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CCH® PENSION — 12/14/11

IRS issues sample plan amendment to satisfy Code Sec. 436 rules

The IRS has issued a notice containing a sample amendment that may be adopted by plan sponsors to satisfy Code Sec. 436 regarding limitations on the accrual and payment of benefits under certain underfunded, single-employer defined benefit plans. In the notice, IRS also extended the deadline to amend plans to satisfy Code Sec. 436 and extended the period during which those amendments are eligible for relief from the anti-cutback provisions of Code Sec. 411(d)(6).

Code Sec. 436, which was added by the Pension Protection Act of 2006 (P.L. 109-280; PPA), sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. When a plan's adjusted funding target attainment percentage (AFTAP) for the plan year falls below 60%, certain benefit payments are prohibited and benefit accruals under the plan cease. When a plan's AFTAP is less than 80% but not less than 60%, the portion of benefit that may be paid in a single sum or other prohibited payment is limited.

Code Sec. 436 is generally effective for plan years that begin on or after January 1, 2008. Final regulations were issued in October 2009. For plan years prior to 2010, plans may rely on the final regulations or an earlier set of proposed regulations for purposes of satisfying the requirements of Code Sec. 436.

Extension of amendment deadline and anti-cutback relief

In Notice 2010-77, the IRS extended the deadline for adopting an interim amendment with respect to Code Sec. 436 to the last day of the first plan year that began on or after January 1, 2011. The notice also provided that a plan amendment that eliminated or reduced a protected benefit would not cause a plan to fail to meet the anti-cutback requirements of Code Sec. 411(d)(6) if the amendment were made within a set time period and if the elimination or reduction were only to the extent necessary to meet the requirements of Code Sec. 436.

The new guidance extends the deadline for adopting an interim amendment with respect to Code Sec. 436 to the latest of: (a) the last day of the first plan year that begins on or after January 1, 2012, (b) the last day of the plan year for which Code Sec. 436 is first effective for the plan, or (c) the due date, including extensions, of the employer's tax return for the tax year that contains the first day of the plan year for which Code Sec. 436 is first effective for the plan. The extension is conditioned on the amendment being effective as of the effective date of Code Sec. 436 with respect to the plan and operation of the plan in accordance with the amendment from and after the effective date of the amendment.

Sample plan amendment

The new guidance also provides a sample amendment that satisfies the requirements of Code Sec. 436 and the final regulations. If a plan is amended by adoption of the sample amendment, the terms of the plan will satisfy those statutory and regulatory requirements.

The sample amendment is in three parts. The first part contains provisions applicable to all plans, including limitations on benefit and accruals when the plan's AFTAP is below a stated percentage, or when the plan's sponsor is in bankruptcy and the plan's AFTAP has not been certified to be at least 100%. The second part contains two alternative provisions, one of which must be adopted along with the first part in the case of a multiple employer plan. The third part consists of four optional provisions that may be used to modify the first part of the sample amendment and pertain to an election of certain accelerated distribution options, the timing and form of such distributions, and the automatic restoration of benefit accruals that were not permitted to accrue as a result of the application to the plan of Code Sec. 436(e), under certain conditions. Any or all of these provisions may be incorporated into the appropriate section of the first part of the sample amendment.

Source: IRS Notice 2011-96.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

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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