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Guest Article

Deloitte logo

(From the June 1, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

House Passes H.R. 4213 with Temporary Pension Funding Relief

On Friday the House passed H.R. 4213 - the "American Jobs and Closing Tax Loopholes Act of 2010." The bill contains funding relief provisions for single employer pension plans. The relief provisions are fundamentally the same as those approved by the Senate in early March, although some tweaks have been made. The Senate is expected to act on the legislation sometime after the Memorial Day recess.

Alternate Amortization Schedules

H.R. 4213 would amend the Internal Revenue Code and ERISA to provide temporary funding relief for single employer pension plans by allowing the election of a temporary alternative amortization schedule for certain specific years.

  • Alternate amortization schedule - In the case of a shortfall amortization base of a plan for any "applicable plan year," plan sponsors would be able to elect either:

    • "2 plus 7" amortization schedule - in which installments during the first two plan years would be only of the interest on the shortfall amortization base for the applicable plan year (using the effective interest rate for the applicable plan year), and installments during the last seven plan years would be of the amounts necessary to amortize the balance of such shortfall amortization base in level annual installments over those last seven years (using the segment rates for the applicable plan year).
    • "15-year" amortization schedule - in which the installments would be the amounts necessary to amortize the shortfall amortization base for the applicable election year in level annual installments over the 15-plan-year period beginning with the applicable plan year, using segment rates as provided under IRC § 430(c)(2).
  • Applicable plan years - The election could be made to apply to not more than two of the plan years beginning in 2008, 2009, 2010 or 2011. However, the election cannot be made for any plan year unless the due date for the minimum required contribution for that year occurs on or after March 10, 2010. If two plan years are elected, the same amortization schedule need not be elected for both.
  • Conditions for election - An election could be made only if the plan sponsor is not a debtor in bankruptcy, there are no unpaid minimum required contributions, there is no lien in favor of the plan for failure to make required contributions, and a distress termination of the plan has not been initiated under ERISA § 4041(c).
  • Increases in required installments - In the case of excess compensation or certain dividends or stock redemptions, the required installments under the elected amortization schedule for the plan year are increased by the sum of the aggregate amount of the excess employee compensation for the plan year plus a determined amount of the dividends and stock redemptions for the plan year. In the case of a "2 plus 7 year" amortization, this cash flow restriction applies for the 3 years beginning with the applicable plan year. With the 15-year amortization, the restriction applies for 5 years beginning with the applicable plan year. In any case, the restriction period will begin no earlier than the first plan year beginning after 2009.

    • Excess employee compensation - means, for any employee for the plan year, the amount includable in income for remuneration (during the calendar year in which the plan year begins) for services performed by the employee for the plan sponsor (whether or not performed during the calendar year) that exceeds $1 million (as indexed for the cost of living). Added to that amount (i.e., remuneration over $1 million) are amounts set aside in a trust (or other arrangement as determined by the Secretary) during the calendar year for purposes of paying deferred compensation to the employee. Only remuneration for services performed after 2009 is taken into account in determining excess employee compensation. Also, payment of nonqualified deferred compensation, restricted stock (or restricted stock units), stock options, or stock appreciation rights under a written agreement in effect on March 1, 2010 (and which was not materially modified before the remuneration was paid) is not taken into account. Commissions that are payable solely on account of individual performance are also not taken into account (unless paid to a "specified employee" under IRC ? 409A(a)(2)(B)(i) - or to an employee who would be a "specified employee" if the plan sponsor were a corporation described in that section).
    • Determined amount of dividends and stock redemptions - means, for any plan year, the sum of the dividends paid during the plan year by the plan sponsor plus the amounts paid for the redemption of stock of the plan sponsor that was redeemed during the plan year over the average of adjusted annual net income of the plan sponsor for the last 5 fiscal years of the plan sponsor ending before such plan year. Alternatively, if less, it means the amounts paid for the redemption of stock of the plan sponsor that was redeemed during the plan year plus the excess of the dividends paid during the plan year by the plan sponsor over the dividend base amount.

      • "Adjusted annual net income" with respect to any fiscal year means annual net income (before after-tax gain or loss on any sale of assets), but without regard to any reduction by reason of depreciation or amortization, except that in no event will the adjusted annual net income for any fiscal year be less than zero.
      • "Dividend base amount" with respect to a plan year means the greater of the median of the amount of dividends paid during the last 5 fiscal years of the plan sponsor ending before such plan year, or the amount of dividends paid during such plan year on preferred stock that was issued on or before May 21, 2010 (or that is replacement stock for such).

      Except for purposes of calculating the dividend base amount, only dividends declared and redemptions occurring after February 28, 2010 are taken into account. Also excluded are dividends paid by one member of a controlled group to another, distribution of stock by the plan sponsor to its shareholders (i.e., stock dividends), and redemptions of securities that are not listed on an established securities market which: (1) are made pursuant to a qualified plan, (2) are made on account of the employee's termination of employment with the plan sponsor or the death or disability of a shareholder, (3) were held directly or indirectly by the Federal government or a Federal reserve bank, or (4) were held by a national government or an employee benefit plan.

  • Plan sponsor - The term "plan sponsor" includes any group of which the plan sponsor is a member and which is treated as a single employer under IRC § 414.
  • Notice - Not more than 30 days after relief is elected the plan administrator must provide notice of the election to the plan's participants and beneficiaries, each labor union representing them, and to the PBGC.

Suspension of Funding-Based Benefit Limitations

H.R. 4213 would allow plans to use the adjusted funding target attainment percentage for the last plan year ending before September 30, 2009, in applying the accrual restrictions (i.e., accrual restrictions that prohibit benefit accruals if the percentage falls below 60 percent) for plan years beginning through December 31, 2011. Also, sponsors would be allowed to apply their credit balances against their minimum required contributions for plan years beginning after June 30, 2009 and on or before December 31, 2011, if the plan was at least 80 percent funded for the plan year beginning after June 30, 2007 and on or before June 30, 2008.

More Information

The status of the bill, proposed amendments, and estimated cost projections can be found on the House Ways and Means Committee website at:

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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