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Final regs explain minimum required contributions for defined benefit pension plans

T.D. 9732, 09/08/2015; Reg. § 1.430(a)-1, Reg. § 1.430(f)-1, Reg. § 1.430(h)(2)-1 , Reg. § 1.430(j)-1, Reg. § 1.436-1, Reg. § 54.4971(c)-1

IRS has issued final regs under Code Sec. 430 that provide guidance on the determination of minimum required contributions for single-employer defined benefit pension plans, as well as on the excise tax for failure to satisfy the minimum funding requirements for defined benefit pension plans. The final regs generally adopt proposed regs, but with several modifications in light of comments received and intervening legislative changes.

Background. Code Sec. 412 provides minimum funding requirements that generally apply for pension plans. Code Sec. 430, which was added by the 2006 Pension Protection Act (PPA, P.L. 109-280) and amended by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA, P.L. 110-458), sets out the minimum funding requirements that generally apply to single-employer defined benefit plans under Code Sec. 412.

Under Code Sec. 430, the minimum required contribution is determined by reference to the plan’s funding target for the plan year—i.e., the present value of all benefits accrued, earned, or otherwise allocated to years of service before the first day of the plan year. (Code Sec. 430(d)(1)) If the value of plan assets (less any prefunding balance or funding standard carryover balance) is less than the funding target, the minimum required contribution is the sum of the plan’s target normal cost and the shortfall and waiver amortization charges for the plan year. (Code Sec. 430(a)(1)) Rules for determining the funding shortfall, amortization installments, waiver charges, etc. are provided in Code Sec. 430(c) and Code Sec. 430(e).

Code Sec. 430(h)(2) specifies the interest rates used in determining a plan’s target normal cost and funding target. Present value is generally determined under Code Sec. 430(h)(2)(B) using three interest rates (segment rates) that correlate to when future benefits are reasonably determined to be payable. Under prior law, the three segments were the 5-year period beginning on the first day of the plan year, the immediately following 15-year period, and the period after the end of that 15-year period. However, a change in law effective for plan years beginning on or after Jan. 1, 2014, provided that the initial 5-year period begins on the valuation date for the plan year. (Highway and Transportation Funding Act of 2014, or “HATFA”; P.L. 113-159)

Under Code Sec. 430(j), the due date for the payment of any minimum required contribution for a plan year is 8 1/2 months after the end of the plan year, with late payments adjusted for interest accruing under the relevant rate under Code Sec. 430(h)(2) for the period between the valuation date (except for small plans, the first day of the plan year) and payment date.

Code Sec. 430(j)(3) provides rules governing the quarterly installments that a plan with a funding shortfall for the preceding plan year must pay toward the required minimum contribution for the plan year, including rules establishing a minimum level of liquid assets the plan must have available. A plan sponsor that fails to satisfy this liquidity requirement is treated as failing to make the required quarterly installment, and the plan is then required to cease making certain types of accelerated payments.

An excise tax is imposed under Code Sec. 4971(a) on the employer for a failure to meet applicable minimum funding requirements. Code Sec. 4971(b) provides an additional excise tax that applies if the applicable minimum funding requirements remain unsatisfied for a specified period. A 10% tax is imposed under Code Sec. 4971(f)(1) on the amount of the liquidity shortfall for a quarter that is not paid by the due date for the installment for that quarter, with an additional excise tax that applies if a plan has a liquidity shortfall as of the close of five consecutive quarters. (Code Sec. 4971(f)(2))

Earlier regs. Final regs were issued in 2009 that addressed issues under Code Sec. 430(b), Code Sec. 430(d), Code Sec. 430(f), Code Sec. 430(g) , Code Sec. 430(h), Code Sec. 430(i), and Code Sec. 436 (T.D. 9467; see Weekly Alert ¶  17  10/15/2009).

Proposed regs were issued in 2008 under Code Sec. 430 and Code Sec. 4971 (see Weekly Alert ¶  11  04/17/2008). The proposed regs under Code Sec. 430, addressing issues that were not covered in the 2009 final regs, were proposed to apply generally to plan years beginning on or after Jan. 1, 2009. The proposed regs under Code Sec. 4971 generally were proposed to apply at the same time the statutory changes to Code Sec. 4971 under PPA ’06 become effective, but would not apply to any tax years ending before the regs’ publication date (Apr. 15, 2008).

New final regs. The new final regs are generally similar to the proposed regs, but reflect a number of changes made in response to comments received, as well as changes made to reflect intervening legislation (including WRERA and HATFA).

The final regs provide rules for determining the minimum required contribution for a plan year for a single-employer defined benefit plan subject to Code Sec. 430, including rules on determining:

…the amount of the contribution, which depends on whether the value of the plan assets is less than or at least equal to the plan’s funding target for the plan year; (Reg. § 1.430(a)-1(a), Reg. § 1.430(a)-1(b))
…the shortfall amortization installments with respect to a shortfall amortization base established for a plan year, including rules for which interest rates apply; (Reg. § 1.430(a)-1(c)(1))
…the shortfall amortization base; (Reg. § 1.430(a)-1(c)(2))
…the waiver amortization installments; (Reg. § 1.430(a)-1(d)) and
…the amount of a minimum required contribution for a short plan year (including the year of termination). (Reg. § 1.430(a)-1(b)(5)(ii))

The final regs also reflect a technical correction made to HATFA under which the first segment rate is used to determine the present value of benefits expected to be payable during the 5-year period beginning on the valuation date for the plan year, but with respect to a plan year beginning before Jan. 1, 2014, for a plan with a valuation date other than the first day of the plan year, the 5-year period beginning on the first day of the plan year is permitted to be used instead. (Reg. § 1.430(h)(2)-1)

The final regs provide rules related to the payment of minimum required contributions, including guidance on:

…the payment of quarterly contributions; (Reg. § 1.430(j)-1(a), Reg. § 1.430(j)-1(b))
…determining the plan year to which a contribution applies (in general, to the earliest plan year for which there is an unpaid minimum required contribution; and if there is none or a portion of the contribution corrects all unpaid minimum required contributions, to the prior or current plan year); (Reg. § 1.430(j)-1(b)(3)) and
…the earliest date that a payment of the minimum required contribution for a plan year can be made (generally, the first day of the plan year), and the deadline for such payment (8 1/2 months after the close of the plan year). (Reg. § 1.430(j)-1(b)(1), Reg. § 1.430(j)-1(b)(2) )

The regs also provide guidance on accelerated quarterly contributions for plans with funding shortfalls, including on:

…computation of the contributions (in general, 25% of the required annual payment, which is equal to the lesser of (i) 90% of the minimum required contribution under Code Sec. 430(a) for the plan year or (ii) 100% of the minimum required contribution for the preceding plan year); (Reg. § 1.430(j)-1(c)(5))
…due dates for the four required quarterly installments with respect to a full plan year (the 15th day of the 4th, 7th, and 10th plan months, and the 15th day following the end of the plan year) (Reg. § 1.430(j)-1(c)(6)) and a short plan year; (Reg. § 1.430(j)-1(c)(7))
…a plan sponsor’s election to use the plan’s funding balances to satisfy quarterly contribution requirements; (Reg. § 1.430(j)-1(c)(4)) and
…special quarterly contribution rules for plans with valuation dates other than the first day of the plan year. (Reg. § 1.430(j)-1(c)(6))

The final regs also include, after receiving a uniformly positive response from commenters on the subject, rules for providing a standing election to satisfy quarterly installments. Under these rules, a plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to use the funding standard carryover balance and the prefunding balance to satisfy any otherwise unpaid portion of a required installment under Code Sec. 430(j)(3) (i.e., the amount necessary to satisfy the required installment rules under Code Sec. 430(j) based on quarterly installment amounts of 25% of the minimum required contribution for the preceding plan year). Under the regs, if the amount of the prefunding and funding standard carryover balances available is less than the amount needed to satisfy any otherwise unpaid portion of a required installment, then the entire amount available will be used under the standing election. The regs also provide rules for how, or situations in which, the election is revoked, terminated, suspended, or replaced. (Reg. § 1.430(f)-1(f)(1)(iii))

In addition, the final regs provide rules for the liquidity requirements that generally apply to plans for which quarterly contributions are required, including rules on:

…the general mechanics of the requirement; (Reg. § 1.430(j)-1(d)(1))
…satisfaction of the requirement; (Reg. § 1.430(j)-1(d)(2))
…the treatment of a required installment (or portion thereof) as unpaid by reason of the liquidity requirements and how interest is computed in this situation (Reg. § 1.430(j)-1(d)(3)), modifying the proposed regs to provide that any such portion is treated as unpaid until the close of the quarter in which the due date for the installment occurs, and including a new special rule in light of that modification that reflects the requirement to use a higher rate of interest of late required installments by converting that requirement into an interest charge that increases the minimum required distribution; (Reg. § 1.430(j)-1(d)(3)(iv)(B))
…the suspension of accelerated distributions for a plan with an unpaid liquidity shortfall; (Reg. § 1.430(j)-1(d)(3)(iii))
…the applicability of excise tax under Code Sec. 4971(f) for failure to pay a liquidity shortfall; (Reg. § 1.430(j)-1(d)(3)(iii)) and
…how any contribution of liquid assets for a quarter applies both toward satisfying the liquidity requirement and the otherwise applicable quarterly installment. (Reg. § 1.430(j)-1(d)(3)(ii))

The regs also reflect certain definitional changes made by the CSEC Act including to the terms “accumulated funding deficiency,” “unpaid minimum required contribution” (under which, for purposes of the total amount subject to excise tax under Code Sec. 4971 , correction of an unpaid minimum required contribution requires a contribution that includes an adjustment for interest), “correct,” and “single-employer plan” (which, under the final regs, includes a multi-employer plan to which Code Sec. 413(c) applies). (Reg. § 1.430(j)-1(e), Reg. § 54.4971(c)-1)

Finally, the final regs make certain modifications and additions to provide IRS with authority to issue published guidance to extend certain deadlines. (Reg. § 1.436-1(h)(4)(iii)(C)(9)) These changes accommodate plan sponsor actions in response to retroactive changes in the minimum funding requirements and are the modifications that IRS indicated were expected to be made in prior guidance.

Effective/applicability date. In general, the regs are effective on Sept. 9, 2015, and apply to plan years beginning on or after Jan. 1, 2016. However, plans are permitted to apply or rely on them in earlier years, subject to the effective dates of the underlying statutes (in general, for plan years beginning before 2016 and after 2007).

References: For minimum required contributions for defined benefit plans, see FTC 2d/FIN ¶  H-7751; United States Tax Reporter ¶  4304.01; TG ¶  8117.

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