit at the time the benefit is expected to be paid nor a function of the participant's service at that time. Under those rules, the benefit would have been allocated proportionately over the years until the participant met the age and service conditions for eligibility for the benefit. A number of commenters suggested that this allocation yielded inappropriate results in certain cases. In response to these comments, the final regulations provide that, to the extent the amount of a benefit that is expected to be paid is neither a function of the accrued benefit nor a function of the participant's service (and is not the excess of a function of the participant's service over a function of the accrued benefit), the portion of the participant's benefit that is taken into account in determining the funding target for a plan year is equal to the total benefit multiplied by the ratio of the participant's years of service as of the first day of the plan year to the years of service the participant will have at the time of the event that causes the benefit to be payable (whether the benefit is expected to be paid at the time of that decrement or at a future time), and the portion of the benefit that is taken into account in determining the

target normal cost for the plan year is the increase in the proportionate benefit attributable to the increase in the participant's years of service during the plan year.

Under the proposed regulations, the determination of the funding target and the target normal cost would not have taken into account any benefit limitations or anticipated benefit limitations under section 436. The reason for this provision was to avoid the circularity in calculations that would result from calculating the funding target based on the imposition of benefit restrictions for purposes of determining whether the benefit restrictions need to be imposed. In response to comments, the final regulations contain modifications to the rules regarding recognition of the section 436 benefit restrictions. In particular, the final regulations provide that benefits that were not paid or accrued prior to the valuation date as a result of the benefit limitations are generally not included in the funding target and the target normal cost, but that the determination of the funding target and the target normal cost is not permitted to anticipate any future applications of the section 436 benefit restrictions.

The final regulations retain the treatment from the proposed regulations regarding the non-recognition of the benefit accrual limitations of section 436(e) in determining target normal cost. This has the effect of requiring an employer sponsoring a plan that provides for ongoing benefit accruals to include the present value of those accruals in the target normal cost, even if the plan is temporarily not permitted to provide for accruals, with the goal of improving the plan's funded status. However, if the plan sponsor actually adopts a plan freeze, the target normal cost will reflect that plan freeze. In connection with this provision, the final regulations provide that if the plan contains a provision under which missed benefit accruals are automatically restored once the plan's AFTAP is above 60 percent (taking into account the missed benefit accruals), then any missed benefit accruals for the prior plan year are taken into account in determining the funding target if, as of the valuation date, the period of the missed benefit accruals is 12 months or less. The final regulations also contain rules regarding restrictions that arise as a result of benefit limitations that are imposed under section 401(a)(32) as a result of a liquidity shortfall and benefit limitations that are imposed under § 1.401(a)(4)-5(b) with respect to certain highly compensated employees.

As under the proposed regulations, these regulations provide that a plan generally is required to reflect in the plan's funding target and target normal cost the liability for benefits that are funded through insurance contracts held by the plan, and to include the corresponding insurance contracts in plan assets.

3

As an alternative treatment of benefits that are funded through insurance contracts, the regulations provide that the plan is permitted to exclude benefits provided under such contracts from the plan's funding target and target normal cost and to exclude the corresponding insurance contracts from plan assets. This treatment is only available with respect to insurance purchased from an insurance company licensed under the laws of a State and only to the extent that a participant's or beneficiary's right to receive those benefits is an irrevocable contractual right under the insurance contract, based on premiums paid to the insurance company prior to the valuation date under the insurance contracts. Thus, the alternative treatment is not available if the plan trustee can surrender a contract to the insurer for its cash value because the participant's or beneficiary's rights to receive those benefits is not an irrevocable contractual right. A plan's treatment of benefits funded through insurance contracts pursuant to either of these methods is part of the plan's funding method. Accordingly, that treatment can be changed only with the consent of the Commissioner.

3

The PBGC has informed the IRS and Treasury Department that this inclusion of insurance contracts in plan assets and the associated benefit liabilities in the funding target does not apply for purposes of Title IV of ERISA and its regulations, which generally require that, if an insurer makes an irrevocable commitment to provide all benefit liabilities with respect to an individual, those benefits cease to be benefit liabilities of the plan, the individual is no longer a plan participant, and the irrevocable commitment is excluded from plan assets.

Except as otherwise provided, the determination under the regulations of a plan's funding target and target normal cost for a plan year are determined based on plan provisions that are adopted no later than the valuation date for the plan year and that take effect during that plan year. For example, a plan amendment adopted on or before the valuation date for the plan year that has an effective date occurring in the current plan year is taken into account in determining the funding target and the target normal cost for the current plan year if it is permitted to take effect under the rules of section 436(c) for the current plan year; however, an amendment is not taken into account if it does not take effect until a future plan year.

The regulations apply the rules under section 436(c) (as described in section VII.C of this preamble) to determine when an amendment that increases benefits takes effect. For an amendment that decreases benefits, the amendment takes effect under a plan on the first date on which the benefits of any individual who is or could be a participant or beneficiary under the plan would be decreased due to the amendment if the individual were on that date to satisfy the applicable conditions for the benefits.

The regulations provide that section 412(d)(2) applies for purposes of determining whether a plan amendment is treated as having been adopted on the first day of the plan year (including a plan amendment adopted no later than 2

1/2

months after the close of the plan year). This is consistent with the IRS's prior interpretations of the pre-PPA '06 counterpart to section 412(d)(2) (section 412(c)(8) as in effect prior to amendments made by PPA '06) as set forth in Rev. Rul. 79-325 (1979-2 CB 190), which provides that section 412(c)(8) applies to plan amendments made during the plan year (as well as to plan amendments made within 2

1/2

months after the end of the plan year). Thus, if an amendment is adopted after the valuation date for a plan year (and no later than 2

1/2

months after the close of the plan year) but takes effect during that plan year, the full increase in liability is taken into account as of the valuation date for that plan year if a section 412(d)(2) election is made, and none of the increase in liability is taken into account as of the valuation date for that plan year if no section 412(d)(2) election is made.

Accordingly, the rule in section 2.02 of Revenue Ruling 77-2 (1977-1 CB 120) under which the charges for a plan year are based on a blend of the charges determined with and without regard to the plan amendment, and the alternative to that rule in section 3 of Revenue Ruling 77-2, no longer apply. However, the rule in section 2.01 of Revenue Ruling 77-2 (under which a change in benefit structure that does not become effective until a future plan year is disregarded) continues to apply. This is because section 430 does not contain any provision that corresponds to section 412(c)(12) as in effect prior to amendments made by PPA '06 (under which the provisions of a collective bargaining agreement were taken into account for funding purposes before the corresponding plan amendments became effective).

The regulations clarify that if an amendment is taken into account for a plan year, then the allocation of benefits that is used for purposes of determining the funding target and the target normal cost for the plan year is based on the plan as amended. Thus, the present value of the increase in the participant's accrued benefit attributable to service before the beginning of the plan year is taken into account in the funding target for the year.

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4

The regulations do not address the effect on the determination of a plan's funding shortfall of an amendment that is permitted to take effect on account of a contribution under section 436(c)(2).

To address a concern regarding avoidance of the benefit restrictions under section 436(c), the final regulations contain a new rule regarding amendments adopted after the valuation date that increase the target normal cost for the plan year. Under this rule, in any case in which an increase in the target normal cost as the result of a plan amendment made after the valuation date would have caused the benefit restrictions of section 436(c) to apply if the increase were included in the plan's funding target (after taking into account all unpredictable contingent event benefits permitted to be paid for unpredictable contingent events that occurred during the current plan year and plan amendments that went into effect in the current plan year), the amendment must be taken into account in determining the plan's funding target and target normal cost for the plan year. This rule is necessary to prevent the avoidance of the benefit restrictions of section 436(c) by means of a mid-year plan amendment that purports not to increase benefits earned prior to the beginning of the plan year (so that the amendment does not increase the funding target for the plan year and the amount required to “buy up” the amendment under section 436(c)(2) by paying the increase to the funding target on account of the amendment would be zero).

Like the proposed regulations, the regulations require all currently employed plan participants, formerly employed plan participants (including retirees and terminated vested participants), and other individuals currently entitled to benefits under the plan to be included in the valuation. Unlike § 1.412(c)(3)-1(c)(3)(ii), the regulations do not permit exclusion from the valuation of those plan participants who could have been excluded from participation in the plan under the rules of section 410(a). However, the final regulations adopt the rules of § 1.412(c)(3)-1(c)(3)(iii) (relating to the exclusion of terminated employees who do not have a vested benefit under the plan and whose service might be taken into account in future years upon return to service, but only if the plan's experience as to separated employees returning to service has been such that the exclusion would not be unreasonable) and the rules of § 1.412(c)(3)-1(d)(2) (under which the future participation in the plan of current employees who are not yet participants is permitted to be anticipated). Whether former employees who are terminated with partially vested benefits are assumed to return to service is determined under the same rules that apply to former employees without vested benefits.

The regulations provide that the determination of any present value or other computation under section 430 must be made on the basis of actuarial assumptions and a funding method. Except as specifically provided, the same actuarial assumptions and funding method must be used for all computations under sections 430 and 436.

The final regulations cross reference other regulations for the details of the statutorily specified interest rates, mortality tables, and actuarial assumptions that apply to plans in at-risk status. Under the final regulations, with respect to the actuarial assumptions used for the plan other than those that are specified by statute, each of those actuarial assumptions must be reasonable (taking into account the experience of the plan and reasonable expectations). In addition, the actuarial assumptions (other than the statutorily specified assumptions), in combination, must offer the plan's enrolled actuary's best estimate of anticipated experience under the plan. The final regulations provide that, in the case of a plan which has fewer than 100 participants and beneficiaries who are not in pay status, the actuarial assumptions are permitted to assume no pre-retirement mortality, but only if that assumption would be a reasonable assumption.

The regulations provide that actuarial assumptions established for a plan year cannot subsequently be changed for that plan year unless the Commissioner determines that the assumptions that were used are unreasonable. Similarly, the regulations provide that a funding method established for a plan year cannot subsequently be changed for that plan year unless the Commissioner determines that the use of that funding method for that plan year is impermissible. For this purpose, actuarial assumptions and funding methods are established by the timely completion (and filing, if required) of the actuarial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”) for a plan year under section 6059. If the Schedule SB is not completed (and filed, if required) by the deadline, then the prior plan year actuarial assumptions and methods will continue to apply, unless the Commissioner permits or requires other actuarial assumptions or another funding method permitted under section 430 to be used for the current plan year.

The regulations provide that a plan's funding method includes not only the overall funding method used by the plan, but also each specific method of computation used in applying the overall method. However, the choice of which actuarial assumptions are appropriate to the overall method or to the specific method of computation is not a part of the funding method. The assumed earnings rate used for purposes of determining the actuarial value of assets under section 430(g)(3)(B) is treated as an actuarial assumption, rather than as part of the funding method.

In accordance with section 430(h)(4), the regulations provide rules relating to the probability that benefit payments will be paid as single sums or other optional forms under a plan and the impact of that probability on the determination of the present value of those benefit payments under section 430. In general, any determination of present value or any other computation under the regulations must take into account the probability that future benefit payments under the plan will be made in the form of optional forms of benefits provided under the plan (including single-sum distributions), determined on the basis of the plan's experience and other related assumptions, and any difference in the present value of future benefit payments that results from the use of actuarial assumptions in determining benefit payments in any such optional form of benefits that are different from those prescribed by section 430(h).

The proposed regulations would have provided that, in the case of a distribution that is subject to section 417(e)(3) and that is determined using the applicable interest rates and applicable mortality table under section 417(e)(3), the computation of the present value of that distribution is treated as having taken into account any difference in present value that results from the use of actuarial assumptions

that are different from those prescribed by section 430(h) if the present value of the distribution is determined by valuing, using special actuarial assumptions, the annuity (either the deferred or immediate annuity) that is used under the plan to determine the amount of the distribution. The final regulations adopt that method and clarify that its use is mandatory for benefits determined using the section 417(e) actuarial assumptions.

Under this special computation, for the period beginning with the annuity starting date for the distribution, the applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date is substituted for the mortality table under section 430(h)(3) that would otherwise be used. In determining the present value of a distribution, the final regulations adopt the rules in the proposed regulations and provide that if a plan uses the generational mortality tables under § 1.430(h)(3)-1(a)(4) or § 1.430(h)(3)-2, the plan is permitted to use a 50-50 male-female blend of the annuitant mortality rates under the § 1.430(h)(3)-1(a)(4) generational mortality tables in lieu of the applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date.

In addition, under this special computation, the valuation interest rates under section 430(h)(2) are used for purposes of discounting the projected annuity payments from their expected payment dates to the valuation date (rather than the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit).

However, a plan is permitted to make adjustments to the interest rates in order to reflect differences between the phase-in of the section 430(h)(2) segment rates under section 430(h)(2)(G) and the adjustments to the segment rates under section 417(e)(3)(D)(iii).

The proposed regulations would have provided that, in the case of a distribution that is subject to section 417(e)(3) but is determined as the greater of the benefit determined using the assumptions required under section 417(e)(3) and some other actuarial basis, the computation of present value must take into account the extent to which the present value of the distribution is greater than the present value determined using this annuity substitution method. Commenters requested a similar rule where the value of the distribution is lower because of the use of different actuarial assumptions that are not more favorable, citing the situation where section 415 may require the use of less favorable actuarial assumptions. In response to these concerns, the final regulations provide that, if a distribution that is subject to section 417(e)(3) is determined on a basis other than using the applicable interest rates and the applicable mortality table under section 417(e)(3), then the computation of present value must take into account the extent to which the present value of the distribution is different from the present value determined using this annuity substitution method.

As under the proposed regulations, the final regulations provide that, in the case of an applicable defined benefit plan described in section 411(a)(13)(C), the amount of a future distribution is based on the amount determined by projecting the future interest credits or equivalent amounts under the plan's interest crediting rules using actuarial assumptions that satisfy the requirements of the regulations. Thus, the present value of a future distribution is not necessarily the current amount of a participant's hypothetical account balance. Commenters requested that various safe harbors be provided for making this determination. The IRS and the Treasury Department believe that this determination should be made using the actuary's best estimate of the projected future interest credits, and that the use of broadly applicable safe harbors for this purpose is not appropriate.

In the case of a single-sum distribution determined under the rules of section 411(a)(13)(A), the amount of the future distribution is equal to the projected account balance at the expected date of payment calculated in accordance with the regulations. In the case of a distribution determined as an annuity, the regulations provide that the amount of the future distribution must be determined by converting the projected account balance to an annuity using the plan's annuity conversion provisions and actuarial assumptions that satisfy the requirements of the regulations.

The regulations provide that, if the plan bases the conversion of the projected account balance to an annuity using the applicable interest rates and applicable mortality table under section 417(e)(3), the future annuity is determined by dividing the projected account balance (or accumulated percentage of final average compensation) by an annuity factor corresponding to the assumed form of payment using, for the period beginning with the annuity starting date, the current applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date (in lieu of the mortality table under section 430(h)(3) that would otherwise be used) and the valuation interest rates under section 430(h)(2) (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit). In determining the amount of a future annuity for this purpose, if a plan uses the generational mortality tables under § 1.430(h)(3)-1(a)(4) or § 1.430(h)(3)-2, the plan is permitted to use a 50-50 male-female blend of the annuitant mortality rates under the § 1.430(h)(3)-1(a)(4) generational mortality tables in lieu of the applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date. In the case of a plan that determines an annuity under the regulations using a variable interest rate or rates other than the applicable interest rates under section 417(e)(3), the amount of the annuity must be based on actuarial assumptions that satisfy the requirements of the regulations.

Some commenters maintained that unpredictable contingent event benefits should not be taken into account for minimum funding purposes before the occurrence of the unpredictable contingent event. The final regulations provide that any determination of present value or any other computation under this section must take into account, based on information as of the valuation date, the probability that future benefits (or increased benefits) under the plan will become payable due to the occurrence of an unpredictable contingent event (as described in § 1.436-1(j)(9)). However, if, as of the valuation date, the likelihood of the occurrence of the event is de minimis, the regulations permit the use of a zero probability of the occurrence of the event.

The regulations provide that any reasonable technique can be used to determine the present value of the benefits expected to be paid during a plan year, based on the interest rates and mortality assumptions applicable for the plan year. For example, the present value of a monthly retirement annuity payable at the beginning of each month can be determined using estimating techniques such as the standard actuarial approximation that reflects 13/24ths of the discounted expected payments for the year as of the beginning of the year and 11/24ths of the discounted expected payments for the year as of the end of the year; or by assuming that the payment is made in

the middle of the year. In the case of a participant for whom there is a less than 100 percent probability that the participant will terminate employment during the plan year, for purposes of determining the benefits expected to accrue, be earned, or otherwise allocated to service during the plan year (which are used to determine the target normal cost), it is permissible to assume the participant will not terminate during the plan year, unless using this method of calculation would be unreasonable.

Like the proposed regulations, the final regulations reflect the provisions of section 430(h)(5), requiring approval of the Commissioner for changes in actuarial assumptions for certain large plans. Under the regulations, except as otherwise provided, any change in actuarial assumptions used to determine a plan's funding target for a plan year cannot be changed from the actuarial assumptions that were used for the preceding year without the approval of the Commissioner if the plan is sponsored by a member of a controlled group which maintains plans with over $50 million in unfunded vested benefits and the change in assumptions results in a decrease in the plan's funding shortfall (within the meaning of section 430(c)(4)) for the current plan year (disregarding the effect on the plan's funding shortfall resulting from changes in interest and mortality assumptions) that exceeds $50,000,000, or that exceeds $5,000,000 and is 5 percent or more of the funding target of the plan before such change.

The proposed regulations did not contain an exception to this rule for a plan exiting at-risk status. Commenters maintained that a plan exiting at-risk status should be able to resume use of its previously used actuarial assumptions without obtaining the Commissioner's approval. To address these concerns, the final regulations provide that a plan that is not in at-risk status for the current plan year and that was in at-risk status for the prior plan year (but not for a period of 5 or more consecutive plan years) is granted automatic approval to use the actuarial assumptions that were applied before the plan entered at-risk status and that were used in combination with the required at-risk assumptions during the period the plan was in at-risk status.

These regulations provide automatic approval for changes in funding method for the first plan year section 430 applies to determine the minimum required contribution for the plan (the first plan year beginning in 2008, or a later year for plans described in sections 104 through 106 of PPA '06). The regulations also provide automatic approval for changes in funding method for the first plan year that a plan applies all the provisions of the regulations under section 430(d), section 430(f), section 430(g), section 430(i), and section 436 (which could be the first plan year beginning on or after January 1, 2010 or an earlier plan year). Thus, a plan can receive automatic approval for a change in funding method for the first plan year beginning on or after January 1, 2009, if it applies all of these regulation provisions, without regard to whether it applies the provisions of § 1.430(h)(2)-1 for that plan year. In addition, the regulations provide automatic approval for a change of funding method that is necessary to reflect the new allocation rules for benefits under § 1.430(d)-1(c)(1)(ii).

III.

Section 1.430(f)-1 Effect of Prefunding Balance and Funding Standard Carryover Balance

Section 1.430(f)-1 of these regulations provides rules relating to the application of prefunding and funding standard carryover balances under section 430(f). The regulations generally adopt the rules that were set forth in the corresponding proposed regulations.

Subject to the limitations otherwise provided, the regulations provide that in the case of any plan year with respect to 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 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. The regulations also provide rules that apply where the plan sponsor elects to use all or a portion of the prefunding balance or the funding standard carryover balance to satisfy the requirement to make quarterly contributions under section 430(j)(3) that are due after the valuation date. Rules with respect to use of the prefunding balance or funding standard carryover balance to satisfy quarterly contribution requirements with respect to installments due before the valuation date are expected to be addressed in future proposed regulations.

Under the regulations, a plan sponsor is permitted to elect 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, and decreased (but not below zero) by the sum of, as of the first day of a plan year, any amount of the prefunding balance that was used to offset the minimum required contribution of the plan for the preceding plan year and any reduction in the prefunding balance for the plan year. The plan sponsor's initial election to add to the prefunding balance constitutes an election to maintain a prefunding balance (so that no special election is necessary to establish a prefunding balance). The prefunding balance is adjusted further for actual investment return for the plan year.

The regulations provide that if the plan sponsor elects to add to the plan's prefunding balance, as of the first day of a plan year, the prefunding balance is increased by the amount so elected by the plan sponsor. The amount added to the prefunding balance cannot exceed the present value of the excess contribution for the preceding plan year increased for interest.

The present value of the excess contribution for the preceding plan is the excess, if any, of the present value of the employer contributions (other than contributions to avoid or terminate section 436 benefit limitations) to the plan for such preceding plan year over the minimum required contribution for such preceding plan year. In addition, a contribution for a plan year to correct an unpaid minimum required contribution for a prior plan year is not treated as part of the present value of excess contributions. This present value is increased with interest from the valuation date for the preceding plan year to the first day of the current plan year. The regulations provide that the plan's effective interest rate under section 430(h)(2)(A) for the preceding plan year is generally used to calculate the present value of the contributions for the preceding plan year and for adjusting the excess amount.

The proposed regulations would have prohibited an employer from adding to the prefunding balance any amount of contributions that are excess contributions for a plan year solely by reason of a reduction in the minimum required contribution for the year through the use of the prefunding balance or funding standard carryover balance. This rule was intended to preclude 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 adjustment with respect to minimum required contributions for the plan year). Commenters argued that this rule was unwarranted and would

prevent plan sponsors from adding excess contributions to the prefunding balance in situations where balance amounts were used to offset minimum contributions earlier for reasons other than interest arbitrage. The final regulations permit an excess contribution to be added to the prefunding balance for a plan year notwithstanding that the amount is an excess contribution solely because an election is made for that plan year to use the funding standard carryover balance or prefunding balance to offset minimum required contributions (or required installments), but provide that the interest adjustment with respect to such a contribution is made using the plan's actual investment experience for the plan year, rather than the effective interest rate under section 430(h)(2)(A). Thus, the funding standard carryover balance and prefunding balance are adjusted with the plan's actual investment return when the balances are not actually used to satisfy the minimum contribution requirement for a plan year, regardless of whether the plan sponsor makes an election to use the balance to offset the minimum contribution requirement and subsequently replenishes the prefunding balance.

The proposed regulations would have provided that the plan sponsor is permitted to maintain a funding standard carryover balance for a plan that had a positive balance in the funding standard account under section 412(b) (as in effect prior to PPA '06) as of the end of the plan's pre-effective plan year (the plan year immediately preceding the first plan year that section 430 applies for purposes of determining the minimum required contribution for the plan). Some commenters suggested that no formal election should be required in order to maintain a funding standard carryover balance. In response, the regulations provide that a funding standard carryover balance is automatically established for a plan that had a positive balance in the funding standard account under section 412(b) (as in effect prior to PPA '06) as of the end of the pre-effective plan year for the plan. A plan sponsor that does not wish to have the funding standard carryover balance established can elect to reduce it to zero.

The final regulations provide that the plan's funding standard carryover balance as of the beginning of the first effective plan year (the first plan year beginning on or after the date section 430 applies for purposes of determining the minimum required contribution for the plan) is the positive balance in the funding standard account under section 412(b) (as in effect prior to PPA '06) as of the end of the pre-effective plan year for the plan. For subsequent plan years, the funding standard carryover balance is decreased (but not below zero) by the sum of, as of the first day of each plan year, any amount of the funding standard carryover balance that was used to offset the minimum required contribution of the plan for the preceding plan year and any reduction in the funding standard carryover balance for the plan year. The regulations also provide that the funding standard carryover balance is adjusted further to reflect the actual rate of return on plan assets for the preceding plan year.

For both the funding standard carryover balance and the prefunding balance, the regulations provide that the adjustment for investment return is applied to the balance as of the beginning of the preceding plan year after subtracting amounts used to offset the minimum required contribution for the preceding plan year and after any reduction of balances for that preceding plan year. 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.

If a plan's valuation date is not the first day of the plan year, then, for purposes determining a plan's prefunding balance and funding standard carryover balance as of the valuation date, the plan's prefunding balance and funding standard carryover balance (if any) are increased to the valuation date using the plan's effective interest rate under section 430(h)(2)(A) for the plan year. Any elections to reduce the prefunding balance and funding standard carryover balance, to use the prefunding balance and funding standard carryover balance to offset the minimum required contribution for the year, or to add to the prefunding balance occur as of the valuation date for the plan year. After the elections are applied as of the valuation date, the resulting amount of the prefunding balance and funding standard carryover balance is adjusted to the first day of the plan year (discounted using the effective interest rate under section 430(h)(2)(A) for that year) before applying the adjustments for investment experience for the plan year.

The regulations provide that, 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 otherwise provided in the regulations. 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 to use all or any portion of the prefunding balance to offset the minimum required contribution is made for the plan year. In addition, for this purpose, 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.

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, the regulations provide that the specified amount is not subtracted from the value of plan assets for purposes of determining the funding shortfall under section 430(c)(4). 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.

To address questions raised by commenters, the final regulations provide ordering rules regarding the application of use and reduction elections with respect to prefunding and funding standard carryover balances. The regulations provide that the amount of prefunding balance or funding standard carryover balance that may be used to offset the minimum required contribution for the plan year must take into account any decrease in those balances which result from a prior election either to use the prefunding balance or funding standard carryover balance under section 430(f) or to reduce those balances under section 430(f) (including deemed elections under section 436(f)(3) and § 1.436-1(a)(5)).

The regulations describe the application of the ordering rules of section 430(f)(5)(A). Under these rules, an election to reduce the funding standard carryover balance or prefunding balance is deemed to occur on the valuation date for the plan before any election to use the balance to offset the minimum required contribution for the current year. Thus, if an election to use the prefunding balance or funding

standard carryover balance to offset the minimum required contribution for the plan year (including an election to satisfy the quarterly contribution requirement) has been made prior to the election to reduce the prefunding balance or funding standard carryover balance, then the amount available for use to offset the otherwise applicable minimum required contribution for the plan year will be retroactively reduced and may result in a missed quarterly contribution.

If an election is made to reduce the prefunding balance or funding standard carryover balance or to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution with respect to a plan year, a special rule applies to determine the amount of remaining prefunding balance or funding standard carryover balance that may be used to offset the minimum required contribution for the prior plan year. Under this special rule, an election to reduce the prefunding balance or the funding standard carryover balance that is made with respect to the later plan year is taken into account by decreasing the funding standard carryover balance or prefunding balance as of the valuation date for the prior plan year by the prior plan year equivalent of the current year election. The prior plan year equivalent of the current year election is determined by dividing the amount of the current year election by a number equal to 1 plus the rate of investment return for the prior plan year. The funding standard carryover balance and prefunding balance are nonetheless adjusted in accordance with the rules described above, after adjusting for all elections for that prior year. Thus, the amount used to offset the minimum required contribution for the earlier plan year is subtracted from the prefunding balance or funding standard carryover balance as of the valuation date for that year prior to the adjustment for investment return for that plan year, and the amount by which the prefunding balance or funding standard carryover balance is decreased for the second year is based on the elections made for the second year.

Accordingly, under the final regulations, a prefunding balance or a funding standard carryover balance is maintained in a manner that tracks the way the balances are reported on Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”. Thus, the balances at the beginning of the year are increased (by investment experience or by addition to the prefunding balance) or decreased (by elections to use or reduce the balances or by investment experience) at the first day of the next plan year. These increases and decreases are made before any elections (whether made or deemed) are applied for the next plan year.

To the extent that a plan has a funding standard carryover balance greater than zero, the regulations provide that 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 used to offset the minimum required contribution.

The regulations provide that an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution is not available for a plan year if the plan's prior plan year funding ratio is less than 80 percent. The plan's prior plan year funding ratio generally is equal to the 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)).

If the prior plan year was the first year of a new plan and the funding target for the prior plan year was zero, the regulations provide that the prior plan year's funding ratio is deemed to be 80 percent for purposes of this limitation on the use of the prefunding or funding standard carryover balances. Thus, the sponsor of a new plan that has no funding target in its first year can use a prefunding balance that resulted from first year contributions in excess of the target normal cost in order to offset the otherwise minimum required contribution in the second year of the plan. Commentators requested rules with respect to plan mergers and spin-offs. The IRS and the Treasury Department expect to address these issues in future proposed regulations.

The regulations provide that 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. If such an election is made, the amount of those balances that must be subtracted from the value of plan assets will be smaller and, accordingly, the value of plan assets taken into account for purposes of sections 430 and 436 will be larger. 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 plan year funding ratio for the following plan year. Section 436(f)(3) and § 1.436-1(a)(5) provide a rule under which the plan sponsor is deemed to make this election. To the extent that a plan has a funding standard carryover balance greater than zero, no election 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 to reduce its prefunding balance.

Like the proposed regulations, these regulations provide that 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 dollar amounts involved in the election. Thus, a conditional or formula-based election generally does not satisfy the requirements.

The final regulations provide rules regarding the timing of elections to use or reduce the prefunding balance or funding standard carryover balance that are generally the same as under the proposed regulations. Under the final regulations, any election to add to the prefunding balance or to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for a plan year must be made no later than the last date for making the minimum required contribution for the plan year as described in section 430(j)(1). Any election 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. These timing rules establish the latest date that an election can be made. An employer is permitted to make an earlier election, and, in certain circumstances, may need to make such an earlier election in order to timely satisfy a quarterly contribution requirement under section 430(j).

In response to comments received on the desirability of standing elections, the final regulations permit a plan sponsor to provide a standing election in writing to the plan's enrolled actuary to use the funding standard carryover balance and the prefunding balance to

the extent needed to avoid an unpaid minimum required contribution under section 4971(c)(4) taking into account any contributions that are or are not made. In addition, the regulations allow a plan sponsor to provide a standing election in writing to the plan's enrolled actuary to add the maximum amount possible each year to the prefunding balance.

5

Any election made pursuant to a standing election is deemed to occur on the last day available to make the election for the plan year. The regulations provide that any standing election remains in effect for the plan with respect to the enrolled actuary named in the election, unless the standing election is revoked by notice to the plan's enrolled actuary and the plan administrator on or before the date the corresponding election is deemed to occur, or the plan's enrolled actuary who signs the Schedule SB is not the enrolled actuary named in the standing election. If there is a change in enrolled actuary for the plan year which would result in a revocation of the standing election, then the plan sponsor may reinstate the revoked standing election by providing a replacement to the new enrolled actuary by the due date of the Schedule SB of Form 5500.

5

The regulations do not provide for a standing election to be made with respect to quarterly contributions. The issue of standing elections with respect to quarterly contributions will be considered in conjunction with future regulations regarding quarterly contributions.

In general, a plan sponsor's election with respect to the plan's prefunding balance or funding standard carryover balance is irrevocable (and must be unconditional). However, an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for a plan year (including an election to satisfy the quarterly contribution requirements for a plan year) is permitted to be revoked to the extent the amount the plan sponsor elected to use to offset the minimum contribution requirements exceeds the minimum required contribution for a plan year (determined without regard to the offset), if and only if the election is revoked by providing written notification of the revocation to the plan's enrolled actuary and the plan administrator by the end of the plan year (or, for plans with a valuation date other than the first day of the plan year, the deadline for contributions for the plan year as described in section 430(j)(1)). The final regulations defer the deadline for making this revocation for the first plan year beginning in 2008 until the due date (including extensions) of the Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan.” Thus, a plan sponsor that made an election to use the funding standard carryover balance for the first plan year beginning in 2008 to offset the minimum required contribution for that plan year determined prior to the enactment of WRERA '08 has an opportunity to revoke that election to the extent it exceeds the minimum required contribution for that plan year taking into account WRERA '08. However, plan sponsors should note that any such revocation made after the enrolled actuary has certified the AFTAP for the plan year, could result in a change in the AFTAP for that plan year, which could be a material change. If such an excess election is not timely revoked, it has the same effect as an election to reduce the applicable balance to the extent of the excess.

The proposed regulations provided a transition rule for determining a plan's funding ratio for the pre-effective plan year (that is, the plan's prior year funding ratio with respect to the plan's first effective plan year). These regulations adopt this transition rule, but limit its application to the 2007 plan year (rather than apply it to a later plan year for a plan described in sections 104 through 106 of PPA '06). Under the regulations, a plan's funding ratio for the plan year preceding the first plan year beginning on or after January 1, 2008 (the “2007 plan year”) is generally the same as the computation of FTAP for the 2007 plan year. However, the assets are determined without subtracting the funding standard account balance from the plan assets.

IV. Section 1.430(g)-1 Valuation Date and Valuation of Plan Assets

Section 1.430(g)-1 provides rules relating to a plan's valuation date and the valuation of a plan's assets for a plan year under section 430(g). The rules under the regulations relating to valuation dates do not reflect significant changes from those under the proposed regulations. The regulations provide that the determination of the funding target, target normal cost, and value of plan assets for a plan year is made as of the valuation date of the plan for that plan year.

Except in the case of a small plan, the valuation date of a plan for any plan year is the first day of the plan year. For this purpose, a small plan is defined as a plan that, on each day during the preceding plan year, had 100 or fewer participants (including active and inactive participants and all other individuals entitled to future benefits). For purposes of making this determination, all defined benefit plans (other than multiemployer plans as defined in section 414(f)) maintained by an employer or members of the controlled group are treated as one plan, but only participants with respect to that employer are taken into account. The regulations provide that, in the case of the first plan year of any plan, this exception for small plans is applied by taking into account the number of participants that the plan is reasonably expected to have on each day during the first plan year.

The regulations provide that the selection of a plan's valuation date is part of the plan's funding method and, accordingly, may only be changed with the consent of the Commissioner. However, a change of a plan's valuation date that is required by section 430 is treated as having been approved by the Commissioner and does not require the Commissioner's prior specific approval.

Under the regulations, the value of plan assets for purposes of section 430 is determined in one of two ways: As the fair market value of plan assets on the valuation date, or as the average of the fair market values of assets on the valuation date and the adjusted fair market value of assets determined for one or more earlier determination dates, subject to a 90 to 110 percent corridor. The method of determining the value of assets is part of the plan's funding method and, accordingly, may only be changed with the consent of the Commissioner.

The regulations provide that the fair market value of an asset is determined as the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Except as otherwise provided by the Commissioner, any guidance on the valuation of insurance contracts under Subchapter D of Chapter 1 of the Internal Revenue Code applies for purposes of the regulations. Such guidance has been issued in Revenue Procedure 2005-25 (2005-1 CB 962) and Revenue Procedure 2006-13 (2006-1 CB 315).

See

§ 601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin.

The regulations provide rules for the treatment of contributions that are made after the valuation date for a plan year that are attributable to a prior plan year. These rules are generally the same as under the proposed regulations. Under these rules, only the present value of the contributions (discounted using the

effective interest rate for the prior plan year) is included in the value of plan assets. The final regulations clarify that a contribution for a prior plan year is taken into account only if the contribution is made by the deadline for contributions for the immediately preceding plan year under section 430(j). However, for the first plan year that begins on or after January 1, 2008, any such prior plan year contribution is taken into account at the full value without a present value discount, provided it is made by the deadline for contributions under section 412(c)(10), as in effect before amendment by PPA '06.

The regulations also provide rules for the treatment of a contribution that is made before the valuation date of the plan year to which it is attributable. Such a contribution (and any interest on the contribution for the period between the contribution date and the valuation date, determined using the effective interest rate under section 430(h)(2)(A) for the plan year) must be subtracted from plan assets in determining the value of plan assets as of the valuation date. If the result of this subtraction is a number less than zero, the value of plan assets as of the valuation date is equal to zero.

Subject to the plan asset corridor rules, a plan is permitted to determine the value of plan assets on the valuation date as the average of the fair market value of assets on the valuation date and the adjusted fair market value of assets determined for one or more earlier determination dates. The regulations require that the period of time between each determination date (treating the valuation date as a determination date) must be equal and that the period of time cannot exceed 12 months. In addition, the earliest determination date with respect to a plan year cannot be earlier than the last day of the 25th month before the valuation date of the plan year (or a similar period in the case of a valuation date that is not the first day of a month). In a typical situation, the earlier determination dates will be the two immediately preceding valuation dates. However, these rules also permit the use of more frequent determination dates (for example, monthly or quarterly determination dates).

The regulations provide that the adjusted fair market value of plan assets for a prior determination date is the fair market value of plan assets on that date, increased for contributions included in the plan's asset balance on the valuation date that were not included in the plan's asset balance on the earlier determination date, reduced for benefits and all other amounts paid from plan assets during the period beginning with the prior determination date and ending immediately before the valuation date, and adjusted for expected earnings. The fair market value of assets as of a determination date includes any contribution for a plan year that ends with or prior to the determination date that is receivable as of the determination date (but only if the contribution is actually made within 8

1/2

months after the end of the applicable plan year). For this purpose, the present value of a contribution receivable for the applicable plan year is determined using the effective interest rate under section 430(h)(2)(A) for the applicable plan year. For purposes of determining the value of plan assets for the first plan year that begins in 2008, if the plan sponsor makes a contribution to the plan after the valuation date for that plan year but by the deadline for contributions under section 412(c)(10) as in effect before the effective date of PPA '06 and the contribution is for the preceding plan year, then the contribution is taken into account as a plan asset without applying any present value discount.

The final regulations provide that, for purposes of determining the adjusted fair market value of plan assets, assets spun off from a plan as a result of a spin-off described in § 1.414(l)-1(b)(4) are treated as an amount paid from plan assets. In addition, except as otherwise provided by the Commissioner, for purposes of this determination, assets that are added to a plan as a result of a plan-to-plan transfer are treated in the same manner as contributions. It is expected that future proposed regulations will provide additional rules, including rules relating to plan mergers.

The regulations provide that if the value of plan assets determined under the averaging method would otherwise be less than 90 percent of the fair market value of plan assets, then the value of plan assets is equal to 90 percent of the fair market value of plan assets. If the value of plan assets determined under the averaging method would otherwise be greater than 110 percent of the fair market value of plan assets, then the value of plan assets is equal to 110 percent of the fair market value of plan assets. The rules for accounting for contribution receipts are applied prior to the application of this 90 to 110 percent corridor.

To reflect changes to the rules regarding determination of average plan assets made by WRERA '08, portions of the regulations have been reserved to provide rules regarding adjustments for expected earnings that are applied in determining average plan assets. These issues are expected to be addressed in future proposed regulations. In the interim, Notice 2009-22 (2009-14 IRB 741) provides guidance regarding these issues.

See

§ 601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. As provided under that guidance, the final regulations permit the use of an assumed earnings rate of zero for purposes of determining the actuarial value of assets for a plan year beginning during 2008 using the averaging rules (even if zero is not the actuary's best estimate of the anticipated annual rate of return on plan assets).

The regulations provide that any change in a plan's valuation date or asset valuation method that is made for the first plan year beginning in 2008, the first plan year beginning in 2009, or the first plan year beginning in 2010 is automatically approved and does not require the Commissioner's specific prior approval. In addition, the regulations provide that a change in a plan's valuation date or asset valuation method for the first plan year to which section 430 applies to determine the plan's minimum required contribution (even if that plan year begins after December 31, 2010) that satisfies the requirements of the regulations is automatically approved and does not require the Commissioner's specific prior approval.

V. Section 1.430(h)(2)-1 Interest Rates Used To Determine Present Value

Section 1.430(h)(2)-1 provides rules relating to the interest rates used in determining the present value of the benefits that are included in the target normal cost and the funding target for the plan for a plan year. These rules follow the rules set forth in the proposed regulations except for a few changes that are noted in this preamble.

The interest rates used under the regulations are generally based on the 24-month moving averages of 3 separate segment rates for the month that includes the valuation date (which are determined based on the monthly corporate bond yield curves for the preceding 24 months). The first segment rate, which is based on the portion of the corporate bond yield curve over the period from 0 to 5 years, applies for purposes of discounting benefits that are expected to be paid during the 5-year period beginning on the valuation date for the plan year in the case of a plan with a beginning of year valuation date. The second segment rate, which is based on the portion of the corporate

bond yield curve over the period between 5 and 20 years, applies for purposes of discounting benefits that are expected to be paid within 15 years after that initial 5 year-period. The third segment rate, which is based on the portion of the corporate bond yield curve over the period between 20 years and 60 years, applies to benefit payments that are expected to be paid after the 20-year period. For example, if a series of monthly payments is assumed to be made beginning on the valuation date, the second segment rate will apply beginning with the 61st such payment and the third segment rate will apply beginning with the 241st such payment. Except in the case of a new plan, a transition rule applies for plan years beginning in 2008 and 2009 under which these segment rates are blended with the long-term corporate bond rate that applies under pre-PPA '06 law.

The monthly corporate bond yield curve is, with respect to any month, a yield curve that is prescribed by the Commissioner for that month based on yields for that month on investment grade corporate bonds with varying maturities that are in the top three quality levels available. Notice 2007-81 (2007-2 CB 899) provides guidance on the monthly corporate bond yield curve and the related first, second, and third segment rates, including a description of the methodology for determining the monthly corporate bond yield curve.

See

§ 601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin.

The proposed regulations would have used the rules for applying the first segment rate as stated in this preamble to all plans, regardless of the valuation date for the plan. Some commenters noted that section 430(h)(2)(B)(i) applies the first segment rates to benefits expected to be paid in the 5 years from the beginning of the plan year rather than the valuation date. These commenters argued that the regulations should likewise base the period to which the first segment rate applies on the beginning of the plan year rather than the valuation date. The IRS and the Treasury Department continue to believe that the position set forth in the proposed regulations remains the best method of valuing assets and liabilities as of the valuation date. Accordingly, the final regulations reserve the issue of guidance on the interest rates to be used by plans with valuation dates other than the first day of the plan year. A technical correction to the statute may address this in the future.

The regulations reflect the special interest rate for determining a plan's funding target in the case of airlines that make the 10-year amortization election described in section 402(a)(2) of PPA '06, in accordance with section 6615 of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, Public Law 110-28 (121 Stat. 112). This special interest rate does not apply for other purposes such as the determination of the plan's target normal cost.

The regulations provide for elections that a plan sponsor can make to use alternative interest rates rather than the segment rates for the month that includes the valuation date. These elections are made by providing written notification of the election to the plan's enrolled actuary. These elections may be adopted for a plan year without obtaining the consent of the Commissioner but, once adopted, they will apply for that plan year and all future plan years and may be changed only with the consent of the Commissioner. Under one such election, a plan sponsor that is using segment rates may elect the use of an alternative month as the applicable month, provided that the alternative month is one of the 4 months preceding that month that as the applicable month. In such a case, the segment rates for an applicable month are based upon data through the end of the immediately preceding month. Under another election, for purposes of determining the funding target, target normal cost, shortfall amortization installments, waiver amortization installments, and the present value of those installments, the plan sponsor may elect to use interest rates under the monthly corporate bond yield curve—which is a set of spot rates for the month preceding the valuation date rather than a 24-month moving average for that month—in lieu of the segment rates. The target normal cost and funding target determined using the monthly corporate bond yield curve will also be used for purposes of sections 404 and 436.

Some commenters have maintained that the rules under which an applicable month earlier than the month before the valuation date can be used should be permitted to be applied when the plan sponsor elects to use the monthly corporate bond yield curve. The IRS and the Treasury Department believe that, while this is a reasonable interpretation of the statute, the better view is that this option should not be available when the plan elects to use the monthly corporate bond yield curve. Accordingly, this interpretation can be used for plan years beginning during 2008 and 2009 (so, for example, for a plan year beginning on January 1, 2009, the plan sponsor could elect to use the monthly corporate bond yield curve for September, October, November 2008, or December 2008, or January 2009, based on data for that month), but such an election is not permitted for plan years beginning on or after the regulations become effective.

The proposed regulations would have required plan sponsors to obtain approval for an election to use alternative interest rates as described above that is made for a plan year after the first plan year for which section 430 applies to the plan. Some commenters argued that the statute permits these elections to be made without approval, with approval required only for a later change or revocation of election. In response to the comments, the final regulations do not require approval for the initial adoption of these elections for any year. For example, a plan sponsor that was using segment rates for the plan year beginning in 2010 can elect to switch to use the monthly corporate bond yield curve for the plan year beginning in 2011 and subsequent years without approval of the Commissioner (and, in such a case, if the plan had been using a different month for the segment rates, then the change to use the yield curve makes the applicable month election irrelevant). However, once an election has been made, any change requires the approval of the Commissioner.

The final regulations provide that, in the case of a plan sponsor using the monthly corporate bond yield curve, if with respect to a decrement the benefit is only expected to be paid for one-half of a year (because the decrement was assumed to occur in the middle of the year), the interest rate for that year can be determined as if the benefit were being paid for the entire year.

The final regulations provide that the interest rate elections are made by the plan sponsor, which is generally the employer or employers responsible for making contributions to or under the plan. In the case of plans that are multiple employer plans to which section 413(c)(4)(A) does not apply, the regulations provide that any reference to the plan sponsor means the plan administrator within the meaning of section 414(g).

The regulations provide that, except as otherwise provided, the effective interest rate determined under section 430(h)(2)(A) for the plan year is the single interest rate that, if used to determine the present value of the benefits that are taken into account in determining the plan's funding target for

the plan year, would result in an amount equal to the plan's funding target determined for the plan year under section 430(d) (without regard to calculations for plans in at-risk status under section 430(i)).

Some commenters asked how to determine the effective interest rate for a plan year for which a plan's funding target is equal to zero. The final regulations provide that if, for the plan year, the plan's funding target is equal to zero, then the effective interest rate determined under section 430(h)(2)(A) for the plan year is the single interest rate that, if used to determine the present value of the benefits that are taken into account in determining the plan's target normal cost for the plan year, would result in an amount equal to the plan's target normal cost determined for the plan year under section 430(b) (without regard to calculations for plans in at-risk status under section 430(i)).

The final regulations provide that the interest rates used to determine the amount of shortfall amortization installments and waiver amortization installments and the present value of those installments are determined based on the dates those installments are assumed to be paid, using the same timing rules that apply in determining target normal cost. Thus, for a plan that uses the segment rates, the first segment rate applies to installments assumed to be paid during the first five plan years, and the second segment rate applies to any installments assumed to be paid during the subsequent 15-year period. For this purpose, the shortfall amortization installments for a plan year are assumed to be paid on the valuation date for that plan year.

Under the regulations, notwithstanding the general rules for determination of segment rates, for plan years beginning in 2008 or 2009, the first, second, or third segment rate for a plan with respect to any month is equal to the sum of the product of that rate for that month, multiplied by the applicable percentage and the product of the weighted average interest rate determined under the rules of section 412(b)(5)(B)(ii)(II) (as that provision was in effect for plan years beginning in 2007), multiplied by a percentage equal to 100 percent minus the applicable percentage. This transition rule does not apply to a plan if the first plan year of the plan begins on or after January 1, 2008. A plan sponsor may elect not to apply the transition rule, but once an election has been made any change to that election requires the approval of the Commissioner.

The proposed regulations would have required that the pre-PPA '06 weighted average be determined as of the same month as the segment rates. In response to comments, the final regulations provide that this weighted average interest rate can be determined for the same month that is used to determine the segment rates, or for the month that contains the first day of the plan year (that is, the month that was used under section 412(b)(5)(B)(ii)(II) as in effect before amendment by PPA '06).

The final regulations provide that any change to any interest rate election that is made for the first plan year beginning in 2009 or 2010 is automatically approved by the Commissioner and does not require the Commissioner's specific prior approval.

VI.

Section 1.430(i)-1 Special Rules for Plans in At-Risk Status

Section 1.430(i)-1 of the final regulations provides special rules related to determining the funding target and making other computations for certain defined benefit plans that are in at-risk status for the plan year due to their significantly underfunded status. The at-risk rules do not apply to small plans. For this purpose, a small plan is defined as a plan sponsored by an employer that had 500 or fewer participants (including both active and inactive participants) in defined benefit plans (other than multiemployer plans) sponsored by the employer or any member of the employer's controlled group on each day during the preceding plan year.

The regulations generally adopt the rules set forth in the proposed regulations, with a few modifications that are noted in this preamble. In general, the regulations provide that a plan is in at-risk status for a plan year if the FTAP for the preceding plan year is less than 80 percent (65, 70, and 75 percent, respectively, for plan years beginning in 2008, 2009, and 2010), and the at-risk FTAP for the preceding plan year is less than 70 percent. For this purpose, the FTAP is defined in the same manner as under § 1.430(d)-1. The at-risk FTAP of a plan for a plan year is a fraction (expressed as a percentage) the numerator of which is the value of plan assets for the plan year after subtraction of the prefunding balance and the funding standard carryover balance under section 430(f)(4)(B), and the denominator of which is the at-risk funding target of the plan for the plan year (determined using the special actuarial assumptions that apply to plans in at-risk status, but without regard to the loading factor that is imposed with respect to certain plans in at-risk status).

In the case of a new plan that was neither the result of a merger nor involved in a spin-off, the FTAP and the at-risk FTAP are equal to 100 percent for years before the plan exists. As a result, such a plan will not be in at-risk status in its first year. In addition, if the funding target of the plan is equal to zero for a plan year, the FTAP and the at-risk FTAP are equal to 100 percent for that plan year. Accordingly, a plan that is established without benefits accruing for periods prior to establishment will not be in at-risk status in its second year. The final regulations reserve a place for rules regarding a plan that is involved in a merger or a spin-off and a newly established plan with a predecessor plan that was in at-risk status.

In accordance with section 430(i)(1), the final regulations provide that the at-risk funding target and the at-risk target normal cost of the plan for the plan year are generally determined in the same manner as for plans not in at-risk status, but using special actuarial assumptions. In addition, the at-risk funding target and the at-risk target normal cost are increased to take into account a loading factor if the plan has been in at-risk status for at least 2 out of the preceding 4 plan years. In any case, the at-risk funding target and the at-risk target normal cost of a plan for a plan year cannot be less than the plan's funding target and target normal cost determined without regard to the at-risk rules. This minimum value is determined on a plan-wide (rather than a participant-by-participant) basis.

The actuarial assumptions used to determine a plan's at-risk funding target for a plan year are the actuarial assumptions that are applied under section 430, with certain modifications as set forth in the final regulations. Under the proposed regulations, if by the end of the plan year that begins 10 years after the end of the current plan year (that is, the end of the 11th plan year beginning with the current plan year) an employee would be eligible to commence an immediate distribution upon termination of employment, then the employee would be assumed to terminate and commence an immediate distribution at the earliest retirement date under the plan, or, if later, at the end of the current plan year. For this purpose, the proposed regulations defined the earliest retirement age under the plan as the earliest age at which a participant could terminate employment and receive an immediate distribution. The proposed regulations provided that, under the special at-risk actuarial

assumptions, all employees who are subject to the special early retirement assumption are also assumed to elect the optional form of benefit available under the plan at the assumed retirement age that would result in the highest present value of benefits.

In response to comments, the final regulations clarify that the special early retirement assumption applies to all participants (employees, terminated vested participants, and beneficiaries) who have not commenced payment and is not limited to employees. In addition, the final regulations provide that the earliest retirement age is not earlier than the age at which the participant's benefit is fully vested. The regulations also provide that, under the special at-risk actuarial assumptions, all participants and beneficiaries (not just the participants who are subject to the special early retirement assumption) who are assumed to retire on a particular date are assumed to elect the optional form of benefit available under the plan that would result in the highest present value of benefits commencing at that date.

If a plan that is in at-risk status for the plan year has not been in at-risk status for one or more of the preceding 4 plan years, the plan's funding target for the plan year is determined as a blend of the funding target determined as if the plan were not in at-risk status and the funding target determined as if the plan had been in at-risk status for each of the preceding 4 plan years. For this purpose, the funding target determined as if the plan had been in at-risk status for each of the preceding 4 plan years is determined without applying the loading factor if the plan has not been in at-risk status for two of the preceding four plan years. The increase in the funding target to reflect the at-risk rules is phased in over 5 years at 20 percent per year. The final regulations provide similar rules for determining the at-risk target normal cost of a plan that has been in at-risk status for fewer than 5 consecutive plan years.

For purposes of applying the rules under section 430(i), the regulations set forth rules for making certain calculations with respect to the first plan year to which section 430 applies to the plan. These rules are generally the same as the rules that apply for that plan year for purposes of section 436.

There is no special rule for determining the at-risk funding target for the plan year preceding the plan year section 430 first applies to the plan. This is because, for a plan to which section 430 applies beginning in 2008, if the plan's FTAP for the preceding plan year was less than the 65 percent needed to be in at-risk status (pursuant to the transition rule described in section 430(i)(4)(B)), then the at-risk FTAP would necessarily be below the 70 percent needed for the plan to be in at-risk status (because the at-risk funding target cannot be less than the funding target for a plan that is not in at-risk status). However, plans for which the effective date of section 430 is delayed for purposes of determining the minimum required contribution will have to determine the at-risk funding target for the plan year that precedes the plan year for which section 430 is first effective with respect to the plan.

VII. Section 1.436-1 Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans

A. Overview and General Rules

1.

In general.

The final regulations set forth the rule that a defined benefit pension plan that is subject to section 412 and that is not a multiemployer plan is a qualified plan only if it satisfies 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. The final regulations generally adopt the rules set forth in the proposed regulations, but with a number of modifications that are discussed in this preamble.

2.

New plans.

In accordance with section 436(g), the final regulations 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. Thus, the only benefit limitation under section 436 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). Except as otherwise provided by the Commissioner in guidance of general applicability, plan years of the plan include the following (in addition to plan years during which the plan was maintained by the employer or plan sponsor): (1) Plan years when the plan was maintained by a predecessor employer within the meaning of § 1.415(f)-1(c)(1); (2) plan years of another defined benefit plan maintained by a predecessor employer within the meaning of § 1.415(f)-1(c)(2) within the preceding five years if any participants in the plan participated in that other defined benefit plan (even if the plan maintained by the employer is not the plan that was maintained by the predecessor employer); and (3) plan years of another defined benefit plan maintained by the employer within the preceding five years if any participants in the plan participated in that other defined benefit plan.

3.

Terminated plans.

The proposed regulations did not contain any special rules regarding terminated plans. Commenters asked whether, upon plan termination, the benefit restrictions under section 436(d) operate to prevent the purchase of annuities to satisfy plan benefits or the distribution of single sums. In response, these regulations contain special rules for plan terminations. Under the final regulations, in general, any section 436 limitations in effect immediately before the termination of a plan continue to apply. However, the limitations under section 436(d) do not apply to prohibited payments that are made to carry out the termination of a plan in accordance with applicable law. For example, a plan sponsor's purchase of an irrevocable commitment from an insurer to pay benefit liabilities with respect to participants in connection with the standard termination of a plan, in accordance with 4041(b)(3) of ERISA and 29 CFR 4041.28, does not violate section 436(d).

4.

Multiple employer plans.

The 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 regulations apply separately with respect to each employer under the plan, as if each employer maintained a separate plan. Thus, the benefit limitations under section 436 can 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 regulations apply as if all participants in the plan were employed by a single employer. Some commenters objected to the separate application of the rules of section 436 for a multiple employer plan to which section 413(c)(4)(A) applies. These commenters argued that, because it is impossible for an employer to make a contribution that inures only to the benefit of its employees in the event of plan termination, it is inappropriate to apply the requirements of section 436 separately for each employer. No change has been made to reflect this comment because the IRS

and the Treasury Department believe that this rule is consistent with the applicable statutory requirement under section 413(c)(4)(A) that applies that the funding rules apply separately to each employer.

5.

Treatment of plan as of close of prohibited or cessation period.

The final regulations use the term

section 436 measurement date

to identify the dates on which a section 436 limitation may apply or cease to apply (as discussed in section VII.A.8 of this preamble). The regulations provide that, if a limitation on prohibited 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 final regulations provide that, if a limitation on benefit accruals under section 436(e) applies to a plan, then, 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. If the accruals resume effective in the middle of a plan year, the plan must comply with the rules relating to partial years of participation and the prohibition on double proration under Department of Labor regulation 29 CFR 2530.204-2(c) and (d).

With respect to a participant who was barred from receiving an optional form of benefit that would have been payable but for the application of a restriction on prohibited payments pursuant to section 436(d), once the restriction ceases to apply, the participant's benefits will continue to be paid in the form previously elected unless the plan offers the participant a new election that modifies the prior election. The final regulations 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 clarify that any such new election will result in 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) are credited under the plan once the limitation no longer applies, subject to applicable qualification requirements (including the limitations of section 436(c)). If a plan provides for the restoration of benefit accruals for the period of the limitation under preexisting plan terms, the plan is generally treated as having adopted an amendment that has the effect of increasing liabilities under the plan. The proposed regulations would have provided an exception to this rule if the period of limitation is 12 months or less. The final regulations retain that exception, but clarify that the exception is available only if the plan's AFTAP would be at least 60 percent taking into account the restored accruals.

6

6

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, unless it is covered by the 12-month exception.

In response to questions raised by commenters, the final regulations clarify the treatment of unpredictable contingent event benefits that are limited under the rules of section 436(b). The regulations provide that, in general, if any unpredictable contingent event benefits are limited under section 436(b) with respect to an unpredictable contingent event, then that limitation applies to all such benefits that otherwise would have been paid to any plan participant with respect to that unpredictable contingent event. However, if the limitations of section 436(b) with respect to an unpredictable contingent event cease to apply for a plan year as a result of a contribution that satisfies the requirements of section 436(b)(2) or a certification of the AFTAP for the plan year, then any unpredictable contingent event benefits that were limited under the rules of section 436(b) for the plan year must automatically become payable, retroactive to the period those benefits would have been payable under the terms of the plan (other than plan terms implementing the requirements of section 436(b)). If the benefits do not become payable during the plan year in accordance with the preceding sentence, then the plan is treated as if it does not provide for those benefits. However, all or any portion of those benefits can be restored pursuant to a plan amendment that meets the requirements of section 436(c) and other applicable qualification requirements.

6.

Treatment of plan amendments that do not go into effect.

The proposed regulations did not contain rules regarding the treatment of plan amendments that do not go into effect because of the restrictions under section 436(c). To clarify the application of these rules, the final regulations provide that, if a plan amendment does not go into effect as of the effective date of the amendment because of the limitations of section 436(c), but is permitted to go into effect later in the plan year as a result of additional contributions that satisfy the requirements of section 436(c)(2) or a certification of the AFTAP for the plan year, then the plan amendment must automatically take effect as of the first day of the plan year (or, if later, the original effective date of the amendment). However, if the plan amendment cannot take effect during the plan year, then it must be treated as if it were never adopted, unless the plan amendment provides otherwise. For example, a plan amendment that provides a benefit increase pursuant to a collective bargaining agreement could provide that if the plan amendment does not take effect pursuant to the rules of section 436(c), it will take effect at the earliest time it is permitted to take effect pursuant to the rules of section 436(c).

7.

Deemed election to reduce prefunding and funding standard carryover balances.

Pursuant to section 436(f)(3), the final regulations provide that, if a limitation on prohibited payments under section 436(d)(1) or (d)(3) would otherwise 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 AFTAP to be at or above the applicable threshold (60 or 80 percent, as the case may be)

7

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 prohibited payments 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 prohibited payments that are subject to the benefit limitation or if the plan is not subject to section 436(d) because the

plan was frozen before September 1, 2005). 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 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. The final regulations provide that, if a plan is presumed to have an AFTAP of less than 60 percent because the plan did not receive a certification of the AFTAP before the first day of the 10th month of the plan year under the section 436(h)(2) 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.

7

Pursuant to section 436(j)(3), for any plan year, if the FTAP is 100 percent or more (or at a lower transition threshold for 2008 through 2010) determined without subtracting the prefunding balance and funding standard carryover balance from the value of plan assets, then the AFTAP is determined without regard to that subtraction. The deemed election under section 436(f)(3) is irrelevant in the case of the 100% funding threshold that applies under section 436(d)(2) when an employer is in bankruptcy because, either the plan is 100 percent or more funded without the subtraction (and therefore no subtraction need be made under section 436(j)(3)), or the plan is less than 100 percent funded without the subtraction so that the value of plan assets must necessarily be insufficient for a deemed election to increase the plan's AFTAP to 100%.

In addition, the regulations 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 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. 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. As in the case of the deemed reduction in funding balances to avoid the application of 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.

The proposed regulations would have provided that, in the case of a plan with respect to which a collective bargaining agreement applies to some, but not all, of the plan participants, the plan is considered a collectively bargained plan 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. A number of commentators asked which participants are taken into account in this calculation. The final regulations adopt the definition in the proposed regulations, but also provide that such a plan is considered a collectively bargained plan if at least 50 percent of the employees benefiting under the plan (within the meaning of § 1.410(b)-3(a)) are members of collective bargaining units for which the benefit levels under the plan are specified under a collective bargaining agreement.

8.

Section 436 measurement date.

The

section 436 measurement date

is a defined term under the final 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 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 is made during the plan year. The regulations further provide that a section 436 measurement date also occurs where there is a change in the plan's presumed AFTAP under the presumption rules of section 436(h). In addition, the regulations 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 in section VII.G of this preamble.

9.

Notice requirement under section 101(j) of ERISA.

Section 101(j) of ERISA requires the plan administrator of a single employer plan to provide a written notice to participants and beneficiaries within 30 days after certain specified dates, including the date the plan has become subject to a restriction described in the ERISA provisions that are parallel to Code sections 436(b) and 436(d); and, in the case of a plan that is subject to the ERISA provisions that are parallel to Code section 436(e), 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). These regulations do not include any guidance on section 101(j) of ERISA. The benefit restrictions under section 436 (and the parallel provisions under section 206(g) of ERISA) apply without regard to whether the requirements of section 101(j) of ERISA are satisfied.

B. Limitation on Plant Shutdown and Other Unpredictable Contingent Event Benefits

In accordance with section 436(b), the final regulations provide that a plan that provides for any unpredictable contingent event benefit

8

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 AFTAP were redetermined applying an actuarial assumption that the likelihood of the occurrence of the unpredictable contingent event during the plan year is 100 percent). 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 plan sponsor makes the contribution specified in section 436(b)(2), as described in section VII.F of this preamble.

8

See also

Notice 2007-14, 2007-1 CB 501 (

see

§ 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.

The regulations provide that an

unpredictable contingent event benefit

is 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 that an

unpredictable contingent event

is 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. 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 (including the absence) 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, that benefit is 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 the plan's funded status is such that benefits contingent upon that plant shutdown are not subject to the limitation described in section 436(b) for that calendar plan year, section 436(b) does not apply to restrict payment of those benefits even if another plant shutdown occurs in 2012 that results in the restriction of benefits that are contingent upon that later plant shutdown under section 436(b) (where the plan's adjusted funding target attainment percentage for 2012 would be less than 60 percent taking into account the liability attributable to those shutdown benefits). 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 60 percent (subject to the rules permitting plan amendments to reinstate previously restricted benefits, including unpredictable contingent event benefits, as described in section VII.A.5 of this preamble).

To clarify the operation of the rules regarding unpredictable contingent event benefits, the final regulations contain rules of application that were not provided in the proposed regulations. The regulations clarify that the limitations of section 436(b) apply on a participant-by-participant basis. Thus, whether payment or commencement of an unpredictable contingent event benefit under a plan is restricted with respect to a participant is determined based on whether the participant satisfies the plan's eligibility requirements (other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability) for such a benefit in a plan year in which the limitations of section 436(b) apply. In addition, in the case of a plan that provides for a benefit that depends upon the occurrence of more than one unpredictable contingent event with respect to a participant, the unpredictable contingent event for purposes of section 436(b) occurs upon the last of those unpredictable contingent events. Cessation of a benefit under a plan upon the occurrence of a specified event does not trigger the application of a limitation under section 436(b). Thus, section 436(b) does not prohibit provisions of a plan that provide for cessation, suspension, or reduction of any benefits upon occurrence of any event.

C. Limitations on Plan Amendments Increasing Plan Liabilities

In accordance with section 436(c), the regulations 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 AFTAP were redetermined taking into account the benefits attributable to the amendment). 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 section VII.F of this preamble. Thus, an amendment that provides for an increase in benefits under a formula that is based solely on service performed by participants after the amendment is adopted is always permitted to take effect in a plan year because the amount of contribution described in section 436(c)(2) is $0. However,

see

§ 1.430(d)-1(d)(2) for a rule that requires such an amendment to be taken into account in determining the funding target and the target normal cost in certain situations.

The final regulations clarify the application of section 436(c) to certain pre-existing plan provisions. Under the regulations, if a plan contains a provision that provides for the automatic restoration of benefit accruals that were not permitted to accrue because of the application of section 436(e), the restoration of those accruals is generally treated as a plan amendment that is subject to section 436(c). However, the automatic restoration of benefit accruals that were not permitted to accrue because of the application of section 436(e) is not treated as a plan amendment that is subject to section 436(c) if the continuous period of the limitation is 12 months or less and the AFTAP for the plan would not be less than 60 percent taking into account the restored benefit accruals for the prior plan year. The application of section 436(c) to other pre-existing plan provisions that result in benefit increases is expected to be addressed in future proposed regulations.

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. Like the proposed regulations, the final regulations provide that 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 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, all covered participants are included in determining the increase in average wages of the participants covered by the amendment. For this purpose, terminated participants who are not employees at any time during the period from the effective date of the most recent benefit increase applicable to all the participants who are covered by the current amendment and ending on the effective date of the current amendment are treated as having no increase or decrease in wages for the period after severance from employment. Alternatively, the employer can adopt two amendments—one that increases benefits for currently employed participants that is eligible for this exception based solely on the wages of those current employees, and another that increases benefits for terminated participants. However, 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 this exception.

As under the proposed regulations, the final regulations exempt a plan amendment (or any pre-existing plan provision) that provides for a mandatory increase in the vesting of benefits under the Code or ERISA (such as vesting rate increases pursuant to statute, plan termination amendments or partial terminations under section 411(d)(3), and vesting increases required by the rules for top-heavy plans under section 416) from the requirements of section 436(c) to the extent the increase in vesting is necessary to enable the plan to continue to satisfy the requirements for qualified plans. In addition, the final

regulations provide that the Commissioner may, in guidance of general applicability, issue additional rules under which other amendments to a plan are not treated as amendments to which section 436(c) applies.

The final regulations contain a rule to clarify when an amendment is considered to take effect for purposes of section 436(c). Under these regulations, in the case of an amendment that increases benefits, the amendment takes effect under a plan on the first date on which any individual who is or could be a participant or beneficiary under the plan would obtain a legal right to the increased benefit if the individual were on that date to satisfy the applicable requirements for entitlement to the benefit (such as the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death, disability, or severance from employment). Thus, if a plan's operations change to provide increased benefits so that participants obtain a legal right to the benefit at the time of the change (with the corresponding plan amendment adopted in that year or in a subsequent year that is within the remedial amendment period under section 401(b)), the amendment takes effect at the time of the change and must satisfy the requirements of section 436(c) for that earlier year. By contrast, if an amendment is adopted to provide increased benefits retroactively with respect to a prior year, but no participant's benefits are increased until the amendment is adopted, the amendment takes effect at the time of adoption and must satisfy the requirements of section 436(c) for the plan year the amendment is adopted.

D. Limitations on Prohibited Payments

1.

Funding percentage less than 60 percent

.

In accordance with section 436(d)(1), under the final regulations, a plan must provide that, if the plan's AFTAP for a plan year is less than 60 percent, a participant or beneficiary is not permitted to elect an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date that is on or after the applicable section 436 measurement date. The proposed regulations would have provided that, if a participant requests such a prohibited payment, the plan must permit the participant to elect another form of benefit available under the plan and this rule is retained in these regulations. Thus, if a participant elects a single-sum payment which is not available because of the section 436 limitations, the participant has to retain the right to elect the annuity forms offered under the plan which do not contain prohibited payments. 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).

The proposed regulations would also have provided that, if a participant requests such a prohibited payment, the plan must permit the participant to elect to defer payment to a later date to the extent permitted under applicable qualification requirements. Questions have arisen regarding whether this deferral right must be provided to a participant who has separated from service and has attained normal retirement age if the plan does not otherwise provide such a participant with the right to defer commencement of benefits. The final regulations clarify that, if a participant requests a prohibited payment at a time when that form of payment cannot be made, the participant retains the right to delay commencement of benefits only if the right to delay commencement is in accordance with the terms of the plan and applicable qualification requirements (such as sections 411(a)(11) and 401(a)(9)). Thus, where payment of an optional form of benefit is restricted pursuant to section 436(d), the plan is not required to provide participants with deferral rights that would not be otherwise available.

Some commenters requested that the regulations permit a plan under which prohibited payments are restricted to handle an election for a prohibited payment by paying the maximum amount permitted under section 436(d) each year, with payments resuming under the originally elected schedule as soon as permitted under section 436(d) (with appropriate catch-up payments). The final regulations do not permit this approach because the IRS and the Treasury Department believe that a plan should pay benefits in accordance with a participant's actual election (with the associated spousal consent, if applicable). However, the final regulations clarify that a plan can offer special optional forms of benefit during the period in which section 436(d)(1) applies to the plan. For example, a plan may permit participants or beneficiaries who commence benefits during this period to elect, within a specified period after the date on which the limitation ceases to apply to the plan, to receive the remaining benefit in the form of a single-sum payment equal to the present value of the remaining benefit to the extent then permitted under section 436(d)(3). Any such optional forms must satisfy section 436(d) and applicable qualification requirements, including satisfaction of section 417(e) and section 415 (at each annuity starting date).

2.

Bankruptcy.

In accordance with section 436(d)(2), under the final regulations, a plan must provide that a participant or beneficiary is not permitte

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