Guest Article

(From the December 5, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Code § 436 Funding-Based Limits: IRS Provides Sample Amendment and Extends Deadline for Amendment

Sponsors of defined benefit plans now have more time to adopt amendments to comply with the Code § 436 funding-based limits on accruals and accelerated benefit payments. The deadline is generally extended to the last day of the plan year beginning in 2012. This provides a year's extension from the prior deadline, which was the last day of the plan year beginning in 2011 — a December 31, 2011 date for calendar-year plans. The IRS also released a sample amendment which, if timely adopted with changes only as permitted, will satisfy the Code § 436 requirements and not cause a violation of the Code § 411(d)(6) anti-cutback requirements.

Code § 436 Funding-Based Limitations

Code § 436 was added by the Pension Protection Act of 2006 to impose limits on the accrual and payment of benefits in underfunded plans. Generally, if a plan's adjusted funding target attainment percentage (AFTAP) is less than sixty percent (60%), the plan is prohibited from making prohibited payments (e.g., lump sum distributions), benefit accruals must cease, and payment of unpredictable contingent event benefits is prohibited (and would also be prohibited if the AFTAP would be less than sixty percent (60%) taking into account the event). If the AFTAP is more than sixty percent (60%) but less than eighty percent (80%), the plan is limited in its ability to make single-sum distributions or other prohibited payments, amendments which increase the liabilities of the plan are generally prohibited (and would be prohibited if the AFTAP would be less than eighty percent (80%) taking into account the amendment), and prohibited payments are prohibited altogether if the plan is in bankruptcy. Code § 436 is generally effective for plan years beginning in 2008. For collectively-bargained plans maintained pursuant to a collective bargaining agreement that was ratified before 2008, however, Code § 436 does not apply to plan years beginning before the earlier of January 1, 2010, or the later of the date such collective bargaining agreement terminates (without regard to any extensions after August 17, 2006) or the first day of the plan year to which Code § 436 would otherwise apply.

Final Regulations were published in October 2009. For years beginning before 2010, plans were permitted to rely on either the final or proposed regulations or a reasonable interpretation of Code § 436. Notice 2010-77 extended the deadline for adopting Code § 436 amendments to the last day of the plan year beginning in 2011, and provided that a plan amendment that eliminates or reduces a Code § 411(d)(6) protected benefit will not violate the anti-cutback rule if it is adopted by that deadline and the elimination or reduction is made only to the extent necessary to comply with Code § 436.

Notice 2011-96 Extended Deadline for Amendments

Notice 2011-96 now extends the deadline for adopting interim amendments to comply with Code § 436 to the latest of:

For most plans, the deadline will be the last day of the plan year beginning in 2012. However, the filing of a determination letter application for an individually-designed plan may accelerate the deadline. The Notice explains that, for determination letter applications filed on or after February 1, 2012, the restated plan must incorporate an interim amendment to comply with Code § 436.

The Notice also extends the prior anti-cutback relief. It provides that a Code § 436 amendment that eliminates or reduces a Code § 411(d)(6) protected benefit will not violate the anti-cutback requirements if the amendment is adopted by the deadline in the Notice, and the elimination or reduction is made only to the extent necessary to enable the plan to comply with Code § 436.

Sample Code § 436 Amendment

The Notice includes a sample amendment which, if timely adopted without any prohibited changes, will satisfy the Code § 436 requirements, and it will not violate the Code § 411(d)(6) anti-cutback rule as long as the plan is operated in accordance with the amendment from its effective date. The adoption of the sample amendment will not cause a pre-approved plan adopted by an employer to be treated as individually designed or fail to be identical to the approved M&P or volume submitter plan.

The sample amendment has three parts. The first is applicable to all plans, the second includes terms that must be adopted by multiple employer plans (i.e., two alternative provisions are provided, for use by multiple employer plans described in Code § 413(c)(4)(A) and (B), respectively), and the third contains optional provisions that can be used to modify the first part of the amendment. Any or all of the optional provision can be adopted: (1) to allow a person who is prohibited from electing certain accelerated distribution options to make a new election after the limitation ceases to apply, (2) to expand the choices of timing and forms of distribution available when accelerated distribution options are limited, and/or (3) to allow automatic restoration of benefit accruals once the conditions are satisfied.

What changes can the plan sponsor make to the sample amendment yet still have reliance? Changes can be made to the sample amendment to conform to the plan's terminology (provided it does not alter the meaning of the amendment), and to specify effective dates for the optional provisions. What if the plan's operation in plan years beginning in 2008 and 2009 was not consistent with the sample amendment, but satisfied the rules under either the proposed or final regulations or another reasonable interpretation of Code § 436? The Notice directs, in that case, that the effective date of the sample amendment be changed to the first day of the plan year beginning after 2009, and the requirements of Code § 436 be incorporated by reference for the earlier plan years.

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, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.