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Guest Article

Deloitte logo

(From the December 30, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Releases Promised Guidance on Pension Funding Relief


The IRS delivered on its promise earlier this year to issue guidance on the special funding relief available to single-employer defined benefit pension plans under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA). The substantial, forty-six page release discusses in detail the requirements for - and ramifications of - electing the relief under the PRA (i.e., electing an alternative amortization schedule). The earliest elections (e.g., for the 2010 calendar plan year and earlier eligible plan years) need to be made by January 31, 2011. The PBGC must be notified by January 31, 2011 (or, if later, 30 days after the date the election is made), with the related notices provided to participants and beneficiaries by May 2, 2011 (or, if later, 120 days after the end of the plan year to which the election relates). Such plans are permitted to make or change certain funding-related elections up until March 31, 2011 (or, if later, the due date for making such funding-related elections under Regulation § 1.430(f)-1(f)).

PRA Funding Relief

The PRA allows single-employer defined benefit plans to elect to amortize the plan's shortfall amortization base for certain years under an alternative amortization schedule. Instead of the normal seven years, an alternative 2-plus-7 year or 15-year amortization schedule can be elected with respect to one or two eligible plan years. The installments required under alternative amortization schedule are accelerated in the event certain "excess" compensation payments, dividends or stock redemptions occur.

Shortly after enactment of the PRA, the IRS issued Notice 2010-55 which underscores that an alternative schedule can be elected only with respect to a plan year whose due date for the minimum required contribution occurs after June 25, 2010, the date of enactment. It promised that the guidance necessary to make the elections, to provide the required notices, to calculate the shortfall amortization installments, to apply the installment acceleration rules and other related matters would be forthcoming. In the meantime, it clarified that for plan years ending before the guidance is issued, a plan sponsor will be permitted to elect an alternative amortization schedule regardless of whether the Form 5500 (and Schedule SB) was filed for the year.

Promised Guidance

By its terms, Notice 2011-3 constitutes the promised guidance. It breaks down the critical components of the PRA funding relief into ten sections:

  • General rules
  • Installment acceleration amounts
  • Excess compensation amounts
  • Excess shareholder payment amounts
  • Mergers and acquisitions
  • Elections to use an alternative amortization schedule
  • Notification to participants, beneficiaries, and the PBGC
  • Eligible charity plans
  • Reporting requirements
  • Transition rules

In addition to setting forth the general rules, the Notice provides numerous examples - including examples on how the installment amounts are calculated under the alternative amortization schedules, how the acceleration adjustment affects the installments for future years, how the annual limitation applies to the increased installments, how the acceleration amount is allocated among more than one plan where the sponsor elects to use alternative amortization schedules for more than one plan (and, also, where more than one election year applies to such plans). Examples are also provided regarding excess shareholder payment amounts, including examples on when dividends are determined and declared in the same manner for at least 5 consecutive years, and how the calculation of excess shareholder payment amounts changes if the installment acceleration amount is to be allocated among two or more plans with differing plan years. Other examples include how a merger or acquisition affects the calculation of the excess compensation amount and the excess shareholder payment amount.

Notable Observations

The Notice merits a careful read by affected parties. Among the general rules and guidance, it contains the following notable items:

  • Funding Waiver Potentially Affected - An election to use an alternative amortization schedule may affect the sponsor's ability to obtain a funding waiver for the plan, since requests for waivers are reviewed on a facts and circumstances basis. A relevant factor would be whether the combination of a funding waiver and the use of an alternative amortization schedule would reduce the minimum required contributions to a point where the granting of the waiver would be adverse to the interests of the plan participants. Q&A G-7.
  • Election for Two Plan Years Caveat - If an alternative amortization schedule is elected for two plan years it is possible for the minimum required contribution to be increased by $2 for every $1 of the installment acceleration amount (i.e., where the installment acceleration amount arises in the restriction period for both election years). The installment acceleration amount is added twice where the plan sponsor elects to use an alternative amortization schedule for two shortfall amortization bases for any plan in the controlled group and both those bases are still within the restriction period. Q&A I-10.
  • Narrow Definition of Commission - Remuneration payable on a commission basis is not taken into account in determining excess compensation amounts. The Notice makes clear that "on a commission basis" means that the remuneration "is paid solely on account of income generated directly by the individual performance of the individual to whom the compensation is paid and the income is a result of a direct sale of a product or service to an unrelated customer in the ordinary course of the business of the employer." Remuneration paid because of income produced by a business unit, or on account of the disposition of a business unit that is not in the ordinary course of business of the employer, would not qualify as commission. Q&A C-6.
  • Dividends "Determined and Declared" - An excess shareholder payment amount is the excess (if any) of the sum of the dividends declared during the plan year by the plan sponsor plus the aggregate amount paid for redemption of stock of the sponsor redeemed during the plan year, over the greater of two amounts: the sponsor's adjusted net income or, in the case of a plan sponsor who "determined and declared dividends in the same manner for at least 5 consecutive years immediately preceding such plan year," the aggregate amount of such dividends determined and declared for such plan year using such manner. The Notice makes clear that "determined and declared dividends in the same manner for at least 5 consecutive years" means:
    [T]he dividends are determined using the same formula (including the same specified dollar amount, determined on either a per share basis, with appropriate adjustments for stock splits and similar changes in capitalization, or on an aggregate basis) as was used for dividends declared during the 60-month period immediately preceding the first day of that plan year. Other examples of dividends determined using the same formula include dividends that increase by a fixed amount each year, dividends that increase by a fixed percentage each year, and dividends that are a fixed percentage of income, earnings, or other consistently applied measure of profitability. Q&A S-3.
  • Redemptions on Account of Death, Disability or Termination of Employment - Redemption of shares made pursuant to a plan maintained with respect to employees (whether or not qualified) are not taken in to account in determining excess shareholder payment amounts. The Notice makes clear that this would not include an agreement or arrangement that covers only a single individual. Q&A S-7.
  • Mergers and Acquisitions - If a plan sponsor that elected to use an alternative amortization schedule merges with, acquires, or is acquired by another company outside of its controlled group and which did not elect to use an alternative amortization schedule, the compensation amounts with respect to employees of the other company that would otherwise be taken into account prior to the date of the merger or acquisition are disregarded in calculating the excess compensation payment amounts for the plan sponsor. Similarly, any dividends declared by such other company and any redemptions of stock of such other company that occur prior to the date of the transaction are ignored for the purpose of calculating the excess shareholder payment amounts. Q&A M-1.

Elections and Notice

A sponsor must make an election to use an alternative amortization schedule in the manner provided in the Notice (i.e., by giving a prescribed written notice to the plan administrator and the plan's enrolled actuary) no later than the latest of: (a) the last day of the plan year for which the election is made, (b) 30 days after the valuation date for the plan year for which the election is made, or (c) January 31, 2011. Q&A E-2. Participants and beneficiaries must be given notice of the election by 120 days after the end of the plan year for which an alternative amortization schedule is elected, or by May 2, 2011, if later. Q&A N-1. The Notice contains a sample participant notice. The PBGC must be notified of the election no later than 30 days after the date the election is made, or by January 31, 2011, if later. Q&A N-7.

Reporting Requirements

Plan sponsors who elected to use an alternative amortization schedule for the 2008 or 2009 plan year are not required to file an amended Form 5500 with a revised Schedule SB. However, the Schedule SB filed with the Form 5500 for a subsequent plan year no later than the 2010 plan year must accurately reflect any election to use an alternative amortization schedule. Differences from the prior year's Schedule SB should be explained in an attachment. Q&A R-1. Alternatively, the sponsor may instead file an amended Form 5500 with a revised Schedule SB for the 2008 or 2009 plan year, or both, as applicable. Q&A R-2.

Transition Rules

If a sponsor's election to use an alternative amortization schedule creates or increases the excess contributions for that year after the deadline for making an election to increase the prefunding balance for the year, a standing election to add the maximum amount to the prefunding balance will automatically result in an increase to the prefunding balance. The sponsor can also temporarily suspend a standing election retroactively, so that all or part of the increased excess contributions created as a result of applying the provisions of the Notice are not added to the prefunding balance. Also, if no standing election was made (or if it was temporarily suspended), the sponsor is permitted under the Notice to elect to increase the prefunding balance by an amount no greater than the increase in the excess contributions resulting from the election to use the alternate amortization schedule. Q&A T-2.

Similarly, if the sponsor has a standing election to use the funding balances to offset the minimum required contribution, the amount of funding balances used to offset the minimum required contribution will automatically be adjusted to reflect the revised minimum required contribution. The sponsor can also temporarily suspend a standing election retroactively, so that the amount of the funding standard carryover balance and the prefunding balance is unchanged as a result of applying the provisions of the Notice. Also, the sponsor is permitted to make an additional election to use the funding balances to offset the minimum required contributions to the extent that the election to use an alternate amortization schedule reduced the minimum required contribution for the plan year. Q&A T-3.

Such funding-related elections must be made no later than the due date that would otherwise apply for making the election under Treasury Regulations § 1.430(f)-1(f) or March 31, 2011, if later.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.


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