IRS Issues Key Guidance on Funding Single Employer Defined Benefit Plans

• mortality assumptions;
• pre-funding and funding standard carryover balances; and
• measuring assets and liabilities.

• Asset Value Equal to or Greater than Funding Target. If the value of the assets is equal to or greater than the funding target, the minimum required contribution is the target normal cost reduced by any such excess. Prop. Treas. Reg. § 1.430(a)-1(b)(3).
  • No shortfall amortization base is established for the plan year. Prop. Treas. Reg. § 1.430(a)-1(c)(2)(i).

• Asset Value Less than Funding Target. If the value of the assets is less than the funding target, the minimum required contribution is the plan's target normal cost plus any applicable shortfall amortization installments and waiver amortization installments. Prop. Treas. Reg. § 1.430(a)-1(b)(2)(i).
  • A shortfall amortization base is established for the plan year, equal to the funding shortfall of the plan minus the sum of the present values of any remaining shortfall amortization installments and waiver amortization installments (determined using the interest rates that apply for current plan year in accordance with Prop. Treas. Reg. § 1.430(h)(2)-1(e)). Prop. Treas. Reg. § 1.430(a)-1(c)(2)(i) & (ii). The funding shortfall is the excess, if any, of the funding target for the plan year over the value of plan assets (reduced to reflect the subtraction of the funding standard carryover balance and pre-funding balance, to the extent provided under Prop. Treas. Reg. § 1.430(f)-1(c) but not below zero). Prop. Treas. Reg. §1.430(a)-1(f)(2).
  • The shortfall amortization installments, with respect to a shortfall amortization base established for the plan year, are the annual amounts necessary to amortize the shortfall base in equal annual installments over a seven-year period beginning with that plan year. The installments are determined assuming that they are paid on the valuation date for each plan year, and using the interest rates applicable under IRC § 430(h)(2)(C) or (D) (i.e., the segments rates or corporate bond yield curve). Prop. Treas. Reg. § 1.430(h)(2)-1(f)(2). The installments are not re-determined in later years to reflect interest rate changes under IRC §430(h)(2) for those years. Prop. Treas. Reg. § 1.430(a)-1(c)(1).
  • In accordance with the transition rule under IRC § 430(c)(5), only a portion of the funding target is taken into account in determining whether a shortfall amortization base is established for plan years beginning before January 1, 2011. The transition rule does not apply to: (i) plan years beginning after 2008 if a shortfall amortization base was required to be established for any preceding year, (ii) a plan that was not in effect for a plan year beginning in 2007, or (iii) a plan that was subject to additional funding requirements under IRC § 412(l) for the plan year prior to the effective date of IRC § 430 (determined after the application of IRC § 412(l)(6) & (9), which excepts small plans and plans with a funded current liability percentage of 90 percent or more). Prop. Treas. Reg. § 1.430(a)-1(c)(2)(iii) and -1(h)(4).
  • A waiver amortization base is established for each plan year for which a waiver of minimum funding standard has been granted, and is equal to the amount of the minimum required contribution (or funding deficiency) that has been waived. Prop. Treas. Reg. § 1.430(a)-1(d)(2).
  • With respect to a waiver amortization base for a plan year, the waiver amortization installments are the annual amounts necessary to amortize the waiver base in equal annual installments over a five-year period beginning with the following plan year. As with shortfall amortization installments, the waiver amortization installments are determined assuming that they are paid on the valuation date for each plan year, and using the interest rates applicable under IRC § 430(h)(2)(C) or (D) (i.e., if the plan is using segment rates, the installment rates are determined by applying the first segment rate to the first four installments and the second segment rate to the fifth and final installment). Prop. Treas. Reg. § 1.430(h)(2)-1(f)(2). The installments are determined using the interest rates that apply for the plan year for which the waiver is granted, even though the first installment is not due until the subsequent plan year. As with shortfall amortization installments, the waiver amortization installments are not re-determined in later years to reflect interest rate changes under IRC § 430(h)(2) for those years. Prop. Treas. Reg. § 1.430(a)-1(d)(1).
  • A waiver amortization base also exists where the plan received a funding waiver under IRC § 412 for a plan year prior to the effective date of IRC § 430. The amortization charges for that funding waiver are treated as waiver amortization installments. The amortization charge, determined using the interest rate or rates that applied for the pre-effective plan year, is the amount of the annual waiver amortization installment. Therefore, for a plan that received a waiver in the past, the sponsor must contribute the amounts needed to amortize that waiver over the original schedule as established. Prop. Treas. Reg. § 1.430(a)-1(d)(2)(i).
  • Consistent with IRC § 430(c)(6), where the funding shortfall is zero for a plan year, the shortfall and waiver amortization bases for all preceding plan years (and all shortfall and waiver amortization installments) are reduced to zero. Prop. Treas. Reg. § 1.430(a)-1(e).
  • Amortization installments are prorated for a short plan year. Target normal cost is not prorated, but rather reflects the accruals during the plan year. The proposed regulations provide rules for the treatment of installments in later years to account for the proration and any change in valuation date. Prop. Treas. Reg. § 1.430(a)-1(b)(2)(ii).

• Similar to Prior Rules. The rules are similar to those under IRS Notice 89-52, but have been updated to reflect statutory changes, including which plans are subject to the quarterly contribution requirement and the interest rate that applies to missed contributions. Quarterly contributions are required if the plan had a funding shortfall for the prior year. Prop. Treas. Reg. § 1.430(j)-1(c)(1)(i).
• Quarterly Installment Amount. The quarterly installment amount is 25 percent of the required annual payment. The required annual payment is equal to the lesser of: (i) 90 percent of the minimum required contribution for the year, or (ii) 100 percent of the minimum required contribution for the prior year determined without regard to any funding waiver under IRC §412. For purposes of determining the required annual payment, the minimum required contribution is determined without regard to the pre-funding balance or funding standard carryover balance in the current or any prior year. Prop. Treas. Reg. § 1.430(j)-1(c)(3).
• Installment Due Date. The four installments are due on the 15th day: of the 4th plan month, the 7th plan month, the 10th plan month, and following the close of the plan year. Special rules apply in the case of a short plan year, or where the plan year does not begin on the first day of a calendar month. Prop. Treas. Reg. § 1.430(j)-1(c)(4).
• Late Payment. If a required installment is not fully paid, the underpayment is adjusted for the period between the installment due date and the date of payment using the effective interest rate for that plan year (under Prop. Treas. Reg. § 1.430(h)(2)-1(f)(1)) plus 5 percent. The additional 5 percent only applies to a required installment that is due on or after the valuation date for the plan year. The underpayment is the difference between the required installment and the amount contributed on or before the due date. The proposed regulations contain an "ordering rule" by which contributions are credited in the order in which the installments were required to be paid. Prop. Treas. Reg. § 1.430(j)-1(c)(1)(iii) & -1(c)(2).
• Funding Balances Can Be Used. A plan sponsor can affirmatively elect to use the plan's prefunding balance and funding standard carryover balance to satisfy the quarterly contribution requirements. IRS requests comments regarding whether deemed elections should be recognized and/or whether the sponsor should be able to make a single election that would remain in effect until revoked. Where a funding balance is used to satisfy the quarterly contribution requirement before the effective interest rate for the plan year has been determined, to avoid underpayment it should be assumed that the effective interest rate is the lowest of the three segment rates in adjusting the elected amount. As provided in Prop. Treas. Reg. § 1.430(f)-1(b)(1)(ii)(B), the amount of the funding balance used to satisfy quarterly contribution requirements cannot later be added back to the pre-funding balance. Prop. Treas. Reg. § 1.430(j)-1(c)(1)(ii) & -1(c)(3)(iii).

• General Requirements. Plans subject to the quarterly contribution requirement (other than a small plan under IRC § 430(g)(2)(B)) will fail to pay the required installment for a quarter to the extent that the value of the liquid assets contributed after the close of the calendar quarter and by the due date for the installment is less than the liquidity shortfall for the quarter. To satisfy the quarterly contribution requirement, liquid assets equal to the liquidity shortfall need to be contributed after the close of the quarter and by the due date for the installment. Funding balances or the contribution of illiquid assets can not be used. Prop. Treas. Reg. § 1.430(j)-1(d)(1)(i).
• Similar to Prior Rules. The requirements are similar to those under IRS Revenue Ruling 95-31, although updated to reflect statutory changes. The definition of "liquid assets" is the same. However, unlike the Revenue Ruling, the proposed regulations measure whether a liquidity shortfall has been satisfied by reference to contributions made after the close of the quarter and by the due date for the installment, while including contributions made during the plan quarter in plan assets. Prop. Treas. Reg. § 1.430(j)-1(d)(1)(i) & -1(d)(5).
• Late Payment. For purposes of applying the additional 5 percent interest adjustment, the portion of the quarterly installment that is due solely by reason of the liquidity requirements, if not paid, continues to be treated as unpaid until the close of the quarter in which the due date for that installment occurs, regardless of when it is contributed. In contrast, in adjusting the contribution to the valuation date at the effective interest rate, the adjustment is made from the contribution date rather than the close of the quarter. The regulations provide an ordering rule by which the contribution is first used to satisfy the quarterly contribution requirement, determined without regard to the liquidity requirement. Prop. Treas. Reg. § 1.430(j)-1(d)(2).
• Limit on Liquidity Shortfall. Any increase in the quarterly contribution due to the liquidity shortfall rules can not exceed that amount that, when added to prior required installments for the plan year, would increase the funding target attainment percentage for the year (taking into account the expected increase in funding target due to benefits accruing or earned during the plan year) to 100 percent. Prop. Treas. Reg. § 1.430(j)-1(d)(1)(ii).

• For a single employer plan, the tax is 10 percent of the "aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year" ending within the taxable year.
• For a multiemployer plan, the tax is 5 percent of the "accumulated funding deficiency" as of the end of any plan year ending within the taxable year.

• A multiemployer plan's "accumulated funding deficiency" is defined under IRC § 431, and takes into account all charges and credits to the funding standard account under IRC § 412 for plan years before the first year for which IRC § 431 applies. Prop. Treas. Reg. § 54.4971(c)-1(b)
  • An accumulated funding deficiency is corrected as provided under previously proposed regulation § 54.4971-2(a). The new proposed regulation sets forth the same rules. An accumulated funding deficiency for a plan year is corrected when a contribution is made to the plan of the amount necessary to reduce the accumulated funding deficiency, as of the end of that plan year, to zero. To reduce the deficiency to zero, the contribution must include interest at the plan's valuation interest rate for the period between the end of the plan year and the date of the contribution. Prop. Treas. Reg. § 54.4971(c)-1(d)(1).
• A single employer plan's "unpaid minimum required contribution" is defined as any minimum required contribution under IRC § 430 that is not paid on or before 8-1/2 months after the close of the plan year. The accumulated funding deficiency for pre-effective plan years is considered an unpaid minimum required contribution for that plan year until correction is made. Unlike the determination of "accumulated funding deficiency," which previously applied under IRC § 412, the total unpaid minimum required contribution is not adjusted with interest. However, the correction of an unpaid minimum required contribution does require an adjustment for interest. Prop. Treas. Reg. § 54.4971(c)-1(c) & -1(d)(2).
  • An unpaid minimum required contribution is corrected when a contribution is made to the plan in an amount that, when discounted (to the valuation date for the plan year for which the unpaid minimum required contribution is due) at the appropriate rate of interest, equals or exceeds the unpaid minimum required contribution. The appropriate rate of interest is the effective interest rate for the plan year for which the contribution is due (except to the extent that additional interest applies on account of the late payment of accelerated quarterly or liquidity contributions). Contributions are applied in accordance with an ordering rule, by which a contribution is attributed to the earliest plan year of any unpaid minimum required contribution for which correction has not yet been made. For pre-effective plan years in which an accumulated funding deficiency is treated as an unpaid minimum required contribution, correction requires that the amount of the accumulated funding deficiency be adjusted with interest from the end of the pre-effective plan year to the date of the contribution, at the plan's valuation interest rate for the pre-effective plan year. Prop. Treas. Reg. § 54.4971(c)-1(d)(2).

• The funding shortfall for the pre-effective plan year would be determined as the excess, if any, of the plan's current liability determined pursuant to IRC § 412(l)(7) on the valuation date for the plan's pre-effective plan year, over the net plan assets for that plan year as determined under Prop. Treas. Reg. § 1.430(i)-1(f)(5)(ii).
• If a quarterly installment is due before the valuation date for the plan year, the minimum required contribution for the plan year would be increased by an additional amount if not paid by the due date. The additional amount would be determined by applying interest at the annual rate of 5 percent to the underpayment for the period between the due date and the earlier of the payment date or valuation date.

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Copyright 2008, Deloitte.

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