Pensions

March 13, 2024

3743 / What is the funding requirement for defined benefit plans beginning after PPA 2006, MAP-21 and HATFA 2014?

<div class="Section1"> Editor’s Note: The SECURE Act 2.0 clarifies that plan fiduciaries are not always required to collect overpayments from participants or make corrective contributions for overpayments not collected from plan participants.  Sometimes, collection efforts for overpayments will now be prohibited in cases where the overpayment was the result of an inadvertent error, and the overpayment began more than three years before a participant or beneficiary receives notice of the overpayment.  The legislation also requires plan sponsors to give participants and beneficiaries access to a dispute process to dispute overpayment recoveries.  These changes are effective immediately.  Plan sponsors should remember that the rules governing minimum funding discussed below have not been changed, meaning that the plan sponsor may need to repay the amounts if the overpayment has a significant impact on plan funding levels. The Pension Protection Act of 2006 (PPA 2006) replaced the minimum funding standard account and the deficit reduction contribution for single-employer defined benefit plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a>) with a single basic “minimum required contribution.”<a href="#_ftn1" name="_ftnref1">1</a> The minimum required contribution for a defined benefit plan (other than multiemployer plans) is determined in the following manner: (1)  If the value of a plan’s assets (reduced as described below) equals or exceeds the funding target of the plan for the plan year, the minimum required contribution is the target normal cost reduced (but not below zero) by such excess.<a href="#_ftn2" name="_ftnref2">2</a> (2)  If the value of the plan’s assets (reduced as described below) is less than the funding target of the plan for the plan year, the minimum required contribution is the sum of: (a) the target normal cost, (b) the shortfall amortization charge (if any) for the plan for the plan year, and (c) the waiver amortization charge (if any) for the plan for the plan year.<a href="#_ftn3" name="_ftnref3">3</a> Target Normal Cost. With the exception of plans in “at-risk” status ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3744">3744</a>), a plan’s target normal cost means the present value of all benefits that are expected to accrue or to be earned under the plan during the plan year. If any benefit attributable to services performed in a preceding plan year is increased by reason of any increase in compensation during the current plan year, the benefit increase will be treated as having accrued during the current plan year.<a href="#_ftn4" name="_ftnref4">4</a> Shortfall Amortization Charge. The shortfall amortization charge for a plan for any plan year is the aggregate total (not below zero) of the shortfall amortization installments for the plan year with respect to any shortfall amortization base that has not been fully amortized.<a href="#_ftn5" name="_ftnref5">5</a> The shortfall amortization installments are the amounts necessary to amortize the shortfall amortization base of the plan for any plan year in level annual installments over the seven-plan-year period beginning with such plan year.<a href="#_ftn6" name="_ftnref6">6</a> For this purpose, the use of segmented interest rates derived from a yield curve will be phased in under rules set forth in IRC Section 430(h)(2)(C). The shortfall amortization base for a plan year is the funding shortfall (if any) of the plan for that plan year, minus the present value of the total of the shortfall amortization installments and waiver amortization installments that have been determined for the plan year and any succeeding plan year with respect to the shortfall amortization bases and waiver amortization bases of the plan for any previous plan year.<a href="#_ftn7" name="_ftnref7">7</a> The funding shortfall of a plan for any plan year is the excess (if any) of the funding target for the plan year over the value of the plan assets (reduced as described below) for the plan year that are held by the plan on the valuation date.<a href="#_ftn8" name="_ftnref8">8</a> If the value of a plan’s assets (reduced as described below) is equal to or greater than the funding target of the plan for the plan year, the shortfall amortization base of the plan for the plan year is zero.<a href="#_ftn9" name="_ftnref9">9</a> Under special transition rules, the determination of the funding shortfall for certain plans was to be calculated using only an applicable percentage of the funding target, as follows: <table style="height: 193px;" border="1" width="399" align="center"> <tbody> <tr> <td style="text-align: center;" width="191">Plan year beginning in calendar year</td> <td style="text-align: center;" width="111">The applicable percentage</td> </tr> <tr> <td style="text-align: center;" width="191">2008</td> <td style="text-align: center;" width="111">92</td> </tr> <tr> <td style="text-align: center;" width="191">2009</td> <td style="text-align: center;" width="111">94</td> </tr> <tr> <td style="text-align: center;" width="191">2010</td> <td style="text-align: center;" width="111">96</td> </tr> </tbody> </table> This phase-in transition relief was available only to plans for which the shortfall amortization base for each of the plan years beginning after 2007 was zero. The transition relief was unavailable for plans that were not in effect for a plan year beginning in 2007.<a href="#_ftn10" name="_ftnref10">10</a> Waiver amortization charge. The waiver amortization charge (if any) for the plan year is the total of the plan’s waiver amortization installments for the plan year with respect to the waiver amortization bases for each of the five preceding plan years.<a href="#_ftn11" name="_ftnref11">11</a> The waiver amortization installments are the amounts necessary to amortize the waiver amortization base of the plan for any plan year in level annual installments over a period of five plan years, beginning with the succeeding plan year. The waiver amortization installment for any plan year in this five-year period with respect to any waiver amortization base is the annual installment determined for that year for that base.<a href="#_ftn12" name="_ftnref12">12</a> Reduction of plan asset values. In the case of a plan that maintains a prefunding balance or a funding standard carryover balance, the amount that is treated as the value of plan assets is subject to reduction for purposes of determining the minimum required contribution and any excess assets, funding shortfall, and funding target attainment percentage. The value of plan assets is deemed to be that amount reduced by the amount of the prefunding balance, but only if the employer has elected to apply a portion of the prefunding balance to reduce the minimum required contribution for the plan year. In turn, this affects the availability of the transition relief described above.<a href="#_ftn13" name="_ftnref13">13</a> Preservation of Access to Care for Medicare Beneficiaries & Pension Relief Act of 2010. To address the hardship produced by the PPA 2006 funding requirements during the severe economic downturn in 2007-2008, Congress began a series of pension funding relief laws that continue to the date of this publication. The first step of relief was the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. It allowed a plan sponsor to elect one of two alternative extensions of the seven-year period otherwise required for amortizing the shortfall amortization base under PPA 2006. Special rules were also applied with respect to alternate required installments in cases of excess compensation or extraordinary dividends or stock redemptions.<a href="#_ftn14" name="_ftnref14">14</a> This first extension was available until the latest of 1) the last day of the first plan year beginning on or after January 1, 2013, 2) the last day of the plan year for which Section 436 is effective, or 3) the due date (including extensions) of the employer’s tax return for the tax year that contains the first day of the plan year for which Section 436 is first effective for the plan.<a href="#_ftn15" name="_ftnref15">15</a> Plan sponsors that elected this extension were required to give notice to participants and beneficiaries and notify the PBGC of the election.<a href="#_ftn16" name="_ftnref16">16</a> MAP-21 (Moving Ahead for Progress in the 21st Century Act of 2012). In 2012, MAP-21 sought to reduce minimum required funding contributions for single employer plans by providing a method to stabilize the interest rate assumption used in the minimum contribution calculations. MAP-21 took the required method for calculating the interest rate assumption used in the calculation, based upon the IRS monthly published “segment rates” (which are based upon investment quality corporate bonds), and stabilized the allowable required rate assumption by establishing an allowable floor and a ceiling for variable rates substituting the average annual segment rates over a 25 year time period. MAP-21 established the floor and ceiling for 2012 calculations as 90 percent and 110 percent of the 25-year historical average. However, this floor/ceiling corridor was designed to widen each year for four years ending with a 70 percent floor and 130 percent ceiling by 2016. MAP-21 gave plan sponsors the option to defer use of these new calculation rules to the 2013 plan year and even allowed for certain revocations of a prior election of interest rate assumption use without IRS consent in order to help smooth the transition. Certain disclosure requirements of the impact of the use of this interest rate assumption stabilization in annual funding notices to participants and beneficiaries was also a part of the law.<a href="#_ftn17" name="_ftnref17">17</a> In addition, MAP-21 made adjustments to PBGC governance abilities; and increased PBGC flat and variable premiums for single employers and the rate for multiemployer plans.<a href="#_ftn18" name="_ftnref18">18</a> It also allowed certain over-funded plans to use the excess pension funds to fund retiree health and life insurance benefits.<a href="#_ftn19" name="_ftnref19">19</a> <hr> Planning Point: The CARES Act extended the deadline for making a 2019 defined benefit contribution until January 1, 2021. However, according to initial guidance, these contributions had to be made by the original deadline in order to be included in calculating the variable portion of the plan sponsor’s PBGC premium. Contributions paid before January 1, 2021 were not considered late, so the plan sponsor did not have to worry about incurring any additional filing obligations. The IRS and Treasury have provided additional relief. Announcement 2020-17 extended the due date for reporting and paying excise taxes related to minimum required contributions to correspond to the CARES Act delay. The deadline was January 15, 2021. <hr> HATFA 2014 (Highway & Transportation Funding Act of 2014). Passed into law in August 2014, HATFA sought to continue pension “funding stabilization” started with MAP-21 by retroactively extending the MAP-21 so-called “phase down percentage” used to calculate the floor of the corridor for valuation interest rates in calculating the minimum required contribution. Under HATFA 2014, the corridor, compared with MAP-21 looks as follows: <table border="1" align="center"> <tbody> <tr> <td width="165">% Phase Down</td> <td width="197">Current Rules/Year</td> <td width="177">HATFA/Year</td> </tr> <tr> <td style="text-align: center;" width="165">90</td> <td style="text-align: center;" width="197">2012</td> <td style="text-align: center;" width="177">2012-2017</td> </tr> <tr> <td style="text-align: center;" width="165">85</td> <td style="text-align: center;" width="197">2013</td> <td style="text-align: center;" width="177">2018</td> </tr> <tr> <td style="text-align: center;" width="165">80</td> <td style="text-align: center;" width="197">2014</td> <td style="text-align: center;" width="177">2019</td> </tr> <tr> <td style="text-align: center;" width="165">75</td> <td style="text-align: center;" width="197">2015</td> <td style="text-align: center;" width="177">2020</td> </tr> <tr> <td style="text-align: center;" width="165">70</td> <td style="text-align: center;" width="197">2016 and later</td> <td style="text-align: center;" width="177">2021 and after</td> </tr> </tbody> </table> Note that for 2018, HAFTA would allow for use of an 85 percent floor while under MAP-21 it would be 70 percent. HATFA 2014 also allowed plan sponsors to ignore the MAP-21 extension for 2013 as to funding or benefit restrictions or just for purposes of benefit restrictions if they were required under MAP-21 to impose benefit restrictions in 2013 because of the plan’s funded status.<a href="#_ftn20" name="_ftnref20">20</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 412(a)(2)(A), 430. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 430(a)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 430(a)(1). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 430(b). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 430(c)(1). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 430(c)(2). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 430(c)(3). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 430(c)(5). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 430(c)(5)(A). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 430(c)(5)(B) (transition rule removed by § 221(a)(57)(C)(i) of the Tax Increase Protection Act of 2014). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 430(e). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 430(e)(2). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 430(f)(4); Treas. Reg. § 1.430(i)-1(e). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 430(c)(7); Notice 2011-3, 2011-2 IRB 263. <a href="#_ftnref15" name="_ftn15">15</a>.  Notice 2011-96, 2011-52 IRB 915; Notice 2012-70, 2012-51 IRB 712. <a href="#_ftnref16" name="_ftn16">16</a>.  Notice 2011-3, 2011-2 IRB 263, at N. <a href="#_ftnref17" name="_ftn17">17</a>.  See generally Moving Ahead for Progress in the 21st Century Act- MAP-21 (P.L. 112-141), Jul. 6, 2012. <a href="#_ftnref18" name="_ftn18">18</a>.  Note that the calculation of variable PBGC premiums is based upon unfunded vested benefits and these are determined without application of MAP-21 (and now HATFA 2014 as well). For all practical purposes, the variable rate premiums act as a kind of tax on a plan’s underfunding. <a href="#_ftnref19" name="_ftn19">19</a>.  See generally Moving Ahead for Progress in the 21st Century Act- MAP-21 (P.L. 112-141), Jul. 6, 2012. <a href="#_ftnref20" name="_ftn20">20</a>.  See generally Highway and Transportation & Funding Act of 2014 –HATFA 2014 (PL 113-159), Aug. 8, 2014. </div></div>

March 13, 2024

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

<div class="Section1"> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a>), 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.<a href="#_ftn1" name="_ftnref1">1</a> 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.<a href="#_ftn2" name="_ftnref2">2</a> 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).<a href="#_ftn3" name="_ftnref3">3</a> In addition, plans that have been at-risk for at least two of the preceding four years will be subject to a loading factor.<a href="#_ftn4" name="_ftnref4">4</a> 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.<a href="#_ftn5" name="_ftnref5">5</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3716">3716</a>).<a href="#_ftn6" name="_ftnref6">6</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a>). <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 430(i)(4)(A), 430(i)(6). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 430(i)(4)(B); Treas. Reg. § 1.430(i)-1. <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 430(i)(1). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 430(i)(1)(A)(ii). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 430(i)(1)(C). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 436. </div></div>