Pensions

March 13, 2024

3734 / What is a target benefit plan?

<div class="Section1"> A target benefit plan is a money purchase pension plan under which contributions to an employee’s account are determined by reference to the amounts necessary to fund the employee’s stated benefit under the plan.<a href="#_ftn1" name="_ftnref1">1</a> Consequently, allocations under a target plan are generally weighted for both age and compensation. Although a target benefit plan is a type of defined contribution plan, it is subject to certain minimum funding requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3746">3746</a>). Safe harbor requirements for target plans are set forth in the cross testing regulations under IRC Section 401(a)(4), under which a target plan will be deemed to be nondiscriminatory.<a href="#_ftn2" name="_ftnref2">2</a> Special rules apply to target plans for meeting the requirements of IRC Section 411(b)(2), which states that a plan may not discontinue or reduce a participant’s benefit accruals or allocations because the participant reaches a particular age.<a href="#_ftn3" name="_ftnref3">3</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.401(a)(4)-8(b)(3)(i). <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.401(a)(4)-8(b)(3). <a href="#_ftnref3" name="_ftn3">3</a>.  Prop. Treas. Reg. § 1.411(b)-2(c)(2)(iii). </div></div>

March 13, 2024

3733 / What is a pension plan?

<div class="Section1"> A pension plan is a qualified plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3736">3736</a>) to its employees over a period of years, usually for life, after retirement. A plan can and must meet the requirement that the benefits be definitely determinable by providing for fixed benefits or fixed contributions.<a href="#_ftn1" name="_ftnref1">1</a> Thus, a pension plan either can be a defined benefit plan or a defined contribution plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3734">3734</a>). Under a plan that provides fixed benefits (a “defined benefit” plan), the amount of the pension, or a formula to determine that amount, is set in advance; an actuary determines the annual contributions that are required to accumulate a fund sufficient to provide each employee’s pension when he or she retires. The size of an employee’s pension is usually related to the employee’s compensation, years of service, or both. Under a plan that provides for fixed contributions (a “defined contribution” or “money purchase” plan), the annual contribution to an employee’s account (rather than his or her future pension) is fixed or definitely determinable, and the employee receives whatever retirement benefit can be purchased with the funds accumulated in the employee’s account. Usually the annual contribution is a fixed percentage of the employee’s compensation; in any event, it must not be related to the employer’s profits.<a href="#_ftn2" name="_ftnref2">2</a> Contributions are not considered “fixed” where an employer intentionally overfunds a money purchase pension plan.<a href="#_ftn3" name="_ftnref3">3</a> A pension plan cannot provide regular temporary disability income or medical expense benefits (except medical expense benefits for retired employees). A pension plan may provide incidental death benefits, through life insurance or otherwise ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3830">3830</a>), and disability pensions.<a href="#_ftn4" name="_ftnref4">4</a> The employer deduction limit for pension plans is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>. For the minimum funding standard that applies to pension plans, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3746">3746</a>. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  The IRS has recently indicated that this requirement can be satisfied in the case of a cash balance pension plan by looking outside the plan document to a another document, such as to a W-2, for the definition of “compensation.” <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 401; Treas. Reg. § 1.401-1. <a href="#_ftnref3" name="_ftn3">3</a>.  William Bryen Co., Inc. v. Comm., 89 TC 689 (1987). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 401(h); Treas. Reg. §§ 1.401-1(a)(2)(i), 1.401-1(b)(1)(i), 1.401-14. </div></div>

March 13, 2024

3735 / What is the maximum amount that an employer may deduct annually for contributions on behalf of employees to a qualified defined benefit pension plan?

<div class="Section1"> The maximum annual limit on deductions by an employer, including a self-employed person, for contributions to a defined benefit pension plan is determined by an actuary who follows regulations that are structured to provide level funding over an employee’s tenure with the employer. An overview of the rules that an actuary follows appears below. (1)  The employer may deduct the amount needed to fund each employee’s past and current service credits distributed as a level amount or level percentage of compensation over the remaining period of his or her anticipated future service. If more than one-half of the remaining unfunded cost is attributable to three or fewer participants, the deduction of such 412(c) unfunded cost for them must be spread over at least five years.<a href="#_ftn1" name="_ftnref1">1</a> (2)  The employer may deduct the plan’s normal cost for the year, plus an amount necessary to amortize the past service credits equally over 10 years.<a href="#_ftn2" name="_ftnref2">2</a> The “normal cost” is the level annual amount that would be required to fund the employee’s pension from his or her date of employment to his or her retirement date.<a href="#_ftn3" name="_ftnref3">3</a> The amortizable base is limited to the unfunded costs attributable to past service liability. (3)  In plan years beginning in 2006 or 2007, the employer could deduct a maximum of 150 percent of the plan’s unfunded current liability for the plan year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a>).<a href="#_ftn4" name="_ftnref4">4</a> In the case of a plan that has 100 or fewer participants, unfunded current liability does not include liability attributable to benefit increases for highly compensated employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3930">3930</a>) resulting from a plan amendment that is made or that becomes effective, whichever is later, within the last two years.<a href="#_ftn5" name="_ftnref5">5</a> (4)  In plan years beginning after December 31, 2007, the employer deduction may be determined by calculating the excess, if any, of (1) the funding target for the plan year plus (2) the target normal cost for the plan year and (3) a cushion amount, over (4) the value of plan assets (determined under IRC Section 430(g)(2)). The deduction limit will be the greater of this amount or the sum of the minimum required contributions under IRC Section 430 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a>).<a href="#_ftn6" name="_ftnref6">6</a> (5)  A defined contribution plan that is subject to the funding standards of IRC Section 412 (e.g., a money purchase plan) is treated as a stock bonus or profit sharing plan for purposes of the deduction limits; thus, it is generally subject to a deduction limit of 25 percent of compensation.<a href="#_ftn7" name="_ftnref7">7</a> <hr> Planning Point: Note that an employer is not entitled to a current deduction for defined benefit plan contributions where those contributions are comprised of the employer’s own debt securities. When the employer makes a payment on the debt, the employer is entitled to deduct the amount paid at that time.<a href="#_ftn8" name="_ftnref8">8</a> <hr> <a href="#_ftn8" name="_ftnref8"></a> In computing the deduction for a contribution to a defined benefit plan, no benefit in excess of the Section 415 limit may be taken into consideration. Note that, similarly, in computing the deduction for a contribution to a defined contribution plan, the contribution taken into account must be reduced by any annual additions in excess of the Section 415 limit for the year.<a href="#_ftn9" name="_ftnref9">9</a> In determining the deductible amount, the same funding method and actuarial assumptions must be used as those that are used for the minimum funding standard.<a href="#_ftn10" name="_ftnref10">10</a> The IRS has denied the deduction where it believes contributions are based on unreasonable actuarial assumptions.<a href="#_ftn11" name="_ftnref11">11</a> The question of what constitutes a reasonable actuarial assumption was once the subject of extensive litigation; after a steady stream of losses in the Tax Court and federal courts, the IRS announced its concession on the issues on which it lost in those cases.<a href="#_ftn12" name="_ftnref12">12</a> In computing the deduction under (1), (2), or (3) above, a plan may not take into consideration any adjustments to the Section 415 limits before the year in which the adjustment takes effect.<a href="#_ftn13" name="_ftnref13">13</a> If the employer contributes more than the maximum deductible amount in any year, the excess amount may be carried over and deducted in succeeding years within the same limitations, even if the plan is no longer qualified in those succeeding years.<a href="#_ftn14" name="_ftnref14">14</a> (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3713">3713</a> for an excise tax on employer contributions that exceed the deduction limits.) Note that in contrast, a contribution to a defined contribution plan in excess of the Section 415 limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>) may not be carried over and deducted in a subsequent year, even if the contribution is required under the minimum funding rules.<a href="#_ftn15" name="_ftnref15">15</a> If, in the case of a defined benefit plan, more than one plan year is associated with the taxable year of the employer due to a change in plan years, then the deductible limit for the employer’s taxable year must be adjusted as described in Revenue Procedure 87-27.<a href="#_ftn16" name="_ftnref16">16</a> If an employer transfers funds from one pension plan to another, the employer realizes income if the previous deduction resulted in a tax benefit.<a href="#_ftn17" name="_ftnref17">17</a> Fully insured defined benefit pension plans. In guidance for fully insured (Section 412(i)) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3812">3812</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3813">3813</a>), the IRS also has stated that the portion of contributions attributable to “excess life insurance coverage” does not constitute “normal cost” and thus is not deductible. Similarly, contributions to pay premiums for the disability waiver of a premium feature with respect to such excess coverage are not deductible. Instead, such amounts are carried over to later years, although they may be subject to a nondeductible contribution penalty ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3943">3943</a>). “Excess” coverage generally refers to contracts held on behalf of a participant whose benefit payable at normal retirement age is not equal to the amount provided at normal retirement age with respect to the contracts held on behalf of that participant, or contracts providing for a death benefit with respect to a participant in excess of the death benefit provided to that participant under that plan.<a href="#_ftn18" name="_ftnref18">18</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 404(a)(1)(A)(ii). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 404(a)(1)(A)(iii); Treas. Reg. § 1.412(c)(3)-1(e)(3). <a href="#_ftnref3" name="_ftn3">3</a>.  For an illustration, see Rev. Rul. 84-62, 1984-1 CB 121. <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 404(a)(1)(A)(i), 404(a)(1)(D). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 404(a)(1)(D), as in effect for plan years beginning before January 1, 2008. <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 404(o). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 404(a)(3)(A)(v). <a href="#_ftnref8" name="_ftn8">8</a>.  IRS CCM 201935011. <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 404(j)(1). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 404(a)(1)(A); Treas. Reg. § 1.404(a)-14(d). <a href="#_ftnref11" name="_ftn11">11</a>.  TAM 9250002. <a href="#_ftnref12" name="_ftn12">12</a>.  IR-95-43 (June 7, 1995); Vinson & Elkins v. Comm., 7 F.3d 1235 (5th Cir. 1993); Wachtell, Lipton, Rosen & Katz v. Comm., 26 F.3d 291 (2d Cir. 1994). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 404(j)(2); Treas. Reg. § 1.412(c)(3)-1(d)(i). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC §§ 404(a)(1)(E), 404(a)(2). <a href="#_ftnref15" name="_ftn15">15</a>.  Notice 83-10, 1983-1 CB 536, F-1, F-3. <a href="#_ftnref16" name="_ftn16">16</a>.  1987-1 CB 769. <a href="#_ftnref17" name="_ftn17">17</a>.  Rev. Rul. 73-528, 1973-2 CB 13. <a href="#_ftnref18" name="_ftn18">18</a>.  See Rev. Rul. 2004-20, 2004-10 IRB 546. </div></div>

March 13, 2024

3739 / Under the Multiemployer Pension Reform Act of 2014, can a plan reduce a participant’s benefit levels?

<div class="Section1"> In some cases, a plan may reduce the benefits of plan participants and beneficiaries. The Multiemployer Pension Reform Act of 2014<a href="#_ftn1" name="_ftnref1">1</a> (MPRA) created a new type of plan status, known as “critical and declining status” that applies to plans that are projected to become insolvent within either (1) the current plan year, or within 14 subsequent plan years or (2) the current year, or within 19 subsequent plan years if (a) the ratio of inactive to active participants exceeds two to one or (b) the plan is less than 80 percent funded.<a href="#_ftn2" name="_ftnref2">2</a> If a plan is in critical and declining status, the plan may temporarily or permanently reduce any current or future payment obligations to plan participants or beneficiaries, whether or not those benefits are in pay status at the time of the reduction.<a href="#_ftn3" name="_ftnref3">3</a> Once benefits are suspended, the plan has no future liability for payment of benefits that were reduced while in critical and declining status.<a href="#_ftn4" name="_ftnref4">4</a> In order to reduce benefits, however, the plan actuary must certify that the plan is projected to avoid insolvency, assuming that the reductions remain in place either indefinitely or until the expiration date set by the plan’s own terms. The plan sponsor must also determine that the plan is projected to remain insolvent unless benefits are reduced, despite the fact that the plan has taken all reasonable measures to avoid insolvency.<a href="#_ftn5" name="_ftnref5">5</a> <hr /> Planning Point: There has been increasing activity to reduce plan benefits under the 2014 law in recent years, so much of an increase that the U.S. Chamber of Commerce described the situation as a “crisis.”<a href="#_ftn6" name="_ftnref6">6</a> The multiemployer Central States Pension Fund applied to the PBGC to approve benefit reductions but was rejected on the basis the cuts would be insufficient to save the fund. However, the request of the Ironworks Union Local No. 17 Pension Fund was approved by the PBGC and by its members in 2017 to become the first to reduce retiree pension benefits under the law.<a href="#_ftn7" name="_ftnref7">7</a> More plans have now followed. <a href="#_ftn8" name="_ftnref8">8</a> The problem of insolvent multi-employer pension plans recently received study from the GAO as part of its “High Risk Series.” In the report, the GAO assessed the risks of these pension liabilities and made recommendations to Congress in February of 2017. In addition, the head of the PBGC has predicted that based upon current trends the PBGC’s fund could be expended by 2025. This has become a priority for Congress and new legislation, allowing loans to plans and consolidation of plans to increase solvency, might be expected as a consequence.<a href="#_ftn9" name="_ftnref9">9</a> In light of the rapidly evolving guidance and perhaps new law in this area, practitioners will need to check the status of any legislation and all new PBGC guidance before proceeding to formally request a reduction in benefits for a plan. In 2021, the American Rescue Plan Act (ARPA) provided relief designed to address the insolvency problem. The PBGC has since issued an interim final rule implementing the special financial assistance (SFA) rule for multiemployer pension plans in the ARPA. Eligible plans may apply to receive a lump-sum payment from a new Treasury-backed PBGC fund. Under the new rules, eligible plans are entitled to amounts that are sufficient to pay all benefits for the next 30 years. According to the PBGC interpretation, that means sufficient funds to forestall insolvency through 2051 (but not thereafter). Plans are entitled to receive the difference between their obligations and resources for the period. “Obligations” are defined to include benefits and administrative expenses that the plan is reasonably expected to pay through the last day of the plan year ending in 2051. “Resources” are defined to include the fair market value of plan assets and the present value of future anticipated contributions, withdrawal payments, and other expected payments. Surprisingly, the PBGC rule provides that SFA funds will be taken into account when calculating a plan’s withdrawal liability. However, plans are required to use mass withdrawal interest rate assumptions published by the PBGC when calculating withdrawal liability until the later of: (1) 10 years after the end of the year in which the plan received the SFA or (2) the time when the plan no longer holds SFA funds. The PBGC has also stated that it intends to propose a separate rule under ERISA Section 4213(a) to prescribe actuarial assumptions that may be used by a plan actuary in determining an employer’s withdrawal liability. <hr /> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Consolidated and Further Continuing Appropriations Act, 2015, Pub. Law. No. 113-235. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 432(b)(5). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 432(e)(9)(B)(i). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 432(e)(9)(B)(iii). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 432(e)(9)(C)(ii). <a href="#_ftnref6" name="_ftn6">6</a>. See generally “The Multi-Employer Pension Plan Crisis: The History, Legislation and What’s Next,” U.S. Chamber of Commerce (Dec. 2017). <a href="#_ftnref7" name="_ftn7">7</a>. See generally, www.PBGC.gov for more detail on recent plan terminations and benefit reductions actions and activities on multiemployer as well as single employer pension plans. <a href="#_ftnref8" name="_ftn8">8</a>. See e.g., letter to Ironworkers Local 16 Pension Funds trustees with preliminary approval of benefits reduction proposals, dated August 1, 2018. <a href="#_ftnref9" name="_ftn9">9</a>. See GAO-17-317, High-Risk Series, Progress on Many High Risk Areas, While Substantial Efforts Needed on Others, GAO, Feb. 2017. </div>

March 13, 2024

3737 / What special qualification requirements regarding retirement age apply to pension plans but not to profit sharing plans?

<div class="Section1"> Pension and annuity plans are retirement plans; thus, they must be established primarily to provide definitely determinable benefits at normal retirement age. The normal retirement age in a pension or annuity plan is the lowest age specified in the plan at which the employee has the right to retire without the consent of the employer and receive retirement benefits based on service to date at the full rate set forth in the plan (i.e., without actuarial or similar reduction because of retirement before some later specified age). Normal retirement age must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.<a href="#_ftn1" name="_ftnref1">1</a> The following table describes the standard by which the IRS will determine whether a normal retirement age is reasonable:<a href="#_ftn2" name="_ftnref2">2</a> <table border="1" align="center"> <tbody> <tr> <td style="text-align: center;" width="242">Normal Retirement Age</td> <td style="text-align: center;" width="297">Standard Applied</td> </tr> <tr> <td width="242">62 or above</td> <td style="text-align: center;" width="297">Deemed reasonable</td> </tr> <tr> <td width="242">Between ages 55 and 62</td> <td style="text-align: center;" width="297">Depends on facts and circumstances or workforce</td> </tr> <tr> <td width="242">Under age 55</td> <td style="text-align: center;" width="297">Deemed unreasonable unless Commissioner determines otherwise</td> </tr> <tr> <td width="242">Age 50 and later</td> <td style="text-align: center;" width="297">Reasonable, if substantially all of participants are public safety workers3</td> </tr> </tbody> </table> The IRS has announced its intention to modify this rule to eliminate the requirement that substantially all of the public safety workers be covered by a separate plan.<a href="#_ftn3" name="_ftnref3">3</a> The IRS has issued proposed regulations that modify the normal retirement regulations to clarify that governmental plans that do not permit in-service distributions before age 62 are not required to meet a standard that otherwise requires that the normal retirement age be reasonably representative of the retirement age that is typical in the industry in question.<a href="#_ftn4" name="_ftnref4">4</a> Further, if a plan covers both public safety and nonpublic safety employees, it is acceptable for the plan to have different normal retirement ages for each group. The regulations, as proposed, became effective January 1, 2017, and apply only for covered employees hired after the effective date. If normal retirement age is less than age 62 and benefits begin before that age, the defined benefit dollar limit must be actuarially reduced for purposes of the Section 415 limits on benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>).<a href="#_ftn5" name="_ftnref5">5</a> The IRC also requires that the accrued benefit of an employee who retires after age 70½ be actuarially increased to take into account any period after age 70½ in which the employee was not receiving any benefits under the plan.<a href="#_ftn6" name="_ftnref6">6</a> Guidance for implementing this requirement is set forth in regulations finalized in 2004 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3896">3896</a>).<a href="#_ftn7" name="_ftnref7">7</a> An actuarial assumption that employees will retire at a normal retirement age specified in the plan that is a lower age than they normally retire could result in computation of amounts that are not currently deductible if the assumption causes the actuarial assumptions in the aggregate to be unreasonable.<a href="#_ftn8" name="_ftnref8">8</a> The IRS has challenged the use of normal retirement ages under age 65 in small defined benefit plans (i.e., plans covering from one to five employees) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3735">3735</a>). A pension plan may permit early retirement, and any reasonable optional early retirement age generally will be acceptable. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.401(a)-1(b)(2). <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.401(a)-1(b)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  Notice 2012-29, 2012 IRB 872. <a href="#_ftnref4" name="_ftn4">4</a>.  Prop. Treas. Reg. § 1.401(a)-1(b)(2), 81 Fed. Reg. 4599 (Jan. 26, 2016). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 415(b)(2)(C). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 401(a)(9)(C)(ii). <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.401(a)(9)-6, A-7. <a href="#_ftnref8" name="_ftn8">8</a>.  Rev. Rul. 78-331, 1978-2 CB 158. </div></div>

March 13, 2024

3741 / What procedures and notices are required in order for a pension plan to reduce participant benefit levels under the Multiemployer Pension Reform Act of 2014?

<div class="Section1"> In order to reduce benefits, the plan sponsor must first apply to the Secretary of the Treasury. The proposed reduction must then be approved by a vote of the plan participants and union representatives. If the reduction is rejected, however, the Treasury and Department of Labor have the authority to override the negative vote if the plan is determined to be systemically important.<a href="#_ftn1" name="_ftnref1">1</a> A systemically important plan is a plan with respect to which the PBGC projects will increase its liabilities by $1 billion or more if benefit reductions are not made.<a href="#_ftn2" name="_ftnref2">2</a> The plan must also provide certain notices to plan participants and beneficiaries that are sufficient to allow the individual to understand the effect of the reduction, including an estimate of the effect on the individual participant or beneficiary. The notice must also include a description of the factors considered in reducing the benefits, a statement that the application for approval will be available on the Secretary of the Treasury website, information on the individual’s rights, a statement describing appointment of a retiree representative (if applicable) and information on how to contact the Treasury for more information.<a href="#_ftn3" name="_ftnref3">3</a> See also Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3739">3739</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3740">3740</a> for more information. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Temp. Treas. Reg. § 1.432(e)(9)-1T(h)(5). <a href="#_ftnref2" name="_ftn2">2</a>.  Temp. Treas. Reg. § 1.432(e)(9)-1T(h)(5)(iv). <a href="#_ftnref3" name="_ftn3">3</a>.  Temp. Treas. Reg. § 1.432(e)(9)-1T(f). </div></div>

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

3745 / When are pension plan contributions credited for funding standard account purposes?

<div class="Section1"> For plan years beginning before 2008, the funding standard account is credited with the contributions for the plan year.<a href="#_ftn1" name="_ftnref1">1</a> The employer had a grace period of 8½ months after the plan year ended to make contributions for that plan year.<a href="#_ftn2" name="_ftnref2">2</a> This is true even with respect to the plan year in which the plan terminates.<a href="#_ftn3" name="_ftnref3">3</a> A contribution was not considered timely made when, prior to the expiration of the 8½ months, an employer merely segregated a sum sufficient to fund its plan contributions in an extra checking account in the name of the employer, not in the name of the plan.<a href="#_ftn4" name="_ftnref4">4</a> The rules governing the time when a contribution is deemed made for the purposes of crediting the funding standard account generally are independent of the rules governing the time when a contribution is deemed made for deduction purposes.<a href="#_ftn5" name="_ftnref5">5</a> Thus, contributions made for one plan year but carried over to a later tax year for deduction purposes may not be credited to the account as a contribution for the later year.<a href="#_ftn6" name="_ftnref6">6</a> A contribution made during the grace period on account of the preceding tax year may be made for and credited to the account for the current plan year.<a href="#_ftn7" name="_ftnref7">7</a> Likewise, a contribution made in and deducted for the current plan year may be credited for the previous year for purposes of the funding rules if made during the grace period.<a href="#_ftn8" name="_ftnref8">8</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a> for overview information on calculating a plan sponsor’s required minimum contribution for the years from 2007-2021 applying the relief in MAP-21 and HATFA 2014. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 412(b)(3)(A), prior to amendment by PPA 2006. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 412(c)(10), prior to amendment by PPA 2006; Temp. Treas. Reg. § 11.412(c)-12(b). <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Rul. 79-237, 1979-2 CB 190, as modified by Rev. Rul. 89-87, 1989-2 CB 81. <a href="#_ftnref4" name="_ftn4">4</a>.  D.J. Lee, M.D., Inc. v. Comm., 92 TC 291 (1989), aff’d on other grounds, 91-1 USTC 87,881 (6th Cir. 1991). <a href="#_ftnref5" name="_ftn5">5</a>.  Temp. Treas. Reg. § 11.412(c)-12(b)(2); Prop. Treas. Reg. § 1.412(c)(10)-1(c). <a href="#_ftnref6" name="_ftn6">6</a>.  Rev. Rul. 77-151, 1977-1 CB 121. <a href="#_ftnref7" name="_ftn7">7</a>.  Rev. Rul. 77-82, 1977-1 CB 121. <a href="#_ftnref8" name="_ftn8">8</a>.  Let. Rul. 9107033. </div></div>

March 13, 2024

3747 / What is the penalty for underfunding a qualified plan that is subject to the minimum funding standard?

<div class="Section1"> If a plan subject to the minimum funding standard ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3746">3746</a>) fails to meet it, the employer sponsoring the plan is penalized by an excise tax, but the plan will not be disqualified.<a href="#_ftn1" name="_ftnref1">1</a> Imposition of the tax is automatic; there is no exception for unintentionally or inadvertently failing to meet the standard or for having intended to terminate the plan.<a href="#_ftn2" name="_ftnref2">2</a> For a single employer plan, the tax is 10 percent of the aggregate unpaid minimum required contributions for all plan years ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3742">3742</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3746">3746</a>) remaining unpaid as of the end of any plan year ending with or within the taxable year.<a href="#_ftn3" name="_ftnref3">3</a> (In the case of a multiemployer plan, the tax is 5 percent of any accumulated funding deficiency; in the case of a CSEC plan, 10 percent of such deficiency.) In one case, an employer was liable for the 10 percent tax where a contribution was made on time according to the terms of the plan, but not within the period specified in IRC Section 412.<a href="#_ftn4" name="_ftnref4">4</a> If the 10 percent tax is imposed on any unpaid minimum required contributions and if it remains unpaid as of the close of the taxable period, or if the 10 percent tax is imposed on a multiemployer plan’s accumulated funding deficiency, an additional tax of 100 percent will be imposed on the employer to the extent that the minimum required contribution or accumulated funding deficiency is not corrected within the taxable period.<a href="#_ftn5" name="_ftnref5">5</a> This additional 100 percent tax will be abated if the deficiency is corrected within 90 days after the date when the notice of deficiency is mailed. This period may be extended by the Secretary of the Treasury.<a href="#_ftn6" name="_ftnref6">6</a> An additional tax is applied to certain defined benefit plans with a funded current liability percentage of less than 100 percent that have a “liquidity shortfall” for any quarter during a plan year.<a href="#_ftn7" name="_ftnref7">7</a> Such a plan may be subject to a tax of 10 percent of the excess of the amount of the liquidity shortfall for any quarter over the amount of such shortfall paid by the required installment for the quarter.<a href="#_ftn8" name="_ftnref8">8</a> If the shortfall was due to reasonable cause and not willful neglect, and if reasonable steps have been taken to remedy the liquidity shortfall, the Secretary of the Treasury has the discretion to waive part or all of the penalty.<a href="#_ftn9" name="_ftnref9">9</a> An uncorrected deficiency will continue in later years and will be increased by interest charges until it is paid.<a href="#_ftn10" name="_ftnref10">10</a> When an employer fails to contribute a plan’s normal cost in any year, that amount will not, thereafter, become a past service cost to be amortized. The funding standard account will show the amount as a deficiency subject to tax each year until corrected. If the employer is a member of a group that is treated as a single employer under the controlled group, common control, or affiliated services group provisions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3933">3933</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3935">3935</a>), then each member of the group is jointly and severally liable for any tax payable under IRC Section 4971.<a href="#_ftn11" name="_ftnref11">11</a> The tax is due for the tax year in which (or with which) the plan year ends. The IRS has determined that general partners were jointly and severally liable for a partnership’s excise tax obligation resulting from failure to satisfy the minimum funding standard.<a href="#_ftn12" name="_ftnref12">12</a> Where a plan chooses to keep both a funding standard account and an alternative minimum funding standard account, the tax will be based on the lower minimum funding requirement.<a href="#_ftn13" name="_ftnref13">13</a> None of the excise taxes payable under IRC Section 4971 are deductible.<a href="#_ftn14" name="_ftnref14">14</a> Note that neither MAP-21 nor HATFA 2014 changed the definition or calculation of unfunded vested benefits upon which the tax is calculated. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a> for more information on the important changes that were made by MAP-21 and HATFA 2014. If a plan is maintained pursuant to a collective bargaining agreement or by more than one employer, the liability of each employer will be based first on the employers’ respective delinquencies in meeting their required contributions, and then on the basis of the employers’ respective liabilities for contributions.<a href="#_ftn15" name="_ftnref15">15</a> The tax does not apply in years after the end of the plan year in which the plan terminates. If the accumulated funding deficiency has not been reduced to zero as of the end of that plan year, then the 100 percent tax is due for the plan year in which the plan terminates.<a href="#_ftn16" name="_ftnref16">16</a> For further guidance on the tax penalty for underfunding, see Treasury Regulation Section 54.4971-1 and Proposed Treasury Regulation Sections 54.4971-2 to 54.4971-3. Also see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a> regarding HATFA 2014 limitations on executive compensation as a consequence of selecting deferred funding of qualified plans. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  TIR 1334 (1/8/75), M-5. <a href="#_ftnref2" name="_ftn2">2</a>.  See D.J. Lee, M.D., Inc. v. Comm., 931 F. 2d 418, 91-1 USTC ¶ 50,218 (6th Cir. 1991); Lee Eng’g Supply Co., Inc. v. Comm., 101 TC 189 (1993). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 4971(a). <a href="#_ftnref4" name="_ftn4">4</a>.  Wenger v. Comm., TC Memo 2000-156 (2000). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 4971(b). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC §§ 4961, 4963(e). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC §§ 4971(f), 430(j). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 4971(f). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 4971(f)(4). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 412(b)(5). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 4971(e). <a href="#_ftnref12" name="_ftn12">12</a>.  Let. Rul. 9414001. <a href="#_ftnref13" name="_ftn13">13</a>.  IRC §§ 4971(c)(1), 412(a). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 275(a)(6). <a href="#_ftnref15" name="_ftn15">15</a>.  IRC §§ 413(b)(6), 413(c)(5). <a href="#_ftnref16" name="_ftn16">16</a>.  Rev. Rul. 79-237, 1979-2 CB 190, as modified by Rev. Rul. 89-87, 1989-2 CB 81. </div></div>

March 13, 2024

3736 / What special qualification requirements regarding the payment of definitely determinable benefits apply to pension plans but not to profit sharing plans?

<div class="Section1"> A pension plan must provide for the payment of definitely determinable benefits to employees upon retirement or over a period of years after their retirement or to their beneficiaries. Benefits must be determined without regard to the employer’s profits.<a href="#_ftn1" name="_ftnref1">1</a> Benefits actually payable need not be definitely determinable, provided the contributions can be determined actuarially on the basis of definitely determinable benefits. This is the theoretical basis for defined benefit plans of the “assumed benefit” or “variable benefit” type (so-called “target” plans). Benefits are “definitely determinable” under a money purchase pension plan that calls for contributions of a fixed percentage of each employee’s compensation.<a href="#_ftn2" name="_ftnref2">2</a> Benefits that vary with the increase or decrease in the market value of the assets from which such benefits are payable or that vary with the fluctuations of a specified and generally recognized cost-of-living index are consistent with a plan providing for definitely determinable benefits.<a href="#_ftn3" name="_ftnref3">3</a> A plan provides a definitely determinable benefit if, in the case of an insured plan, the practice of the insurer is to provide a retirement annuity that is the higher of an annuity bought at an annuity rate guaranteed in the contract surrendered in exchange for the same type of annuity purchased at current annuity rates.<a href="#_ftn4" name="_ftnref4">4</a> The IRS determined that a governmental cash balance plan in which the interest rate credited on contributions was set by a board appointed under state law nonetheless provided a definitely determinable benefit.<a href="#_ftn5" name="_ftnref5">5</a> In a TE/GE Memo to plan examiners, the IRS indicated that a cash balance plan can meet the definitely determinable requirement when the formula under which a credit is determined by looking at compensation, if the compensation information is otherwise available outside the terms of the plan, like in a W-2.<a href="#_ftn6" name="_ftnref6">6</a> <hr /> Planning Point: The IRS has directed its examination staff to focus on the issue of “definitely determinable benefits” in audits since compliance with this requirement is a precondition to qualification. Hence, plan sponsors may wish to have legal counsel to periodically review their plan for compliance under current IRS guidance in order to assure themselves of continuing plan qualification in the event of an audit. <hr /> To be definitely determinable, a plan that credits interest must specify how the plan determines interest and must specify how and when interest is credited. Interest must be credited at least annually. Regulations specify two methods that a plan can use to determine the plan’s interest crediting rate: the applicable periodic interest crediting rate that applies over the current period or the rate that applied in a specified lookback month with respect to a stability period.<a href="#_ftn7" name="_ftnref7">7</a> A plan is permitted to round the calculated interest rate or rate of return in accordance with regulations issued in 2015.<a href="#_ftn8" name="_ftnref8">8</a> A defined benefit plan will not be treated as providing definitely determinable benefits unless the actuarial assumptions used to determine the amount of any benefit (including any optional or early retirement benefit) are specified in the plan in a way that precludes employer discretion.<a href="#_ftn9" name="_ftnref9">9</a> Under certain plans, a participant receives not only a defined benefit specified in the plan but also amounts that have been credited to individual accounts each year based on excess earnings; in other words, actual trust earnings in excess of the investment yield assumption used in the valuation of the cost of providing the defined benefit (an excess earnings plan). Where contributions to these plans are discretionary, the amount of excess interest allocations to the defined contribution portion of the plan is not definitely determinable, and the plan will not qualify.<a href="#_ftn10" name="_ftnref10">10</a> Retirement benefits are not definitely determinable under a plan that permits the withdrawal of employer contributions. Hence, a pension plan may not permit the withdrawal of employer contributions or earnings thereon, even in the case of financial need, before death, retirement, disability, severance of employment, or termination of the plan.<a href="#_ftn11" name="_ftnref11">11</a> Withdrawals may be made once the employee has reached normal retirement age even if the employee has not actually retired.<a href="#_ftn12" name="_ftnref12">12</a> A pension plan may permit withdrawal of all or part of an employee’s own contributions plus interest actually earned thereon when the employee discontinues participation in the plan, even though the employee continues to work for the employer.<a href="#_ftn13" name="_ftnref13">13</a> In addition, a pension plan may permit an employee to withdraw his or her nondeductible voluntary contributions without terminating his or her participation in the plan, provided the withdrawal will not affect the employee’s participation in the plan, the employer’s past or future contributions on his or her behalf, or the basic benefits provided by both the employee’s and the employer’s mandatory contributions, and no interest is allowable with respect to the contributions withdrawn either at the time of withdrawal or in computing benefits at retirement.<a href="#_ftn14" name="_ftnref14">14</a> The IRS takes the position that all benefits payable under a plan, including early retirement, disability pension, and preretirement death benefits, must be definitely determinable. Thus, a pension plan funded by a combination of life insurance and an auxiliary fund, which provided a pension on early retirement or disability, the amount of which was based in part on the participant’s interest in the auxiliary fund, failed to qualify because the employer was not required to maintain the fund at a particular level or to make contributions at any particular time.<a href="#_ftn15" name="_ftnref15">15</a> Similarly, a defined benefit pension plan that provided a preretirement death benefit equal to the amount of the pension benefit funded for a participant as of the date of the participant’s death failed to qualify.<a href="#_ftn16" name="_ftnref16">16</a> Likewise, a change in actuarial factors that affects the calculation of a participant’s optional or early retirement benefit would result in plan disqualification.<a href="#_ftn17" name="_ftnref17">17</a> Benefits under a defined benefit plan will be considered definitely determinable even if they are offset by benefits provided by a profit sharing plan, if determination of the amount of the offset is not subject to the employer’s discretion. The actuarial basis and the time for determining the offset must be specified in the defined benefit plan to preclude employer discretion.<a href="#_ftn18" name="_ftnref18">18</a> Pension benefits will not fail to be definitely determinable because a factor or condition, determinable only after retirement, is used to compute benefits in accordance with an express provision in the plan if the factor or condition is not subject to the discretion of the employer.<a href="#_ftn19" name="_ftnref19">19</a> Forfeitures Related to the definitely determinable benefits rule is the requirement that a pension plan provide that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.<a href="#_ftn20" name="_ftnref20">20</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. §§ 1.401-1(a)(2)(i), 1.401-1(b)(1)(i). <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. § 1.401-1(b)(1)(i). <a href="#_ftnref3" name="_ftn3">3</a>. Rev. Rul. 185, 1953-2 CB 202. <a href="#_ftnref4" name="_ftn4">4</a>. Rev. Rul. 78-56, 1978-1 CB 116. <a href="#_ftnref5" name="_ftn5">5</a>. Let. Rul. 9645031. <a href="#_ftnref6" name="_ftn6">6</a>. TE/GE 04-0417-0014 (4-7-2017). The memo contains some useful examples to review. <a href="#_ftnref7" name="_ftn7">7</a>. Treas. Reg. § 1.411(b)(5)-1. <a href="#_ftnref8" name="_ftn8">8</a>. 80 FR 70680 (Nov. 16, 2015). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 401(a)(25); Rev. Rul. 79-90, 1979-1 CB 155. <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Rul. 78-403, 1978-2 CB 153. <a href="#_ftnref11" name="_ftn11">11</a>. Rev. Rul. 69-277, 1969-1 CB 116; Rev. Rul. 74-417, 1974-2 CB 131. <a href="#_ftnref12" name="_ftn12">12</a>. Rev. Rul. 71-24, 1971-1 CB 114; Rev. Rul. 73-448, 1973-2 CB 136, superseded by GCM 38002 which republished Rev. Rul. 73-448. <a href="#_ftnref13" name="_ftn13">13</a>. Rev. Rul. 60-281, 1960-2 CB 146. <a href="#_ftnref14" name="_ftn14">14</a>. Rev. Rul. 60-323, 1960-2 CB 148; Rev. Rul. 69-277, 1969-1 CB 116. <a href="#_ftnref15" name="_ftn15">15</a>. Rev. Rul. 69-427, 1969-2 CB 87. <a href="#_ftnref16" name="_ftn16">16</a>. Rev. Rul. 72-97, 1972-1 CB 106. <a href="#_ftnref17" name="_ftn17">17</a>. Rev. Rul. 81-12, 1981-1 CB 228. <a href="#_ftnref18" name="_ftn18">18</a>. Rev. Rul. 76-259, 1976-2 CB 111. <a href="#_ftnref19" name="_ftn19">19</a>. Rev. Rul. 80-122, 1980-1 CB 84. <a href="#_ftnref20" name="_ftn20">20</a>. IRC § 401(a)(8). </div>