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CCH® PENSION AND BENEFITS — 4/21/08

IRS issues proposed regs on minimum required contributions under PPA

The IRS has issued proposed regulations under Code Sec. 430 which provide guidance on the minimum contribution rules applicable to single-employer defi ned benefit plans. These are the fourth in a series of proposed regulations issued by the IRS that implement the new funding rules enacted by the Pension Protection Act of 2006 (PPA; P.L. 109-280). Earlier proposed rules dealt with the use of mortality tables to determine current liability for multiemployer plans (CCH Pension Plan Guide 20,261Y ), prefunding and funding standard carryover balances (CCH Pension Plan Guide 20,262D ) and the measurement of plan assets and liabilities for funding purposes (CCH Pension Plan Guide 20,262G ).

Determination of minimum required contribution

Under the proposed regulations, the amount of the minimum required contribution (MRC) for a plan year depends on whether the value of plan assets equals or exceeds the plan’s funding target for the plan year. If this value of plan assets is less than the funding target for the plan year, the MRC for that plan year is equal to the sum of the plan’s target normal cost for the plan year plus any applicable shortfall amortization installments and waiver amortization installments. If this value of plan assets equals or exceeds the funding target for the plan year, the MRC for that plan year is equal to the target normal cost of the plan for the plan year reduced by any such excess.

The shortfall amortization installments with respect to a shortfall amortization base established for a plan year are the annual amounts necessary to amortize that shortfall amortization base in level annual installments over the 7-year period beginning with that plan year.

If the value of plan assets is equal to or greater than the funding target for the plan year, then no shortfall amortization base is established for that plan year, under the proposed regulations. If this value of plan assets is less than the funding target for the plan year, a shortfall amortization base is established for the plan year.

Under the proposed regulations, the waiver amortization installments with respect to a waiver amortization base established for a plan year are the annual amounts necessary to amortize that waiver amortization base in level annual installments over the 5-year period beginning with the following plan year.

The waiver amortization installments established with respect to a waiver amortization base are determined using the interest rates that apply for the plan year for which the waiver is granted (even though the first installment with respect to the waiver amortization base is not due until the subsequent plan year) and are not redetermined in subsequent plan years to reflect changes in interest rates for those subsequent plan years. A waiver amortization base is established for each plan year for which a waiver of the minimum funding standard has been granted, and the amount of that waiver amortization base is equal to the amount of the MRC waived (or the waived funding deficiency) for the plan year.

Payment of minimum required contribution

The proposed regulations provide rules on the payment of MRCs, including the payment of quarterly contributions and liquidity requirements.

Under the proposed regulations, a payment of the MRC for a plan year can be made no earlier than the first day of the plan year and no later than 8 1/2 months after the close of the plan year. Otherwise an excise tax under Code Sec. 4971 applies.

In any case in which the plan has a funding shortfall for the preceding plan year, the employer maintaining the plan must make the required quarterly installments. For this purpose, the required annual payment is equal to the lesser of 90% of the MRC for the plan year, or 100% of the MRC for the preceding plan year.

The proposed regulations provide the due dates for the four required quarterly installments and rules for accelerated quarterly contributions for underfunded plans. If the employer fails to pay the full amount of a required installment, then the rate of interest used to adjust the amount of the contribution with respect to the underpayment of the required installment is equal to the effective interest rate for the plan for that plan year plus 5 percentage points.

The proposed regulations provide that a plan sponsor generally can use a plan’s funding balances to satisfy quarterly contribution requirements, subject to certain limitations.

An eligible plan sponsor’s election to use the plan’s prefunding balance and funding standard carryover balance under Code Sec. 430(f) satisfies the obligation to make an installment on the date of the election, to the extent of the amount elected, as adjusted with interest at the plan’s effective interest rate under Code Sec. 430(h)(2)(A) for the plan year from the valuation date through the due date of the installment. The IRS is requesting comments regarding whether rules should be provided under which a plan sponsor is deemed to make an election to use a funding balance to the extent it is available to avoid a failure to make any required quarterly installment or under which a plan sponsor can make a single election that will apply to all future quarterly installments until revoked.

Under the proposed regulations, a plan subject to the requirement to make quarterly contributions is treated as failing to pay the full amount of the required installment for a quarter to the extent that the value of the liquid assets paid after the close of that quarter and on or before the due date for the installment is less than the liquidity shortfall for that quarter. Thus, in order to satisfy the quarterly contribution requirement for a quarter, liquid assets in the amount of the liquidity shortfall must be contributed after the close of that quarter and on or before the due date for the installment. The use of funding balances or the contribution of illiquid assets cannot remedy a liquidity shortfall.

The rules under the proposed regulations relating to the liquidity requirements are similar to the rules provided under Rev. Rul. 95-31 (CCH Pension Plan Guide 19,806 ). Unlike Rev. Rul. 95-31, however, the proposed regulations measure satisfaction of a liquidity shortfall by reference to contributions made after the close of the quarter and by the due date for the installment while including contributions made during the plan quarter in plan assets. The two formulations are mathematically identical, according to the IRS.

The proposed regulations provide that, for purposes of applying the additional 5 percentage point interest adjustment in the case of a quarterly contribution that is not fully paid, the liquidity increment for the quarter continues to be treated as unpaid until the close of the quarter in which the due date for that installment occurs, regardless of when it is contributed. However, for purposes of adjusting the contribution to the valuation date at the effective interest rate, the adjustment is made from the actual contribution date.

Effective dates

The proposed regulations under Code Sec. 430 would apply generally to plan years beginning on or after January 1, 2009. When the regulations are finalized, plans will be permitted to apply them for plan years beginning in 2008. In addition, for plan years beginning in 2008, plans are permitted to rely on the proposed regulations for purposes of satisfying the requirements of Code Sec. 430 . The regulations under Code Sec. 4971 generally are proposed to apply at the same time the statutory changes to Code Sec. 4971 under the PPA become effective but would not apply to taxable years ending before April 15, 2008.

Technical corrections effect

Currently pending technical correction bills (H.R. 3361 passed by the House of Representatives on March 13, 2008 and S. 1974 passed by the Senate on December 19, 2007) would authorize the Treasury Department to provide rules for determining the funding shortfall for purposes of the pre-effective plan year, and to provide special rules for the treatment of quarterly contributions in the case of a plan with a valuation date other than the first day of the plan year.

If a technical corrections act similar to what has been proposed is passed, the IRS states that it may add the following provisions to the final regulations: 1) The funding shortfall for the pre-effective plan year would be determined as the excess of the plan’s current liability on the valuation date for the plan’s pre-effective plan year, over the net plan assets for the pre-effective plan year; and 2) If a quarterly installment is due before the valuation date for the plan year, the MRC for the plan year would be increased by an additional amount if that quarterly installment is not paid by the due date. This additional amount would be determined by applying interest at an annual rate of 5% to the underpayment of the required installment for the period of time between the due date for the required installment and the earlier of the date of payment or the valuation date.

Comments requested by July 14

Comments on the proposed regulations must be received by July 14, 2008, and should be directed to CC:PA:LPD:PR (REG-108508-08), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044, or sent via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-108508-08).