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CCH® PENSION AND BENEFITS — 2/4/08

Proposed pension funding regs criticized at IRS hearing

Proposed regulations issued by the IRS on benefit restrictions for underfunded pension plans enacted by the Pension Protection Act of 2006 (PPA; P.L. 109-280) (CCH Pension Plan Guide 20,262D ) came under criticism from benefits practitioners at a January 28, 2008 IRS hearing in Washington, D.C. The proposed regulations impose limits on benefits and benefit accruals on underfunded single-employer defined benefit plans and restrict the use of certain funding balances maintained for defined benefit pension plans. Representatives from the American Benefits Council and American Society of Pension Professionals and Actuaries (ASPPA) offered recommendations on changes that should be made when the regulations are finalized.

Good faith compliance

Until the final regulations are issued, the IRS is allowing plans to rely upon the proposed regulations for qualification purposes, as long as the rules are applied “on a consistent and reasonable basis.” According to attorney Kent A. Mason, representing the American Benefits Council, the proposed regulations are effectively functioning as temporary rules. In this area of complexity, he said, temporary rules are not appropriate. He called for a “reasonable good faith interpretation” standard for judging compliance during this transition period.

Liability projections

Mason also recommended that defined benefit plans be permitted to project their liabilities, rather than being forced to prematurely compute them in order to determine funding balances. “Congress never spoke to the question of what type of valuation should be required,” he stated. For example, some calendar year plans may be required to compute their liabilities by January 1, which is impossible to do. As a result, the plan would be restricted from delivering benefits until the funding issue was resolved. It would be more manageable to finish the valuation by April 1, he explained, but this would likely cause many errors in the calculations. As a result, he stated, the IRS would have to create and plans would have to follow corrections programs for years.

Coordination of rules

Judy A. Miller, chief of actuarial issues and director of retirement policies at ASPPA, recommended that the IRS “coordinate” Code Secs. 430 and 436 in the final regulations. Such coordination, she said, would affect the liability and contributions associated with any benefit increase included in the plan target liability and assets for the year of the amendment and the presumed adjusted funding target attainment percentage (AFTAP) for the next plan year. Thus, each time there is a contribution under Code Sec. 436, or a plan amendment takes effect, the funding target attainment percentage and AFTAP would be re-determined for all Code Sec. 436 purposes reflecting both the additional contribution and the plan amendment. Miller also said the final regulations should provide that benefits restrictions cease as of the date of plan termination for a plan not covered by the PBGC or a plan that was in a standard PBGC termination.

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