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Guest Article
(From the November 9, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
Deeper Dive: Funding Regulations Provide Plan Sponsors with Numerous Elections
The Final Treasury Regulations on determining the value of assets and liabilities for funding purposes, and on applying the benefit restrictions to underfunded plans, provide plan sponsors with numerous elections that merit identification. 74 Federal Register 53004 (October 15, 2009).
The Final Treasury Regulations under Internal Revenue Code §§ 430 and 436 lay out the regime by which single employer defined benefit plans are required to value plan assets and benefit liabilities for funding purposes and also for the application of benefit restrictions for underfunded plans. The regulations identify or otherwise provide the plan sponsor with numerous elections that can be made in this regard.
| ELECTION | DESCRIPTION | REQUIREMENTS / TIMING |
| §1.430(d)-1 Determination of Funding Target and Target Normal Cost | ||
| § 412(d)(2) Election -- Whether an amendment is treated as having been adopted as of the 1st day of the plan year | For an amendment that is adopted after the valuation date (and not later than 2-1/2 months after the close of the plan year), but which takes effect during that plan year, an election can be made to take the full increase in liability into account as of the valuation date of that plan year. If no election is made, none of the increase in liability is taken into account as of the valuation date of that plan year. | Election must be made by the time for filing the Annual Return relating to the minimum funding standards for the Plan (i.e., election on Schedule R to Form 5500 with supporting statement). Treas. Reg. § 11.412(c)-7. |
| §1.430(f)-1 Effect of Prefunding Balance and Funding Standard Carryover Balance | ||
| §430(f)(1) Election -- Pre-PPA Funding Standard Account | A plan that had a positive balance in its funding standard account at the end of its pre-PPA effective plan year automatically has a funding standard carryover balance unless the plan sponsor elects to reduce it to zero. | No election is required to establish a funding standard carryover balance. If the plan sponsor wants to reduce the funding standard carryover balance to zero the election must be made no later than the last day of the plan year to which the election relates. |
| §430(f)(2) Election -- To Reduce the Prefunding Balance or Funding Standard Carryover Balance | An election can be made to reduce the prefunding balance or funding standard carryover balance for a plan year. | The plan sponsor must provide a written election to the plan administrator and enrolled actuary no later than the last day of the plan year to which the election relates. |
| §430(f)(3) Election -- To Add to Prefunding Balance or Offset Minimum Required Contributions | An election can be made to add to the prefunding balance, or to use or reduce the prefunding balance or funding standard carryover balance to offset the minimum required contributions for a plan year. | The plan sponsor must provide a written election to the plan administrator and enrolled actuary no later than the last day for making the minimum required contributions for the plan year. Ordering rules apply which can result in a missed quarterly contribution if not carefully followed. |
| §430(f) Election -- Standing Elections | A standing election can be made to:
|
A standing election is deemed to occur
on the last possible day to make the
election. Note: A standing election cannot be made with respect to quarterly contributions. This is to be addressed in future regulations. |
| §430(f)(3) Election -- Revocation of Election | An election to use the prefunding balance or funding standard carryover balance to offset minimum required contributions can sometimes be revoked. | These elections are generally irrevocable. However, to the extent the amount to be used to offset the minimum required contribution exceeds the minimum required contribution for the plan year, the election can be revoked by written notice from the plan sponsor by the end of the plan year. In the case of the 2008 plan year, this deadline is extended to the due date (including extension) for filing the Schedule SB for the plan. |
| §430(f) Election -- Quarterly Contribution Requirements | An election can be made to use the prefunding balance or funding standard carryover balance to satisfy quarterly contribution requirements with respect to installments due before the valuation date. | [This will be addressed in future regulations.] |
| §1.430(g)-1 Valuation Date and Valuation of Plan Assets | ||
| § 430(g) -- Plan Valuation Date | Selection of the plan's valuation date is part of the plan's funding method and cannot be changed without the consent of the Commissioner of the IRS. | A change in valuation date that is required by § 430 is treated as approved by the Commissioner. |
| §1.430(h)(2)-1 Interest Rates Used to Determine Present Value | ||
| § 430(h)(2) -- Election to Use Alternative Interest Rates | An election can be made to use alternative interest rates rather than the segment rates for the month that includes the valuation date. One alternative election would be to use the segment rate but elect the use of an alternative month (i.e., one of the four months preceding the month that includes the valuation date). Another alternative election would be to use the monthly corporate bond yield curve in lieu of segment rates. For plan years beginning in 2008 and 2009, this latter election could be paired with an election to also use an alternative month. Use of an alternative month in connection with the monthly corporate bond yield curve for plan years after 2009, however, is not permitted. | Election is made by the plan sponsor who must provide written notice to the plan's actuary. Once an election to use an alternative interest rate is adopted, the election applies for all future plan years unless a change is approved by the Commissioner. (However, see the special exception for the 2009 and 2010 plan years noted under § 430(h)(2) below.) |
| §430(h)(2) -- Election to Not Apply Transition Rule | An election can be made not to use the transition rule which would otherwise apply to plan years beginning in 2008 and 2009 and would require the use of a weighted average of the first, second and third segment rates. | The election is made by the plan sponsor and is irrevocable once made, unless the approval of the Commissioner is obtained. |
| §430(h)(2) -- Interest Rate Changes for the 2009 and 2010 Plan Years | A change can be made to an interest rate election for 2009 or 2010. | Any change to any interest rate election that is made for the first plan year beginning in 2009 or 2010 is automatically approved. |
| §1.436-1 Limits on Benefits and Benefit Accruals under Single Employer Defined Benefit Plans | ||
| § 436(c) -- Option to Make the Plan Amendment Effective Once the Restriction is Lifted | If a plan amendment cannot take effect during the plan year because of § 436(c), it is treated as never adopted -- unless the amendment provides otherwise. | A plan amendment that fails to take effect in the plan year because the AFTAP is less than 80%, can be drafted so that it will take effect in a later plan year once the restriction is lifted. |
| §436(e) -- Option to Not Allow Automatic Resumption of Benefit Accruals | If a limitation on benefit accruals applies under § 436(e), the benefit accruals will automatically resume effective as of the § 436 measurement date as of which the benefit accruals are no longer restricted -- unless the plan provides otherwise. | If accruals resume mid-year, the plan must comply with Department of Labor rules regarding partial years of participation and the prohibition on double proration. |
| §436(d) -- Option to Allow New Election of Form of Benefit | For participants who are barred from receiving an optional form of benefit because of the restrictions on prohibited payments under § 436(d), a plan is permitted to provide that a participant will have the opportunity to have a new election under which the form of benefit previously elected may be modified. | The new election would be subject to applicable qualification requirements, and would result in a new annuity starting date. |
| §436(f)(3) -- Deemed Election to Reduce Funding Balances | If a limitation on prohibited payments would otherwise apply under § 436(d)(1) or (d)(3) (i.e., the AFTAP is less than 60% or 80%), the employer is treated as having made an election under § 436(f)(3) to reduce the prefunding balance or funding standard carryover balance by the amount necessary for the AFTAP to be above the applicable threshold (i.e., 60% or 80%) in order for the limitation not to apply. | The deemed election is treated as made
on the § 436 measurement date as of
which the benefit limitation would
otherwise apply.
The deemed reduction only applies if the balances to be reduced are large enough to avoid application of the limitations (i.e., no reduction is required if the limitation would still apply for as year even if the funding balances were reduced to zero). |
| §436(d)(1) -- Special Optional Forms of Benefit During Restricted Period (i.e., where the AFTAP is less than 60%) | Plans are permitted to offer participants who commence benefits during the period in which § 436(d)(1) applies with special optional forms of benefits (e.g., a form which provides a participant with an election to receive payment of a single lump sum of the remaining benefit once the limitation ceases to apply, to the extent permitted under § 436(d)(3)). | Such optional forms must satisfy the applicable qualification requirements, including § 417(e) and § 415 (at each annuity starting date). |
| §436(d)(3) -- Separate Elections Allowed for Restricted and Unrestricted Portions of the Benefit (i.e., where the AFTAP is less than 80% but more than 60%) | Plans are permitted to provide separate elections for the restricted and unrestricted portions of the benefit, regardless of whether the participant elects an optional form that includes a prohibited payment that is not permitted to be paid under § 436(d)(3). | Such optional forms must also satisfy the applicable qualification requirements, including § 417(e), and in the case of optional forms with different annuity starting dates, § 415 at the later annuity starting date for the restricted portion of the benefit. |
In addition, as pointed out in the preambles to the Final Regulation, the Worker, Retiree, and Employer Recovery Act of 2008 amended § 430(b) to modify the definition of "target normal cost" by adding the amount of plan-related expenses expected to be paid from plan assets during the year, and by subtracting the amount of mandatory employee contributions expected to be made during the plan year. While the modification applies to plan years beginning after 2008, a plan sponsor can elect to apply the new definition beginning with the first plan year beginning after 2007.
| The 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, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2009, Deloitte. |
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