Federal Register: August 31, 2007 (Volume 72, Number 169)

DOCID: fr31au07-34 FR Doc 07-4262

Veterans Affairs Department

CFR Citation: 26 CFR Part 1

RIN ID: RIN 1545-BG72

REG ID: [REG-113891-07]

NOTICE: Part V

DOCID: fr31au07-34

DOCUMENT ACTION: Notice of proposed rulemaking.

SUBJECT CATEGORY:

Benefit Restrictions for Underfunded Pension Plans

DATES: Written or electronic comments and requests for a public hearing must be received by November 29, 2007.

DOCUMENT SUMMARY:

This document contains proposed regulations providing guidance regarding the use of certain funding balances maintained for defined benefit pension plans and regarding benefit restrictions for certain underfunded defined benefit pension plans. The proposed regulations reflect changes made by the Pension Protection Act of 2006. These regulations affect sponsors, administrators, participants, and beneficiaries of single employer defined benefit pension plans.

SUMMARY:

Treasury Department, Internal Revenue Service,

SUPPLEMENTAL INFORMATION

Paperwork Reduction Act

The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by October 30, 2007. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or startup costs and costs of operation, maintenance, and purchase of service to provide information.

The collection of information in this proposed regulation is in Sec. 1.430(f)1(f) and Sec. Sec. 1.4361(f) and 1.4361(h). This information is required in order for a qualified defined benefit plan's enrolled actuary to provide a timely certification of the plan's AFTAP for each plan year to avoid certain benefit restrictions. In addition, these proposed regulations provide for several written elections to be made by the plan sponsor upon occasion. This information is voluntary to obtain a benefit. The likely respondents are qualified retirement plan sponsors and enrolled actuaries.

Estimated total annual reporting burden: 60,000 hours.

Estimated average annual burden hours per respondent: 0.75 hours.

Estimated number of respondents: 80,000.

Estimated annual frequency of responses: occasional.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background

This document contains proposed Income Tax Regulations (26 CFR part 1) under sections 430(f) and 436, as added to the Code by the Pension Protection Act of 2006 (PPA '06), Public Law 109280, 120 Stat. 780.

Section 412 contains minimum funding rules that generally apply to defined benefit plans.\1\ The minimum funding rules that apply specifically to single employer defined benefit plans (including multiple employer plans within the meaning of section 413(c)) are set forth in new section 430.
\1\ Section 302 of the Employee Retirement Income Security Act of 1974, as amended (ERISA) sets forth funding rules that are parallel to those in section 412 of the Code, section 303 of ERISA sets forth additional funding rules for defined benefit plans (other than multiemployer plans) that are parallel to those in section 430 of the Code, and section 206(g) of ERISA sets forth fundingbased limitations for defined benefit plans (other than multiemployer plans) that are parallel to those in section 436 of the Code. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and section 302 of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these proposed regulations for purposes of ERISA, as well as the Code. Thus, these proposed Treasury regulations issued under sections 430(f) and 436 of the Code apply as well for purposes of ERISA sections 303(f) and 206(g), respectively.

Section 430 generally provides that the minimum required contribution for a year is the sum of the target normal cost for the year and the shortfall and waiver amortization charges. Under section 430(f)(3), certain funding balances referred to as the prefunding balance and the funding standard carryover balance are permitted to be used to reduce the otherwise applicable minimum required contribution for a plan year in certain situations. Under section 430(f)(7), the funding standard carryover balance is based on the funding standard account credit balance as determined under section 412 for a plan as of the last day of the last plan year beginning in 2007. Under section 430(f)(6), the prefunding balance represents the accumulation of the contributions that an employer makes for a plan year that exceed the minimum required contribution for the year. Thus, an employer that makes additional contributions for a plan year is permitted in certain circumstances to use those excess contributions in order to satisfy the minimum funding requirement in a subsequent plan year.

The treatment of these balances under section 430 reflects congressional concern with the treatment of a funding standard account credit balance under the section 412 rules in effect prior to PPA '06. Accordingly, section 430(f)(3) sets forth new limits on the ability of a
[[Page 50545]]
poorly funded plan to use the prefunding balance and the funding standard carryover balance for a plan year. In addition, section 430(f)(4) requires that the prefunding balance and the funding standard carryover balance be subtracted from the value of plan assets for certain purposes (including the determination of the plan's funding target attainment percentage (FTAP), as defined under section 430(d)(2)) and section 430(f)(8) requires that the prefunding balance and the funding standard carryover balance be adjusted for actual investment return on the plan assets. In order to give employers the opportunity to minimize the impact of the requirement to subtract the prefunding balance and funding standard carryover balance from the plan assets, section 430(f)(5) permits an employer to elect to reduce the balances.

Section 401(a)(29) requires that a defined benefit plan (other than a multiemployer plan) satisfy the requirements of section 436. Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. Under section 436(g), these limitations (other than the limitations on accelerated benefit payments under section 436(d)) do not apply to a plan for the first 5 plan years of the plan, taking into account any predecessor plan.

Section 436(b) sets forth a limitation on plant shutdown and other unpredictable contingent event benefits in situations where the plan's adjusted funding target attainment percentage (AFTAP) for the plan year is less than 60 percent or would be less than 60 percent taking into account the occurrence of the event. For this purpose, an
``unpredictable contingent event benefit'' means any benefit payable solely by reason of (1) a plant shutdown (or a similar event) or (2) an event other than attainment of age, performance of service, receipt or derivation of compensation, or the occurrence of death or disability. Under section 436(b)(2), the limitation does not apply for a plan year if the plan sponsor makes a specified contribution (in addition to any minimum required contribution). If the AFTAP for a plan year is less than 60 percent, then the specified contribution is equal to the amount of the increase in the plan's funding target for the plan year attributable to the occurrence of the event. If the AFTAP for a plan year is 60 percent or more but would be less than 60 percent taking into account the occurrence of the event, then the specified contribution is the amount sufficient to result in an AFTAP of 60 percent taking into account the occurrence of the event.

Under section 436(c), a plan amendment that has the effect of increasing the liabilities of the plan by reason of any increase in benefits (including changes in vesting) may not take effect if the plan's AFTAP for the plan year is less than 80 percent or would be less than 80 percent taking into account the amendment. Under section 436(c)(2), the limitation does not apply for a plan year if the plan sponsor makes a specified contribution (in addition to any minimum required contribution). If the plan's AFTAP for the plan year is less than 80 percent, then the specified contribution is equal to the amount of the increase in the plan's funding target for the plan year attributable to the amendment. If the plan's AFTAP for the plan year is 80 percent or more but would be less than 80 percent taking into account the amendment, then the specified contribution is the amount sufficient to result in an AFTAP of 80 percent taking into account the amendment. In addition, under section 436(c)(3), the limitation does not apply to an amendment that provides for a benefit increase under a formula not based on compensation, but only if the rate of increase does not exceed the contemporaneous rate of increase in average wages of the participants covered by the amendment.

Under section 436(d), a plan is required to set forth certain limitations on accelerated benefit distributions. If the plan's AFTAP for a plan year is less than 60 percent, the plan must not make any prohibited payments after the valuation date for the plan year. If the plan's AFTAP for a plan year is at least 60 percent but is less than 80 percent, the plan must not pay any prohibited payment to the extent the payment exceeds the lesser of (1) 50 percent of the amount otherwise payable under the plan and (2) the present value of the maximum PBGC guarantee with respect to a participant. In addition, if the plan sponsor is in bankruptcy proceedings, the plan may not pay any prohibited payment unless the plan's enrolled actuary certifies that the AFTAP of the plan is at least 100 percent. However, section 436(d) does not apply to a plan for a plan year if the terms of the plan provide for no benefit accruals with respect to any participant for the period beginning on September 1, 2005, and extending throughout the plan year.

Under section 436(d)(5), a ``prohibited payment'' is (1) any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements that are provided under the plan), to a participant or beneficiary, (2) any payment for the purchase of an irrevocable commitment from an insurer to pay benefits (an annuity contract), or (3) any other payment specified by the Secretary by regulations.

Under section 436(e), a plan is required to provide that if the plan's AFTAP is less than 60 percent for a plan year, all future benefit accruals under the plan must cease as of the valuation date for the plan year. Under section 436(e)(2), the limitation ceases to apply with respect to any plan year, effective as of the first day of the plan year, if the plan sponsor makes a contribution (in addition to any minimum required contribution for the plan year) equal to the amount sufficient to result in an AFTAP of 60 percent.

Section 436(f) sets forth a series of rules under which the limitations of section 436 will not apply to a plan. Under section 436(f)(1), an employer is permitted to provide security to the plan (in the form of a surety bond, cash, or other forms satisfactory to the Treasury Department and the parties involved) that is treated as an asset of the plan for purposes of determining the plan's AFTAP. Under section 436(f)(2), if an employer uses the option in section 436(b)(2), 436(c)(2), or 436(e)(2) to make the specified contribution that would avoid a limitation under section 436, the specified contribution must be an actual contribution and the employer may not use a prefunding balance or funding standard carryover balance in lieu of making the specified contribution. In addition, a contribution to avoid a benefit limitation is disregarded in determining whether the minimum required contribution under section 430 has been made and in determining the plan's prefunding balance.

Section 436(f)(3) describes certain situations in which an employer is deemed to have made the election in section 430(f)(5) to reduce the plan's funding standard carryover balance or prefunding balance. Such an election has the effect of increasing the plan's FTAP (because the result of the election is a higher asset value used to determine the FTAP) and could lead to the plan not being subject to a benefit limitation under section 436. In particular, if the limitation under section 436(d) would otherwise apply to a plan, the plan sponsor is treated as having made an election (a deemed election) to reduce any prefunding balance or funding standard carryover balance by the amount necessary to prevent the benefit limitation from applying. A comparable rule applies to the other benefit limitations under sections 436(b), [[Page 50546]]
436(c), and 436(e), but only in the case of a plan maintained pursuant to a collective bargaining agreement. In either case, this deeming rule applies only if the prefunding balance and funding standard carryover balances are large enough to avoid the application of a section 436 limitation.

Section 436(h) sets forth a series of presumptions that apply during the portion of the plan year that is before the plan's enrolled actuary has certified the plan's AFTAP for the year. Under section 436(h)(1), if a plan was subject to a limitation under section 436(b), 436(c), 436(d), or 436(e) for the plan year preceding the current plan year, the plan's AFTAP for the current year is presumed to be the same as for the preceding year until the plan's enrolled actuary certifies the plan's AFTAP for the current year. Under section 436(h)(3), if any of these limitations did not apply to the plan for the preceding year, but the plan's AFTAP for the preceding year was within 10 percentage points of the limitation's threshold, the plan's AFTAP is presumed to be reduced by 10 percentage points as of the first day of the 4th month of the current plan year, unless the plan's enrolled actuary has certified the plan's AFTAP for the current year by that day (and that day is deemed to be the plan's valuation date for purposes of applying the benefit limitations). If the plan's enrolled actuary has not certified the plan's AFTAP by the first day of the 10th month of the current plan year, section 436(h)(2) provides that the plan's AFTAP is conclusively presumed to be less than 60 percent as of that day (and that day is deemed to be the valuation date for purposes of applying the benefit limitations).

Under section 436(i), unless the plan provides otherwise, if a limitation on prohibited payments or future benefit accruals under section 436(d) or (e) ceases to apply to a plan, all such payments and benefit accruals resume, effective as of the day following the close of the limitation period.

Section 436(j) provides definitions that are used under section 436, including the plan's AFTAP. In general, the plan's AFTAP is based on the plan's FTAP for the plan year. However, the plan's AFTAP is determined by adding the aggregate amount of purchases of annuities for employees other than highly compensated employees (within the meaning of section 414(q)) made by the plan during the two preceding plan years to the numerator and the denominator of the fraction used to determine the FTAP.

In addition, section 436(j)(3) provides a special rule which applies to certain wellfunded plans under which the plan's FTAP for purposes of section 436 (and hence the plan's AFTAP) is determined by using the plan's assets without reduction for the prefunding balance and the funding standard carryover balance. Section 436(j)(3)(B) sets forth a transition rule for determining eligibility for this special rule.

Section 436(k) provides that, for plan years that begin in 2008, the determination of the plan's FTAP for the preceding year is to be made pursuant to guidance issued by the Secretary.
Explanation of Provisions
I. Section 430(f)Effect of Prefunding Balance and Funding Standard Carryover Balance

A. Overview

1. In general. The proposed regulations would be the second in a series of proposed regulations under new section 430.\2\ These regulations would provide guidance on the application of section 430(f), relating to the establishment and maintenance of a funding standard carryover balance and a prefunding balance for purposes of sections 430 and 436. The Treasury Department and the IRS intend to issue additional proposed regulations relating to other portions of the rules under section 430 later in 2007.
\2\ Proposed regulation Sec. Sec. 1.430(h)(3)1 and
1.430(h)(3)2, relating to the mortality tables used to determine liabilities under section 430(h)(3), were issued May 29, 2007 (REG 14360106, 72 FR 29456).

2. Multiple employer plans. The proposed regulations under section 430(f) apply to plans subject to section 412 that are maintained by one employer or a controlled group of employers and to multiple employer plans within the meaning of section 413(c). In the case of a multiple employer plan to which section 413(c)(4)(A) applies, the rules under the proposed regulations would be applied separately for each employer under the plan, as if each employer maintained a separate plan. Thus, each employer under such a multiple employer plan may have a separate funding standard carryover balance and a prefunding balance for the plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in section 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), the proposed regulations under section 430(f) would apply as if all participants in the plan were employed by a single employer. B. Establishment of Prefunding Balance and Funding Standard Carryover Balance

The proposed regulations would provide that an employer is permitted to establish a prefunding balance for a plan that represents the accumulation of contributions made for plan years beginning on or after the effective date of section 430 with respect to the plan (the first effective plan year) that are in excess of the minimum required contributions (determined without regard to the prefunding balance and funding standard carryover balance) for those plan years. Specifically, for the first effective plan year of a plan, the prefunding balance is initialized at zero dollars and an employer is permitted to elect to add some or all of the excess contributions made to a plan for each plan year to the prefunding balance as of the first day of the next plan year. For this purpose, the excess contributions are generally determined as the amount by which the employer contributions to the plan for the plan year exceed the minimum required contribution for the plan year, with appropriate adjustments for interest determined at the effective interest rate under section 430(h)(2)(A). However, the proposed regulations would provide that any contribution that is made to avoid the application of a benefit limitation under section 436 is not taken into account in determining the amount of excess contributions.

The proposed regulations would also provide that the minimum required contribution for purposes of determining the amount of excess contributions for the year is determined without regard to any offset of the minimum required contribution for the year as a result of the use of the prefunding or funding standard carryover balances. Accordingly, an employer would not be permitted to add to the prefunding balance any amount of contributions that are ``excess'' by reason of an offset of the minimum required contribution for the year through the use of the prefunding balance or funding standard carryover balance. This prohibition precludes an employer from avoiding the requirement to adjust the prefunding balance and funding standard carryover balance by the actual rate of return on plan assets in the situation where the plan assets have experienced a loss (or a rate of return that is lower than the effective interest rate that is used for interest adjustments with respect to minimum required contributions for the plan year).

[[Page 50547]]

The proposed regulations would provide that the funding standard carryover balance is initialized as the balance in the funding standard account as of the last day of the last plan year before section 430 applies to a plan (the preeffective plan year). This is generally the last plan year beginning in 2007, but could be a later year in the case of a plan to which a delayed effective date applies under the rules of sections 104 through 106 of PPA '06.
C. Maintenance of Prefunding Balance and Funding Standard Carryover Balance

The proposed regulations would provide that a plan's prefunding balance and funding standard carryover balance as of the beginning of a plan year are adjusted to reflect the actual rate of return on plan assets for the plan year. This calculation of the actual rate of return on plan assets for the plan year is determined on the basis of fair market value and must take into account the amount and timing of all contributions, distributions, and other plan payments made during the year. The adjustment for investment return is applied to the prefunding balance and funding standard carryover balance after any reductions to those balances as described under the following two headings in this preamble. In addition, the proposed regulations would provide special rules in the case of a plan with a valuation date that is not the first day of the plan year.
D. Use of Prefunding Balance and Funding Standard Carryover Balance To Offset Minimum Funding Requirements for a Year

The proposed regulations would provide that the employer may elect to use some or all of the prefunding balance or funding standard carryover balance to offset the otherwise applicable minimum required contribution for a plan year, provided that the plan met a funding percentage threshold for the preceding plan year. Specifically, an employer is permitted to make such an election only if the plan's prior year funding ratio was at least 80 percent. For this purpose, the plan's prior year funding ratio generally is a fraction (expressed as a percentage), the numerator of which is the value of plan assets on the valuation date for the preceding plan year, reduced by the amount of any prefunding balance (but not the amount of any funding standard carryover balance), and the denominator of which is the funding target of the plan for the preceding plan year (determined without regard to the atrisk rules of section 430(i)(1)).

The proposed regulations would provide a transition rule to determine a plan's prior year funding ratio for the first effective plan year. Under this transition rule, the current liability for the plan for the preeffective plan year is substituted for the funding target of the plan for that plan year. In addition, the transition rule provides that the value of plan assets is determined under section 412(c)(2) as in effect for that preeffective plan year, except that the value of plan assets must be limited so that it is not less than 90 percent and not more than 110 percent of the fair market value of plan assets.

The proposed regulations would reflect the rule in section 430(f)(3)(B) that requires the plan sponsor to have reduced the funding standard carryover balance in full (either by using the funding standard carryover balance to offset the minimum required contribution for a year or through a voluntary reduction under section 430(f)(5)) before the prefunding balance is permitted to be used to offset a current year minimum funding requirement.
E. Subtraction From Plan Assets and Employer Election To Reduce Balances

The proposed regulations would reflect the rules under section 430(f)(4) which provide that the prefunding balance and funding standard carryover balance are subtracted from the plan assets for certain purposes. These include the determination of the FTAP, which is also relevant for purposes of applying the benefit limitations of section 436.

In accordance with section 430(f)(4)(A), the proposed regulations would provide that the amount of the prefunding balance is subtracted from the value of plan assets for purposes of determining whether a plan is exempt from the requirement to establish a new shortfall amortization base under section 430(c)(5) only if an election to use the prefunding balance to offset the minimum required contribution is made for the plan year. In addition, pursuant to section
430(f)(4)(B)(ii), the proposed regulations would provide that the prefunding balance and funding standard carryover balance are not subtracted from plan assets for purposes of determining the funding shortfall under section 430(c)(4) to the extent that there is a binding written agreement with the Pension Benefit Guaranty Corporation (PBGC) which provides that all or a portion of those balances cannot be used to offset the minimum required contribution for a plan year. For this purpose, an agreement with the PBGC is taken into account with respect to a plan year only if the agreement was executed prior to the valuation date for the plan year.

In addition, section 436(j) sets forth an exception from the requirement to subtract the plan's prefunding balance and funding standard carryover balance from the value of plan assets in determining a plan's FTAP for purposes of the benefit limitation rules of section 436 provided that the plan's FTAP would meet certain standards if it were calculated without subtracting the balances from plan assets.

Section 430(f)(5) provides that an employer may elect to reduce the amount of the prefunding balance and the funding standard carryover balance. This will have the effect of increasing the plan assets for various purposes. For example, the increase in plan assets will increase the FTAP, which may allow the plan to avoid the application of section 436 limitations. The proposed regulations would reflect the rule in section 430(f)(5)(B) that requires the employer to reduce the funding standard carryover balance in full (either by using the funding standard carryover balance to offset the minimum required contribution for a year or through a voluntary reduction under section 430(f)(5)) before any reduction is permitted for the prefunding balance. F. Elections Under Section 430(f)

The proposed regulations would provide that an election under section 430(f) is made by the plan sponsor by providing written notification of the election to the plan's enrolled actuary and the plan administrator, must be irrevocable when made, and must satisfy certain timing rules. The written notification must set forth the relevant details of the election, including the specific amounts involved in the election with respect to the prefunding balance and funding standard carryover balance. An election under section 430(f) generally must be made on or before the due date (with extensions) for the filing of the plan's Form 5500 ``Annual Return/Report of Employee Benefit Plan'' for the plan year to which the election relates (or, in the case of a plan not required to file a Form 5500 for the plan year, before the last day of the seventh month after the end of the plan year to which the election relates). For this purpose, an election to add to the prefunding balance relates to the plan year for which excess contributions were made. However, the proposed regulations would require any section 430(f)(5) election to reduce a portion of the prefunding balance or funding standard carryover balance for a plan year to be made by the end of the plan
[[Page 50548]]
year to which the election relates. For example, in the case of a calendar year plan required to file Form 5500, an election to add to the prefunding balance as of the first day of the 2010 plan year (in an amount not in excess of the 2009 interestadjusted excess
contributions), must be made no later than the due date for filing the 2009 Form 5500 (with extensions) while an election to reduce the prefunding balance as of the first day of the 2010 plan year must be made by the end of the 2010 plan year. In both cases, the election would be reported on the 2010 Form 5500 (Schedule SB) that would be filed in 2011.

The proposed regulations would provide that, for purposes of elections under section 430(f), any reference in the proposed regulations to the plan sponsor generally means the employer or employers responsible for making contributions to the plan. However, in the case of elections under section 430(f) for multiple employer plans to which section 413(c)(4)(A) does not apply, any reference in the proposed regulations to the plan sponsor means the plan administrator within the meaning of section 414(g).
II. Section 436Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans

A. Overview and General Rules

1. In general. The proposed regulations would set forth the rules that a defined benefit pension plan that is subject to section 412 and that is not a multiemployer plan must satisfy in order to comply with the requirement in section 401(a)(29) that the plan meet the requirements of section 436. This requirement is a qualification requirement. A plan satisfies the requirements of section 436 only if the plan meets the requirements of these regulations.

2. New plans. In accordance with section 436(g), the proposed regulations would provide that the limitations described in sections 436(b), 436(c), and 436(e) do not apply to a plan for the first five plan years of the plan. For purposes of applying this new plan rule, plan years under a plan are aggregated with plan years under a predecessor plan. Thus, the only benefit limitation that could apply under a plan that is not a successor plan during the first five years of its existence is the section 436(d) limitation applicable to accelerated benefit payments (such as single sum distributions).

3. Multiple employer plans. The proposed regulations under section 436 apply to plans maintained by one employer (including a controlled group of employers) and to multiple employer plans (within the meaning of section 413(c)). In the case of a multiple employer plan to which section 413(c)(4)(A) applies, the rules under the proposed regulations would be applied separately for each employer under the plan, as if each employer maintained a separate plan. Thus, the benefit limitations under section 436 could apply differently to employees of different employers under such a multiple employer plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in section 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), the proposed regulations under section 436 would apply as if all participants in the plan were employed by a single employer.

4. Treatment of plan as of close of prohibited or cessation period. The proposed regulations would provide that, if a limitation on accelerated benefit payments under section 436(d) (such as single sum distributions) applies to a plan as of a section 436 measurement date, but that limit subsequently ceases to apply to the plan as of a later section 436 measurement date, then the limitation does not apply to benefits with annuity starting dates that are on or after that later section 436 measurement date. In addition, the proposed regulations would provide that, if a limitation on benefit accruals under section 436(e) applies to a plan, unless the plan provides otherwise, benefit accruals under the plan will resume effective as of the section 436 measurement date as of which benefit accruals are no longer restricted.

With respect to a participant who had an annuity starting date within a period during which the accelerated benefit payment limitation rules of section 436(d) applied to the plan, once the limitation ceases to apply, the participant's benefits will continue to be paid in the form previously elected unless the plan permits the participant to be offered a new election which would modify the prior election. The proposed regulations would permit a plan to provide that the participant will be offered the opportunity to have a new election under which the form of benefit previously elected may be modified, subject to applicable qualification requirements, and that new election will constitute a new annuity starting date for purposes of section 417. Similarly, a plan is permitted to be amended to provide that any benefit accruals that were limited under the rules of section 436(e) will be credited under the plan once the limitation no longer applies, subject to applicable qualification requirements. If a plan provides for the restoration of benefit accruals for the period of the limitation under preexisting plan terms, the plan is treated as having adopted an amendment that has the effect of increasing liabilities under the plan if the period of the limitation exceeded 12 months. Whether a plan is amended or is treated as having been amended as described above, the amendment or preexisting plan provision is subject to the limitations of section 436(c).\3\
\3\ The PBGC has informed the IRS and the Treasury Department that it expects similarly to treat such an automatic restoration of missed benefit accruals as a plan amendment.

In addition, the proposed regulations would provide that a plan is permitted to be amended to provide that any unpredictable contingent event benefits that were limited under the rules of section 436(b) will be paid or reinstated when the limitation no longer applies, subject to applicable qualification requirements. Any such amendment is subject to the limitations of section 436(c). A plan is not permitted to provide for restoration of any such unpredictable contingent event benefits without an amendment that complies with section 436(c).

5. Deemed election to reduce prefunding and funding standard carryover balances. The proposed regulations would provide that, if a limitation on accelerated benefit payments under section 436(d) would otherwise apply to a plan, the plan sponsor is treated as having made an election under section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for the AFTAP to be at or above the applicable threshold (60, 80, or 100 percent, as the case may be) in order for the benefit limitation not to apply to the plan. In such a case, the plan sponsor is treated as having made that election on the section 436 measurement date as of which the benefit limitation would otherwise apply. This deemed election applies if the plan provides for accelerated distributions that would be limited in a plan year, regardless of whether a plan participant is eligible or elects to receive such a distribution during the plan year (but does not apply if the plan does not provide for any accelerated distributions that are subject to the benefit limitation). However, the deemed reduction applies with respect to this limitation only if the prefunding and funding standard carryover balances to be reduced are large enough
[[Page 50549]]
to avoid the application of the limitation. Thus, no reduction of prefunding and funding standard carryover balances is required if the limitation would still apply for a year even if those balances were reduced to zero.

In addition, the proposed regulations would provide that, in the case of a plan maintained pursuant to one or more collective bargaining agreements between an employee representative and one or more employers in which a benefit limitation under section 436(b), 436(c), or 436(e) would otherwise apply to the plan, the employer is treated for purposes of section 436 as having made an election under section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for the AFTAP to be at or above the applicable threshold for the benefit limitation not to apply to the plan, taking into account the unpredictable contingent event benefits or plan amendment, as applicable. The proposed regulations would provide that, in the case of a plan with respect to which collective bargaining agreements apply to some, but not all, of the plan participants, the plan is considered a collectively bargained plan for purposes of this provision if at least 25 percent of the participants in the plan are members of the collective bargaining units for whom the benefit levels under the plan are specified under the collective bargaining agreements. As in the case of the deemed reduction in funding balances for the accelerated benefit distributions under section 436(d), the deemed reduction applies only if the prefunding and funding standard carryover balances to be reduced are large enough to avoid the application of the limitation under section 436(b), 436(c), or 436(e), as applicable.

If the mandatory reduction of funding balances applies to a plan, the employer is treated as having made that election on the date as of which the applicable benefit restriction would otherwise apply. In addition, the proposed regulations would provide that, if a plan (whether or not collectively bargained) is presumed to have an AFTAP of less than 60 percent under the section 436(h) presumption rules, then the plan is treated as if the plan's funding standard carryover balance and prefunding balance are insufficient to increase the plan's AFTAP to the threshold percentage.

6. Section 436 measurement date. The ``section 436 measurement date'' is a defined term under the proposed regulations that is used to describe the date that stops or starts the application of the limitations of sections 436(d) and 436(e) and is also used for calculations with respect to applying the limitations of sections 436(b) and 436(c). The regulations would provide that the date of the enrolled actuary's certification of the AFTAP for the plan year is a section 436 measurement date if it occurs within the first nine months of the plan year. If the date of an enrolled actuary's certification of the AFTAP is between the first day of the 10th month of a plan year and the last day of that plan year, that date is not a section 436 measurement date for purposes of the limitations of section 436(d) or 436(e) because, in that case, the plan's AFTAP is presumed to be under 60 percent (however, receipt of the enrolled actuary's certification during that period impacts the plan's presumed ``carryover'' AFTAP for the following year). The proposed regulations would provide that a section 436 measurement date occurs where there is a change in the plan's AFTAP under the presumption rules of section 436(h). In addition, the proposed regulations would provide a series of rules in cases where the enrolled actuary's certification of the AFTAP for a plan year is made after the end of the plan year, as described below under the heading ``Presumed underfunding for purposes of benefit limitations.''
B. Limitation on Plant Shutdown and Other Unpredictable Contingent Event Benefits

In accordance with section 436(b), the proposed regulations would provide that a plan that provides for any unpredictable contingent event benefit \4\ must provide that the benefit will not be paid to a plan participant during a plan year if the AFTAP for the plan year is less than 60 percent (or is 60 percent or more but would be less than 60 percent if the benefits attributable to the unpredictable contingent event were taken into account in determining the AFTAP). However, this prohibition on payment of unpredictable contingent event benefits no longer applies for a plan year, effective as of the first day of the plan year, if the employer makes the contribution specified in section 436(b)(2), as described in paragraph F in this preamble.
\4\ See also Notice 200714, IRB 501, (see Sec. 601.601(d)(2) of this chapter) requesting comments on the types of benefits that are permitted to be provided in a qualified defined benefit plan, including benefits payable in the event of a plant shutdown or similar event.

For this purpose, the proposed regulations would provide that an ``unpredictable contingent event benefit'' means any benefit or increase in benefits to the extent the benefit or increase would not be payable but for the occurrence of an unpredictable contingent event, and an ``unpredictable contingent event'' means a plant shutdown (whether full or partial) or similar event, or an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability. Thus, for example, if a plan provides for an unreduced early retirement benefit upon the occurrence of an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability, then that unreduced early retirement benefit is an unpredictable contingent event benefit to the extent of any portion of the benefit that would not be payable but for the occurrence of the event, even if the remainder of the benefit is payable without regard to the occurrence of the event. Similarly, an unpredictable contingent event benefit under the proposed regulations includes a benefit payable upon the presence of circumstances specified in the plan (other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability), so that a plan that provides those benefits upon a participant's severance from employment in those circumstances, but not upon a severance from employment that does not involve those circumstances, is providing an unpredictable contingent event benefit.

Unpredictable contingent event benefits attributable to a plant shutdown or other unpredictable contingent event that occurred within a period during which no limitation under section 436(b) applied to the plan are not affected by the limitation as it applies in a subsequent period. For example, if a plant shutdown occurs in 2010 and a plan's funded status is such that its shutdown benefits are not subject to the limitation for that plan year, benefits paid pursuant to that shutdown are permitted to be paid in a later plan year even if the plan's AFTAP for the subsequent year is less than 60 percent. Conversely, if a plant shutdown occurs in 2010 and a plan's funded status is such that its shutdown benefits are subject to the limitation under section 436(b) for that plan year and cannot be paid, those shutdown benefits related to the 2010 plant shutdown are not permitted to be paid in a later year even if the plan's AFTAP for the later year is at or above the 60 percent threshold for the section 436(b) limitation (subject to [[Page 50550]]
the rules permitting plan amendments to reinstate previously restricted benefits, including unpredictable contingent event benefits, as described in paragraph II.A.4 of this preamble).
C. Limitations on Plan Amendments Increasing Liability for Benefits

In accordance with section 436(c), the proposed regulations would provide that a plan satisfies the limitation on plan amendments increasing liability for benefits only if the plan provides that no amendment to the plan that has the effect of increasing liabilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable is permitted to take effect if the AFTAP for the plan year is less than 80 percent (or is 80 percent or more but would be less than 80 percent if the benefits attributable to the amendment were taken into account in determining the AFTAP). However, this prohibition on plan amendments no longer applies for a plan year if the employer makes the contribution specified in section 436(c)(2), as described in paragraph F of this preamble.

In accordance with section 436(c)(3), the limitation on amendments increasing liabilities does not apply to any amendment that provides for an increase in benefits under a formula that is not based on a participant's compensation, but only if the rate of increase in benefits does not exceed the contemporaneous rate of increase in average wages of participants covered by the amendment. The proposed regulations would provide that the determination of the rate of increase in average wages is made by taking into consideration the net increase in average wages during the period beginning with the effective date of the most recent benefit increase applicable to all of those participants who are covered by the current amendment and ending on the effective date of the current amendment. If the participants covered by an amendment include both currently employed participants and terminated participants (who will have no increase or decrease in wages for this purpose after severance from employment), all covered participants must be included in determining the increase in average wages of the participants covered by the amendment. Alternatively, the employer could adopt two amendmentsone that increases benefits for currently employed participants and another one that increases benefits for the terminated participants. In that case, this exception from application of the section 436(c) limitation generally would apply to the amendment that increases benefits for currently employed participants (based solely on the wages of those current employees), but the amendment that applies only to terminated participants (who received no increase in wages from the employer during the period over which the increase in average wages is determined) would not be eligible for the exception.

In addition, the proposed regulations would provide that, to the extent that any amendment results in (or is made pursuant to) a mandatory increase in the vesting of benefits under the Code or ERISA (such as vesting rate increases pursuant to statute and plan termination amendments under section 411(d)(3)), that amendment does not constitute an amendment that changes the rate at which benefits become nonforfeitable for purposes of section 436(c).

D. Limitations on Accelerated Benefit Distributions

1. Funding percentage less than 60 percent. In accordance with section 436(d)(1), under the proposed regulations, a plan must provide that, if the plan's AFTAP for a plan year is less than 60 percent, the plan will not pay any prohibited payment with an annuity starting date that is on or after the applicable section 436 measurement date. However, if a participant requests such a prohibited distribution, the plan must permit the participant to elect another form of benefit available under the plan or to defer payment to a later date to the extent permitted under applicable qualification requirements. Similar rules apply in any case in which a beneficiary is entitled to a prohibited payment (for example, where a qualified preretirement survivor annuity is offered in an alternative single sum payment).

2. Bankruptcy. In accordance with section 436(d)(2), under the proposed regulations, a plan must provide that the plan will not pay any prohibited payment with an annuity starting date that is during any period during a plan year in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, until the date on which the enrolled actuary of the plan certifies that the plan's AFTAP is not less than 100 percent.

3. Limited payment if percentage at least 60 percent but less than 80 percent. In accordance with section 436(d)(3), under the proposed regulations, a plan must provide that, in any case in which the plan's AFTAP for a plan year is 60 percent or more but is less than 80 percent, a participant is permitted to elect a prohibited payment only if the present value of the portion of the payment that is greater than the amount of the monthly straight life annuity under the plan (and any social security supplement, if applicable) does not exceed 50 percent of the present value of the participant's benefits (or if less, 100 percent of the present value of the maximum guarantee with respect to the participant under section 4022 of ERISA). For this purpose, present value is determined using the rules of section 417(e) except that, if the plan provides a single sum distribution that is larger than the present value of the benefit determined using the rules of section 417(e), then that larger benefit is substituted for the present value of the participant's benefits before applying the 50 percent factor. Similar rules apply in any case in which a beneficiary is entitled to a prohibited payment.

If an optional form of benefit that is otherwise available under the terms of the plan is not available as of the annuity starting date because it is a prohibited payment that cannot be paid under the preceding paragraph, then the plan must provide a participant who elects such an optional form with the option either to defer payment to a later date (to the extent permitted under applicable qualification requirements) or to bifurcate the benefit into unrestricted and restricted portions. If the participant elects to bifurcate the benefit, the plan must permit the participant to elect, with respect to the unrestricted portion, any optional form of benefit otherwise available under the plan with respect to the participant's entire benefit (whether or not the optional form of benefit with respect to the unrestricted portion is a prohibited payment). The unrestricted portion of the benefit is the lesser of (i) 50 percent of the benefit and (ii) the benefit that has a present value that does not exceed 100 percent of the present value of the maximum PBGC guarantee with respect to the participant under section 4022 of ERISA. If the participant elects payment of the unrestricted portion of the benefit in the form of a prohibited payment, then the plan must permit the participant to elect payment of the restricted portion in any optional form of benefit under the plan that would have been permitted with respect to the participant's entire benefit other than a prohibited payment. A plan is also permitted (but not required) to offer optional forms of benefit that are solely available during the period section 436(d)(3) applies to the plan, such as an optional form of benefit that provides [[Page 50551]]
for the current payment of the unrestricted portion of the benefit, with a delayed commencement for the restricted portion of the benefit, subject to other applicable qualification requirements.

A participant who receives a prohibited payment (or a series of prohibited payments under a single optional form of benefit) under the rule permitting certain prohibited payments cannot receive any additional payment that would be a prohibited payment until there is a plan year for which none of the limitations on accelerated distributions under section 436(d) apply. Benefits provided to a participant and any beneficiary are aggregated for purposes of determining the limited distribution under section 436(d)(3). The proposed regulations would also reflect the rules of section 436(d)(3)(B)(ii), which describes how this limited distribution is allocated among the beneficiaries of a participant.

4. Exception for certain frozen plans. In accordance with section 436(d)(4), the limitations under section 436(d) will not apply to a plan for any plan year if the terms of the plan, as in effect for the period beginning on September 1, 2005, provided for no benefit accruals with respect to any participants. However, if such a plan provides for any benefit accruals during a plan year, this exception will cease to apply for the plan as of the date those accruals start.

5. Prohibited payment. In accordance with section 436(d)(5), the proposed regulations would provide that the term ``prohibited payment'' means:
(i) Any payment for a month that is in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose annuity starting date (as defined in section 417(f)(2)) occurs during any period that a limitation on accelerated benefit payments is in effect;
(ii) Any payment for the purchase of an irrevocable commitment from an insurer to pay benefits; and
(iii) Any other payment that is identified as a prohibited payment by the Commissioner in revenue rulings and procedures, notices and other guidance published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).

In addition, for purposes of applying the limitations on accelerated benefit payments under the requirements of section 436(d), the term annuity starting date means, as applicable
(a) The first day of the first period for which an amount is payable as an annuity as described in section 417(f)(2)(A)(i); (b) In the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred (including the participant's election, the participant's severance from employment if the participant is below normal retirement age, and, if applicable, the participant's survival to the date as of which payment is made) which entitle the participant to such benefit as described in section 417(f)(2)(A)(ii);
(c) In the case of an amount payable on a retroactive annuity starting date, the benefit commencement date; and
(d) The date of any payment for the purchase of an irrevocable commitment from an insurer to pay benefits under plan.

E. Limitation on Benefit Accruals

In accordance with section 436(e), under the proposed regulations, a plan must provide that, in any case in which the plan's AFTAP for a plan year is less than 60 percent, benefit accruals under the plan will cease as of the applicable section 436 measurement date. If a plan must cease benefit accruals under this limitation, then the plan is also not permitted to be amended in a manner that would increase the liabilities of the plan by reason of an increase in benefits or establishment of new benefits. This rule applies regardless of whether an amendment would otherwise be permissible under section 436(c)(3) (involving certain amendments to increase benefits under a formula not based on a participant's compensation). This prohibition on additional benefit accruals will no longer apply for a plan year if the plan sponsor makes the contribution specified in section 436(e)(2), as described in paragraph F of this preamble.
F. Rules Relating to Contributions Required To Avoid Benefit Limitations

The proposed regulations provide rules regarding contributions by the plan sponsor to avoid benefit limitations under section 436. An employer sponsoring a plan that would otherwise be subject to the limitations of section 436 can avoid the application of those limits through one of four different techniques: 1) reducing the funding standard carryover balance and prefunding balance; 2) making additional contributions for a prior plan year that are not added to the prefunding balance; 3) making the specific contributions described in sections 436(b)(2), 436(c)(2), and 436(e)(2); and 4) providing security, as described in section 436(f)(1).

As noted in this preamble, under the first of the techniques, if a plan sponsor elects to reduce the plan's funding standard carryover balance or the prefunding balance, this will have the effect of increasing the plan assets that are taken into account in determining the plan's FTAP and AFTAP and, thereby, will raise the AFTAP to a level so that the benefit limitations may no longer apply to the plan. Alternatively, if the deadline for making prior year contributions has not passed, the plan sponsor could utilize the second techniquemaking additional contributions for the prior plan year. If these additional contributions are not added to the prefunding balance, then the additional contributions will also have the effect of increasing the plan's FTAP and AFTAP.

The third and fourth techniques for avoiding the application of the benefit limitations of section 436 are described in Sec. 1.4361(f) of the proposed regulations. Under the third technique, the plan sponsor makes additional contributions that are specifically designated at the time the contribution is used to avoid the application of a limitation under section 436(b), 436(c), or 436(e). The proposed regulations would provide for this designation to be provided to the plan's enrolled actuary and plan administrator in writing. Furthermore, the designation must be irrevocable, except as described below. If the contributions are made on a date other than the valuation date for the plan year, the contributions must be adjusted for interest (using the plan's effective interest rate, except as provided in the proposed regulations). These contributions are separate from any minimum required contributions required by section 430, and no prefunding balance or funding standard carryover balance under section 430(f) may be used as a contribution to avoid a section 436 benefit limitation. A plan sponsor that makes such a current year contribution will nonetheless fail to satisfy the minimum funding requirements if it does not make the minimum required contribution under section 430 for the year. In addition, as noted above, these contributions are not taken into account in determining whether a plan sponsor is making excess contributions for purposes of adding to the plan's prefunding balance.

The fourth technique for a plan sponsor to avoid the application of the benefit limitations of section 436 is for the plan sponsor to provide security. In such a case, the AFTAP for the plan year is determined by treating as an asset of the plan any security provided by a plan sponsor by the valuation date
[[Page 50552]]
for the plan year in a form meeting certain specified requirements. However, this security is not taken into account for any other purpose, including section 430. The only security permitted to be provided by a plan sponsor for this purpose is (i) a bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of ERISA, or (ii) cash or United States obligations that mature in three years or less that are held in escrow by a bank or insurance company. The regulations would reflect sections 436(f)(1)(C) and (D) in specifying when the security is to be contributed to the plan and when it may be released. If the security is turned over to the plan, then that amount is treated as an employer contribution when it is turned over to the plan. The proposed regulations would provide that any such security turned over to the plan pursuant to the enforcement mechanism cannot be treated as a contribution to avoid or terminate the application of a section 436 benefit limitation under section 436(b)(2), 436(c)(2), or 436(e)(2).
G. Presumed Underfunding for Purposes of Benefit Limitations

The proposed regulations reflect the rules of section 436(h), which sets forth a series of presumptions that are used to apply the section 436 benefit limitations in situations where the plan's enrolled actuary has not yet issued a certification of the plan's AFTAP for the plan year. In addition, the proposed regulations also set forth rules for the application of the limitations prior to and during the period those presumptions apply to a plan, and describe the interaction of those presumptions with plan operations after the plan's enrolled actuary has issued a certification of the plan's AFTAP for the plan year. These rules are designed to encourage plans to obtain certifications in a timely manner, with a particular emphasis with respect to plans that have a greater likelihood of having a new section 436 benefit limitation apply because they had an AFTAP for the prior plan year that was near a threshold for a benefit limitation to apply.

The proposed regulations would provide that, in any case in which a plan was subject to a benefit limitation on the last day of the prior plan year, the first day of the plan year is a section 436 measurement date and the AFTAP of the plan for the current plan year is presumed to be equal to the preceding year's certified AFTAP until the plan's enrolled actuary certifies the AFTAP of the plan for the current plan year. Because no plan could be subject to a benefit limitation for a plan year that precedes the plan year that begins in 2008, the section 436(h)(1) presumption generally will not apply to any plan before the first plan year beginning in 2009.

In accordance with section 436(h)(3), the proposed regulations would provide that, if the enrolled actuary of the plan has not certified the AFTAP of the plan for the current plan year by the first day of the 4th month of the plan year and the AFTAP for the preceding year was certified to be at least 60 percent but less than 70 percent or at least 80 percent but less than 90 percent, then the first day of the 4th month of the current plan year is a section 436 measurement date, and the AFTAP of the plan is presumed to be equal to 10 percentage points less than the AFTAP of the plan for the preceding plan year. This presumption will apply until the earlier of the date the enrolled actuary certifies the AFTAP for the plan year or the first day of the 10th month of the plan year.

In accordance with section 436(h)(2), the proposed regulations would provide that, in any case in which no certification of the specific AFTAP for the current plan year is made before the first day of the 10th month of such year, that date is a section 436 measurement date and, as of that date, the plan's AFTAP is conclusively presumed to be less than 60 percent. In such a case, the presumed AFTAP of under 60 percent for the current plan year will continue to apply under the rules of section 436(h)(1) for the next plan year, until such time as the enrolled actuary certifies the AFTAP for either the current plan year or the next plan year.

The proposed regulations would provide rules that apply the section 436(h) presumptions for the plan year in cases in which the enrolled actuary's certification for the prior plan year is made on or after the first day of the 10th month of that prior plan year. If the date of the enrolled actuary's certification of the specific AFTAP for a plan year occurs on or after the date the conclusive presumption applies but on or before the last day of the plan year, the proposed regulations would provide that the certified percentage is disregarded for that plan year but is used for purposes of the presumption rule of section 436(h)(1) starting with the beginning of the following plan year (rather than continuing to apply the lessthan60 percent presumption that applied before the first day of that following plan year). If the date of the enrolled actuary's certification of the specific AFTAP for a plan year occurs after the end of the plan year but prior to the first day of the 4th month in the following plan year, the proposed regulations would provide that the certification date is treated as a section 436 measurement date for that following plan year and that, starting on that date, the plan's AFTAP is presumed to be the certified AFTAP for the prior year (rather than continuing to apply the lessthan60 percent presumption that applied before the certification). If the date of the enrolled actuary's certification of the specific AFTAP for a plan year occurs after the first day of the 4th month in the following plan year but before the first day of the 10th month, the proposed regulations would provide that the certification date also is a section 436 measurement date for that followin

FOR FURTHER INFORMATION CONTACT

Lauson C. Green or Linda S.F. Marshall at (202) 6226090; concerning submissions and requests for a public hearing, contact Kelly Banks at (202) 6227180 (not tollfree numbers).

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