Guest Article

(From the September 10, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Proposed Regulations on Pension Protection Act's Benefit Limitations for Underfunded Plans

The IRS on August 28, 2007 issued long-awaited proposed regulations on certain of the Pension Protection Act's (PPA) funding-related provisions for single-employer plans. 72 FR 50544 (August 31, 2007). Specifically, these proposed regulations provide guidance on the effect of maintaining and using credit balances to offset minimum funding contributions, applying a series of benefit limitations to certain underfunded plans, and the rules for enrolled actuaries to certify a plan's funded status each year. Even though these provisions generally do not take effect until 2008, the proposed regulations include certain provisions that demand plan sponsors' immediate attention. These provisions are the focus of this article. Future editions of Washington Bulletin will address the rules relating to credit balances (which will become known as "funding standard carryover" and "prefunding" balances when the PPA takes effect) and other aspects of the proposed regulations.

Issues for Immediate Attention

As indicated, the PPA established a series of Benefit Limitations for certain underfunded plans, effective for plan years beginning on or after January 1, 2008. These Benefit Limitations, as described by the IRS, are as follows:

Generally speaking, these Benefit Limitations apply (or do not apply) during a plan year based on a plan's AFTAP for that plan year, as certified by the plan's Enrolled Actuary (EA). Of course, it generally will not be possible for a plan's EA to certify the AFTAP until sometime after the first day of the plan year. As a result, certain statutory presumptions based on the prior year's AFTAP are used to determine if one or more Benefit Limitations apply until the current year's AFTAP is certified. That is where the 2007 AFTAP comes in.

Presumptions Based on 2007 AFTAP

Calendar-year plans with a certified 2007 AFTAP of at least 90 percent will be in the best shape when the PPA's Benefit Limitations become effective starting January 1, 2008. These plans will not be subject to any Benefit Limitations in 2008 so long as their Eas certify the 2008 AFTAP before October 1, 2008. However, if such a plan's EA does not certify the 2008 AFTAP by this deadline, the plan's 2008 AFTAP will be presumed to be less than 60 percent as of October 1, 2008. This presumption will remain in effect for the rest of the 2008 plan year, even if the plan's EA subsequently certifies the plan's 2008 AFTAP.

If a calendar-year plan's certified 2007 AFTAP is less than 90 percent but at least 80 percent, or less than 70 percent but at least 60 percent, the plan's EA will have to certify the 2008 AFTAP before April 1, 2008 in order to avoid triggering a presumption that the plan's 2008 AFTAP is 10 percentage points less than the 2007 AFTAP, effective on April 1, 2008 and having the plan subject to a restriction that would not otherwise apply. So if the plan's 2007 AFTAP is 85 percent and the EA does not certify the 2008 AFTAP before April 1, 2008, the 2008 AFTAP will be presumed to be 75 percent beginning on April 1, 2008. This will result in the plan being subject to the restriction on amendments increasing benefits and partial limitations on paying lump sums and other accelerated distributions. The presumption will continue until the EA certifies the plan's 2008 AFTAP or October 1, 2008, whichever comes first.

Do Plans Have to Have a Certified 2007 AFTAP?

What happens if a plan's EA does not certify the 2007 AFTAP before the beginning of the 2008 plan year? According to the proposed regulations, in this case the plan's 2007 AFTAP will be presumed to be less than 60 percent until the 2007 AFTAP or 2008AFTAP is certified. If this presumption applies, the limitations on paying shutdown benefits and on plan amendments increasing benefit liabilities will apply as of January 1, 2008 (assuming a calendar year plan). The limitations on paying lump sums and future benefit accruals will begin to apply on April 1, 2008 unless the plan's EA certifies the 2007 or 2008 AFTAP before that date.

Calculating the 2007 AFTAP

The proposed regulations also provide guidance on calculating the 2007 AFTAP. Basically, the proposed regulations require plans to use modified versions of the 2007 current liability and actuarial value of plan assets for this purpose. Both the current liability and actuarial value of plan assets must be increased by aggregate annuity purchases for non-highly compensated employees during the preceding two plan years. Also, the actuarial value of plan assets must be at least 90, but no more than 110, percentof their fair market value. Finally, plan asset values may have to be reduced by any funding standard account credit balance the plan carried as of the 2007 valuation date.

The proposed regulations give plan sponsors some flexibility to improve their 2007 AFTAPs if necessary. Options include making larger plan contributions for the 2006 and/or 2007 plan years and waiving some or all of the plan's funding standard carryover balance as of January 1, 2008.

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, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.