Guest Article

(From the October 15, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Guidance on Yield Curve for Calculating Funding Requirements, Lump Sums

Filling in the Pension Protection Act's pieces one by one, the IRS on October 9, 2007 announced the corporate bond yield curve ("yield curve") single employer defined plans will be required to use to calculate minimum funding contributions and lump sum distributions beginning in 2008. An appendix to IRS Notice 2007-81 includes background information on the methodology the IRS used to develop the yield curve, and more detailed information is provided in a white paper available on the Treasury Department's Web site at www.ustreas.gov.

Minimum Funding Rules

For minimum funding purposes, the yield curve will be used to calculate a plan's funding target and target normal cost. The yield curve rates will be presented in three segments based on the amount of time before the plan's obligations to begin paying normal retirement benefits to corresponding groups of participants become due. The First Segment is for participants who will reach eligibility for normal retirement within five years, the Second Segment is for participants who will reach eligibility for normal retirement after five years but within twenty years, and the Third Segment is for those participants who are more than twenty years from normal retirement eligibility. Each month's segment rates will be an average of the segment rates over the immediately preceding twenty four months.

According to Notice 2007-81, the twenty-four month average segment rates for September 2007 are as follows:

24-Month Average Segment Rates - Applicable for September 2007

However, pursuant to a special transitional rule plans in existence prior to 2008 will be able to use blended segment rates for 2008 and 2009 plan years. That is, the twenty-four month average segment rates derived from the yield curve will be blended with the long-term corporate bond rates plans currently use to calculate current liability. The blended rates for September 2007 are as follows:

Otherwise eligible plans may elect not to use these funding transitional segment rates.

Lump Sum Distributions

The segmented yield curve rates also will replace the 30-year Treasury rate for purposes of calculating lump sum distributions beginning in 2008. The segment rates used for this purpose will be spot rates, as opposed to the twenty-four month average rates used for the minimum funding rules. Additionally, the segmented yield curve will be phased in over five years instead of just two. Thus, for plan years beginning in 2008, 2009, 2010 and 2011 the segment rates will be blended with the 30-year Treasury rate, and the blended rate will be used to calculate lump sums. The blended segments for August 2007 are as follows:

Minimum Present Value Transitional Segment Rates - For August 2007

By comparison, the 30-year Treasury rate for August 2007 is 4.93 percent. The spot segment rates for August 2007 are 5.40 percent (First Segment), 6.20 percent (Second Segment), and 6.66 percent (Third Segment).

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.