436 Prohibited Payment

[Guest raintrain19]

I have a plan that had an AFTAP that was between 60 and 80% last year. A payment was made during the year which violates 436(d) in that 100% of the lump sum payment was paid to the non-highly employee. I originally considered this a "disqualification" event and was researching different correction methods for this type of issue.

Upon doing some digging, I ran into this section from 436:

"436(d)(3)(B)One-time application.—

436(d)(3)(B)(i)In general.—The plan shall also provide that only 1 prohibited payment meeting the requirements of subparagraph (A) may be made with respect to any participant during any period of consecutive plan years to which the limitations under either paragraph (1) or (2) or this paragraph applies.

436(d)(3)(B)(ii)Treatment of beneficiaries.—For purposes of this subparagraph, a participant and any beneficiary on his behalf (including an alternate payee, as defined in section 414(p)(8)) shall be treated as 1 participant. If the accrued benefit of a participant is allocated to such an alternate payee and 1 or more other persons, the amount under subparagraph (A) shall be allocated among such persons in the same manner as the accrued benefit is allocated unless the qualified domestic relations order (as defined in section 414(p)(1)(A)) provides otherwise."

It would almost appear that 436(d)(3)(B) says that one prohibited payment MAY be made during a period in which the plan is restricted or partially restricted. This seems bizarre to me, but I have not found any explanation or guidance regarding this paragraph.

Has anyone out there ever run into this? Am I misunderstanding something here? Any and all help would be greatly appreciated! Thanks,

[Guest D.W.]

That limitation is for the 50% portion of a lump sum payment (subject to the PBGC limit), etc. The limitation is listed because if it wasn't, you could construe the rules to mean that a participant could receive 50% this year, 50% more next year, etc. It does not, however, allow each participant to receive 100% of their benefit as a lump sum one time only, or a plan would effectively not be limited by the payment restrictions. Below is the cite for subparagraph A that describes the type of prohibited payment that may be made one time.

(3) Limited payment if percentage at least 60 percent but less than 80 percent

(A) In general

A defined benefit plan which is a single-employer plan shall provide that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is 60 percent or greater but less than 80 percent, the plan may not pay any prohibited payment after the valuation date for the plan year to the extent the amount of the payment exceeds the lesser of—

(i)50 percent of the amount of the payment which could be made without regard to this section, or

(ii)the present value (determined under guidance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assumptions under section 417(e)) of the maximum guarantee with respect to the participant under section 4022 of the Employee Retirement Income Security Act of 1974.