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

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

3742 / What is the minimum funding standard that applied in plan years before 2008?

<div class="Section1"> The Pension Protection Act of 2006 (PPA 2006) replaced the minimum funding standard with a single minimum required contribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3743">3743</a>). The PPA 2006 funding provisions generally took effect for plan years beginning after 2007. For plan years beginning before 2008, the IRC provided for a minimum funding standard requiring at least a minimum level of funding for qualified defined benefit plans. A second “deficit reduction contribution” applied in the case of certain plans with over 100 participants. The minimum amount that an employer is required to contribute to fund a money purchase pension plan (both before and after PPA 2006) is the contribution amount required under the terms of the plan for each year, as stated in the plan formula.<a href="#_ftn1" name="_ftnref1">1</a> Profit sharing and stock bonus plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3749">3749</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3816">3816</a>), certain government and church plans, certain employee-pay-all plans, and fully insured plans (known as 412(i) plans) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3813">3813</a>) are exempt from the minimum funding requirements, both before and after PPAPPA 2006.<a href="#_ftn2" name="_ftnref2">2</a> The minimum funding requirements are not qualification requirements.<a href="#_ftn3" name="_ftnref3">3</a> Waiver of the minimum funding standard because of hardship may be available in some circumstances ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3747">3747</a>).<a href="#_ftn4" name="_ftnref4">4</a> Under the minimum funding standard, the employer must contribute at least a minimum amount to its qualified defined benefit, money purchase pension, or annuity plan.<a href="#_ftn5" name="_ftnref5">5</a> To determine its minimum contribution, an employer must establish a separate funding standard account for each plan.<a href="#_ftn6" name="_ftnref6">6</a> A plan that has a funding method requiring contributions at least equal to those required under the entry age normal cost method also may maintain an alternative minimum funding standard account.<a href="#_ftn7" name="_ftnref7">7</a> Under the regular funding rules, the funding standard account (and the alternative account, if one is maintained) is to be charged with certain liabilities and credited with certain amounts each plan year. If the charges to the funding standard account for all plan years beginning after the standard is first applicable to the plan exceed the credits (or, if less, the excess of the charges to the alternative minimum funding standard account for the same years over the credits), the plan has an “accumulated funding deficiency” to the extent of the excess. The minimum funding standard is satisfied when there is no accumulated funding deficiency; that is, when the balance in the funding standard account (or the alternative minimum funding standard account) at the end of the year is zero.<a href="#_ftn8" name="_ftnref8">8</a> Charges The liabilities that must be currently funded and charged to the funding standard account under the regular funding rules are the “normal cost” (the level annual amount that would be required to fund the employee’s pension from his date of employment to his retirement), and the amounts required to amortize, in equal installments, until fully amortized: (1)  the unfunded past service liability that existed on the first day the section applied to the plan over a period of 30 years (40 years if the plan was in existence on January 1, 1974); (2)  any net increase in unfunded past service liability because of plan amendments in the year over a period of 30 years; (3)  any net experience loss over a period of five years (15 years if a multiemployer plan); (4)  any net loss from changes in actuarial assumptions over a period of 10 years (30 years if a multiemployer plan); (5)  each previously waived funding deficiency over a period of five years (15 years if a multiemployer plan); and (6)  any amount previously credited to the account as a result of using the alternative minimum funding standard account as the funding standard over a period of five years.<a href="#_ftn9" name="_ftnref9">9</a> Employers generally must amortize the amount that they would have been required to contribute, but for the increase, over 20 years ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3724">3724</a>).<a href="#_ftn10" name="_ftnref10">10</a> Special rules apply to funding methods that do not provide for amortization bases.<a href="#_ftn11" name="_ftnref11">11</a> <hr> Planning Point: In October, 2017 the IRS released final regulations regarding new official mortality tables and the application of mortality to the computation of plan liabilities to all plans subject to minimum funding standards. These new mortality tables for 2018 will generally increase plan liabilities because of greater longevity reflected in the tables. At the same time, the IRS released Rev. Proc. 2017-55 that allows for integrating the tables to specific plans, and Rev. Proc 2017-60 that allows for application of the new tables for about one year. Plan sponsors will wish to explore the potential to delay application for one year and to reduce the application impact by review its application to specific plans, especially if derisking or termination of a plan is under consideration since the tables will increase the liabilities of the plan and make derisking and termination more expensive. <hr> Credits Amounts that are credited to the funding standard account under the regular funding rules include: (1)  employer contributions; (2)  amounts necessary to amortize, in equal installments (1) any net decrease in unfunded past service liability arising from amendments over a period of 30 years, (2) any net experience gain over a period of five years (15 years if a multiemployer plan), and (3) any gain from changes in actuarial assumptions over a period of 10 years (30 years if a multiemployer plan); (3)  the amount of the funding standard that has been waived by the Secretary of Treasury because of substantial business hardship; and (4)  an adjustment, if the alternative minimum funding standard was used in a previous year.<a href="#_ftn12" name="_ftnref12">12</a> Amortization periods may be longer in certain circumstances.<a href="#_ftn13" name="_ftnref13">13</a> Guidelines for determining experience gains and losses are set forth in Revenue Ruling 81-213.<a href="#_ftn14" name="_ftnref14">14</a> Dividends, rate credits, and forfeitures are treated as experience gains if: (1)  the plan is funded solely through a group deferred annuity contract; (2)  the annual single premium is treated as the normal cost; and (3)  an amount necessary to pay, in equal annual installments over the amortization period, the single premium necessary to provide all past service benefits not initially funded, is treated as the annual amortization amount.<a href="#_ftn15" name="_ftnref15">15</a> Alternative Minimum Funding Standard Account The alternative minimum funding standard account is charged only with the lesser of (1) normal cost under the plan’s funding method or under the unit credit method, any excess of the value of accrued benefits over the fair market value of plan assets, and any excess of credits over charges to the account in all prior years. The alternative funding standard account is credited with the employer’s contribution and is also charged or credited with interest.<a href="#_ftn16" name="_ftnref16">16</a> Interest The funding standard account also is charged or credited with interest at a rate consistent with that used to determine plan costs. For plan years beginning in 2006 and 2007, the interest rate was based on a yield curve derived from a two year weighted average of interest rates on investment grade corporate bonds. This amendment extended the relief implemented by PFEA 2004.<a href="#_ftn17" name="_ftnref17">17</a> Deficit Reduction Contributions An additional charge to the funding standard account (and, thus, an increased contribution) is required for certain defined benefit plans (other than multiemployer plans) that have more than 100 participants and have a funded current liability percentage for any plan year below certain limits.<a href="#_ftn18" name="_ftnref18">18</a> Relief from this requirement is available for certain airlines and steel manufacturers.<a href="#_ftn19" name="_ftnref19">19</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 412(a)(2)(B). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 412(e)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  See Anthes v. Comm., 81 TC 1 (1983), aff’d, 740 F.2d 953 (1st Cir. 1984). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 412(c)(2). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 412, prior to amendment by PPA 2006. <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 412(b). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 412(g). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 412(a). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 412(b)(2). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 412(b)(2)(E). <a href="#_ftnref11" name="_ftn11">11</a>.  Rev. Rul. 2000-20, 2000-1 CB 880. <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 412(b)(3). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC §§ 412(e), 412(b)(6). <a href="#_ftnref14" name="_ftn14">14</a>.  1981-2 CB 101. <a href="#_ftnref15" name="_ftn15">15</a>.  Treas. Reg. § 1.412(b)-2. <a href="#_ftnref16" name="_ftn16">16</a>.  Former IRC § 412(g)(2); Prop. Treas. Reg. § 1.412(g)-1. <a href="#_ftnref17" name="_ftn17">17</a>.  IRC § 412(b)(5); see also IRC § 412(l)(7)(C)(i)(IV); Notice 2004-34, 2004-18 IRB 848; Notice 2013-2, 2013-6 IRB 473. <a href="#_ftnref18" name="_ftn18">18</a>.  IRC §§ 412(l)(1), 412(l)(6). <a href="#_ftnref19" name="_ftn19">19</a>.  IRC § 412(i)(12). </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>

March 13, 2024

3746 / What other special requirements applied in plan years prior to 2008 when a qualified plan was subject to the minimum funding standard?

<div class="Section1"> Under the full funding limitation, a plan generally was required to fund for certain expected increases due to benefits accruing during the plan year.<a href="#_ftn1" name="_ftnref1">1</a> Any resulting increase in unfunded liability must be amortized over 30 years. Although a change in benefit provisions of a plan may not be assumed under a reasonable funding method, future salary may be assumed to change without being considered a benefit change. Thus, funding was to be based on projected benefits reflecting expected salary history, but only to the extent that the projected benefits do not exceed the maximum benefit permitted under the current plan provisions. For example, funding for a benefit of 90 percent of the participant’s salary for his or her high three consecutive years may be based on 90 percent of the participant’s projected salary, but not in excess of the maximum dollar benefit provided under the plan for the current year.<a href="#_ftn2" name="_ftnref2">2</a> Experience gains and losses were to be determined and plan liability valued at least once a year.<a href="#_ftn3" name="_ftnref3">3</a> Normal costs, accrued liabilities, and experience gains and losses were to be determined under the funding method used to determine costs under the plan. Plan assets were to be valued by any reasonable actuarial method that takes into account fair market value and is permitted under regulations.<a href="#_ftn4" name="_ftnref4">4</a> Asset valuations were not to be based on a range of 85 percent to 115 percent of average value.<a href="#_ftn5" name="_ftnref5">5</a> Ordinarily, the annual valuation was to be made during the plan year or within one month prior to the beginning of the plan year. A valuation date from the immediately preceding plan year could be used provided that, as of that date, the plan assets were not less than 100 percent of the plan’s current liability.<a href="#_ftn6" name="_ftnref6">6</a> A change to a prior year valuation could not be made unless plan assets were not less than 125 percent of the plan’s current liability.<a href="#_ftn7" name="_ftnref7">7</a> Each actuarial assumption must be reasonable or, when aggregated, result in a total contribution equal to the amount that would be determined if each were reasonable. In the case of multiemployer plans, actuarial assumptions only need be reasonable in the aggregate. Of course, all actuarial assumptions must offer the actuary’s best estimate of anticipated experience.<a href="#_ftn8" name="_ftnref8">8</a> Automatic approval is available for certain changes in a plan’s funding method. Examples of such automatic approvals include: (1)  to remedy unreasonable allocation of costs; (2)  for fully funded terminated plans; (3)  for takeover plans; (4)  for changes in valuation software; (5)  for de minimis mergers; (6)  for certain mergers with the same plan year and a merger date of first or last day of plan year; and (7)  for certain mergers involving a designated transition period.<a href="#_ftn9" name="_ftnref9">9</a> Defined benefit pension plans generally are not permitted to anticipate amendments (even if adopted within the remedial amendment period) in determining funding, except as specifically required by IRC Section 412(c)(12).<a href="#_ftn10" name="_ftnref10">10</a> For a multiemployer plan maintained pursuant to a collective bargaining agreement, the minimum funding standard is determined as if all participants in the plan were employed by a single employer.<a href="#_ftn11" name="_ftnref11">11</a> Projected benefit increases scheduled to take effect during the term of the agreement must be taken into account.<a href="#_ftn12" name="_ftnref12">12</a> In contrast, each employer in a multiple employer plan generally is treated as maintaining a separate plan for purposes of the minimum funding rules, unless the plan uses a method for determining required contributions under which each employer contributes at least the amount that would be required if each employer maintained a separate plan.<a href="#_ftn13" name="_ftnref13">13</a> If the employer maintaining the plan is a member of a group treated as a single employer under the controlled group, common control, or affiliated service 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 the amount of any contributions required under the minimum funding standard or the amount of any required installments to the plan.<a href="#_ftn14" name="_ftnref14">14</a> The minimum funding standard continues to apply even if the plan later becomes nonqualified. It does not apply in years after the end of the plan year in which the plan terminates completely. For guidelines as to the application of the minimum funding standard to the plan year in which a plan terminates, see Revenue Ruling 89-87<a href="#_ftn15" name="_ftnref15">15</a> and Proposed Treasury Regulation § 1.412(b)-4. The minimum funding standard must be re-established if the terminated plan is restored to the sponsoring employer by the PBGC.<a href="#_ftn16" name="_ftnref16">16</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 412(c)(7)(E)(i)(I). <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 81-195, 1981-2 CB 104. <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 412(c)(9). <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.412(c)(2)-1(b)(6). <a href="#_ftnref5" name="_ftn5">5</a>.  OBRA ’87, § 9303(c). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 412(c)(9)(B). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 412(c)(9)(B)(iv). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 412(c)(3). <a href="#_ftnref9" name="_ftn9">9</a>.  Rev. Proc. 2000-40, 2000-2 CB 357. <a href="#_ftnref10" name="_ftn10">10</a>.  Rev. Proc. 98-42, 1998-2 CB 55. <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 413(b)(5). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 412(c)(12). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 413(c)(4). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 412(c)(11). <a href="#_ftnref15" name="_ftn15">15</a>.  1989-2 CB 81. <a href="#_ftnref16" name="_ftn16">16</a>.  Treas. Reg. § 1.412(c)(1)-3, TD 8494, 1993-2 CB 203. </div></div>

March 13, 2024

3748 / Can the minimum funding standard for qualified plans be waived?

<div class="Section1"> Under limited circumstances, the IRS may grant a waiver of the minimum funding standard. To obtain such a waiver, the employer sponsoring the plan must demonstrate that imposition of the 100 percent tax would be a substantial business hardship and adverse to the interest of plan participants in the aggregate.<a href="#_ftn1" name="_ftnref1">1</a> Updated procedures for requesting a waiver of the 100 percent tax are set forth in Revenue Procedure 2004-15.<a href="#_ftn2" name="_ftnref2">2</a> In 2017, the IRS issued Revenue Procedure 2017-4, which eliminated the alternative of requesting a determination letter in conjunction with a minimum funding waiver.<a href="#_ftn3" name="_ftnref3">3</a> The IRS may still grant a waiver contingent on certain conditions being met. If they are not met, the waiver is void retroactively. An employer sponsoring a plan may request a modification of a conditional waiver of the minimum funding requirements by private letter ruling request.<a href="#_ftn4" name="_ftnref4">4</a> The IRS has privately ruled that waiver is appropriate where the hardship is likely to be temporary,<a href="#_ftn5" name="_ftnref5">5</a> but not where the hardship is of a permanent nature.<a href="#_ftn6" name="_ftnref6">6</a> Under certain circumstances, the IRS may approve a retroactive plan amendment reducing plan liabilities due to substantial business hardship.<a href="#_ftn7" name="_ftnref7">7</a> Employers sponsoring certain terminated single-employer defined benefit plans may obtain a waiver of the 100 percent tax imposed on an accumulated funding deficiency. To obtain the waiver, these conditions must be met: (1)  the plan must be subject to Title IV of ERISA, (2)  the plan must be terminated in a standard termination under ERISA Section 4041, (3)  plan participants must not be entitled to any portion of residual assets remaining after all liabilities of the plan to participants and their beneficiaries have been satisfied, (4)  excise taxes that have been (or could be) imposed under IRC Section 4971(a) must have been paid for all taxable years (including the taxable year related to the year of plan termination), and (5)  the plan must have filed all applicable forms in the 5500 series (including Schedule B) for all plan years (including the year of plan termination).<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 the relief as to the required minimum contribution by MAP-21 and HAFTA 2014. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 412(d). <a href="#_ftnref2" name="_ftn2">2</a>.  2004-7 IRB 490. See, e.g., Let. Ruls. 200349005, 9849024. <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Proc. 2017-4, 2017-1 IRB 146. <a href="#_ftnref4" name="_ftn4">4</a>.  See, e.g., Let. Ruls. 9852051, 9849031. <a href="#_ftnref5" name="_ftn5">5</a>.  Let Rul. 9846047. <a href="#_ftnref6" name="_ftn6">6</a>.  Let. Rul. 9846049. <a href="#_ftnref7" name="_ftn7">7</a>.  Let. Rul. 9736044. <a href="#_ftnref8" name="_ftn8">8</a>.  Rev. Proc. 2000-17, 2000-1 CB 766. </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

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

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>