3744 / What requirements apply to defined benefit plans that are “at risk” beginning after 2007?

In plan years beginning after December 31, 2007, a defined benefit plan with more than 500 participants (determined on a controlled group basis) will be considered “at-risk” if the funding target attainment percentage determined under IRC Section 430 ( Q 3743), but without regard to the at-risk rules, is less than 80 percent and the funding target attainment percentage for the preceding plan year determined under IRC Section 430 and using the more aggressive assumptions described below to compute the funding target, is less than 70 percent.¹

Under transition rules, the 80 percent funding target attainment percentage is reduced to 65 percent in 2008, 70 percent in 2009, and 75 percent in 2010. For plan years beginning in 2008, the determination of the 70 percent threshold for the preceding year may be estimated under guidance to be provided in the future.²

If a plan is “at risk” for a plan year, its funding target is the present value of all the benefits accrued or earned under the plan as of the beginning of the plan year, using more aggressive actuarial assumptions, as follows: (1) all employees who are not otherwise assumed to retire as of the valuation date, but who will be eligible to elect benefits during the plan year and the 10 succeeding plan years, will be assumed to retire at the earliest retirement date under the plan year after the end of the year for which the at-risk funding target and target normal cost are being determined, and (2) all employees will be assumed to elect the retirement benefit with the highest present value of benefits at the assumed retirement age determined in (1).³

In addition, plans that have been at-risk for at least two of the preceding four years will be subject to a loading factor.⁴ The loading factor is $700 times the number of participants in the plan, plus 4 percent of the funding target, determined without regard to this provision, of the plan for the plan year.⁵

At-risk plans also may be subject to a qualification requirement that suspends many benefit increases, plan amendments, and accruals in single-employer plans when funding falls below specified levels ranging from 60 percent to 80 percent ( Q 3716).⁶ These rules were subject to certain modifications in keeping with certain funding relief provisions under MAP-21 and HATFA 2014, but generally remain applicable for underfunded plans as defined ( Q 3743).