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CCH® PENSION ó 4/22/08

IRS Proposes Regs On Minimum Funding Contributions For Single-Employer Plans

From Spencer's Benefits Reports: The Internal Revenue Service has issued proposed regulations that provide guidance on the determination of minimum required contributions for purposes of the funding rules that apply to single-employer defined benefit plans. The proposed regulations appeared in the April 15 Federal Register.

The Pension Protection Act of 2006 (PPA) added Sec. 430 to the Tax Code to make extensive changes to the minimum funding requirements for single-employer defined benefit plans; these changes generally apply for plan years beginning on or after Jan. 1, 2008. As provided by Sec. 430(a), a planís minimum required contribution for a plan year is determined under one of two rules, depending on whether the value of plan assets is less than, or is equal to or greater than, the planís funding target. If the value of plan assets is less than the funding target, the minimum required contribution is the sum of: (1) target normal cost; (2) any shortfall amortization charge; and (3) any waiver amortization charge. If the value of plan assets equals or exceeds the funding target, the minimum required contribution is the planís target normal cost, reduced (but not below zero) by the excess of the value of plan assets over the planís funding target.

Sec. 430(c) provides that a shortfall amortization charge is the total (not less than zero) of the shortfall amortization installments for the plan year with respect to any shortfall amortization base established for that plan year and the six preceding plan years. The shortfall amortization installments with respect to a shortfall amortization base established for a plan year are the amounts necessary to amortize the shortfall amortization base in level annual installments over the seven-plan-year period beginning with that plan year. Under Sec. 430(e), the waiver amortization charge for a plan year is the total of the waiver amortization installments for the plan year with respect to any waiver amortization bases for the five preceding plan years. The waiver amortization installments with respect to a waiver amortization base established for a plan year are the amounts necessary to amortize the waiver amortization base in level annual installments over the five-plan-year period beginning with the following plan year. Under Sec. 430(j), as under pre-PPA law, the due date for the payment of a minimum required contribution for a plan year generally is 8-1/2 months after the end of the plan year.

As specified by Sec. 430(j)(3)(A), quarterly contributions must be made during a plan year if the plan had a funding shortfall for the preceding plan year. Each quarterly installment is 25% of the required annual payment. The required annual payment is equal to the lesser of 90% of the minimum required contribution for the plan year or 100% of the minimum required contribution for the preceding plan year. Under Sec. 430(j)(4), the sponsor of a plan that is subject to the quarterly contribution requirements for a plan year (other than a small plan) must make additional quarterly contributions in order to ensure that a minimum level of liquid assets is available to pay benefits as of the end of each quarter.

Finally, IRC Sec. 4971(a) imposes an excise tax on a failure to meet the minimum funding requirements. In the case of a single-employer plan, the tax is equal to 10% of the aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year ending with or within a taxable year.

Provisions Of The Regulations

Reg. Sec. 1.430(a)-1 would provide rules for determining the minimum required contribution for a single-employer defined benefit plan for a plan year under Sec. 430(a). As provided by the regulations, any shortfall amortization installments with respect to a shortfall amortization base established for a plan year are determined assuming that the installments are paid on the valuation date for each plan year and using the interest rates applicable under Sec. 430(h)(2)(C) or (D). The shortfall amortization installments are determined using the interest rates that apply for the plan year for which the shortfall amortization base is established and are not redetermined in subsequent plan years to reflect changes in interest rates. If a shortfall amortization base is established for a plan year, the shortfall amortization base is equal to the funding shortfall of the plan for the plan year, minus the sum of the present values of any remaining shortfall amortization installments and waiver amortization installments. The regulations reflect the transition rule under Sec. 430(c)(5)(B), pursuant to which only a specified portion of the funding target is taken into account in determining whether a shortfall amortization base is established for plan years beginning before Jan. 1, 2011.

Under the proposed regulations, the waiver amortization installments are determined assuming that the installments are paid on the valuation date for each plan year and using the interest rates applicable under Sec. 430(h)(2). Thus, if the plan is using segment rates, the installments are determined by applying the first segment rate to the first four installments and the second segment rate to the fifth (and final) installment. 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 and are not redetermined in subsequent plan years to reflect changes in interest rates. The regulations also would provide rules for determining the amount of a minimum required contribution for a short plan year.

The proposed regulations under Sec. 430(j) would provide rules related to the payment of minimum required contributions, including the payment of quarterly contributions and liquidity requirements. In addition, the regulations would provide rules for accelerated quarterly contributions for underfunded plans.

Finally, the proposed regulations set forth the definitions that apply for purposes of applying the rules of Sec. 4971, as amended by the PPA. The regulations would define the term ďunpaid minimum required contribution,Ē with respect to any plan year, as any minimum required contribution under Sec. 430 for the plan year that is not paid on or before the due date for the plan year under Sec. 430(j)(1). Unlike the determination of accumulated funding deficiency that applied under pre-PPA law, the total unpaid minimum required contributions is not adjusted with interest. However, the correction of an unpaid minimum required contribution does require a contribution that includes an adjustment for interest.

Public Hearing Scheduled

The IRS has scheduled a public hearing on the proposed regulations beginning at 10 a.m. on August 4. The hearing will be held in the 7th floor auditorium of the IRS Building, 1111 Constitution Avenue, N.W., Washington, D.C.

Comments on the proposed regulations must be submitted by July 14, while outlines of topics to be discussed at the public hearing must be submitted by July 15. Send submissions to: CC:PA:LPD:PR (REG-108508-08), Room 5203, IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Comments also may be submitted electronically to http://www.regulations.gov. For further information concerning the regulations, contact Lauson C. Green or Linda S.F. Marshall at (202) 622-6090; for further information concerning submissions of comments or the hearing, contact Richard A. Hurst at (202) 622-7180 or via e-mail at Richard.A.Hurst@irscounsel.treas.gov.

 

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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