IRS Issues Regulations on Funding for Single-Employer Pension Plans

On September 9, 2015, the Internal Revenue Service (IRS) issued final regulations for determining the minimum required contribution and quarterly contributions for single-employer defined benefit plans under the Pension Protection Act of 2006 (PPA '06), Public Law 109-280. The final regulations also reflect certain changes made by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Public Law 110-458, the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), Public Law 112-141, and the Highway and Transportation Funding Act of 2014 (HATFA), Public Law 113-159.

Effective Date: In general, the regulations apply to plan years beginning on or after January 1, 2016. However, plan sponsors may elect to apply them to earlier years.

Action Needed Now: Sponsors of single-employer defined benefit plans should review the regulations in conjunction with their actuary to determine whether and how they affect their plans and funding policy. The final regulations may be found at this link.


Section 430 of the Internal Revenue Code was added by PPA '06 and revised the minimum funding requirements for single-employer defined benefit plans. Under section 430, a minimum required contribution is determined for each plan year. The minimum required contribution generally consists of a seven-year amortization of any funding shortfall (the difference between the value of accrued benefits at the beginning of the year and the plan assets) plus the normal cost (the value of benefit accruals expected during the year). Section 4971 imposes an excise tax on the sponsoring employer for failure to satisfy the minimum funding standards.

Proposed rules were issued in April 2008. Plan sponsors were permitted to rely upon the proposed rules until final regulations were issued. The final regulations basically follow the proposed rules; however, there are some important additions and changes. This alert focuses on these important additions and changes.

Important Additions and Changes in the Final Regulations

  1. Plan Year of Plan Termination - The plan year in which a plan is terminated is treated as a short plan year that ends on the termination date.1 Therefore, the amortization amounts are pro-rated to reflect the short year, and the target normal cost is the value of benefits actually accrued during the short plan year. Also, any minimum required contribution for the year of plan termination is due 8½ months after the termination date.
  2. Termination Date for Section 430 - For a plan covered by the plan termination insurance provisions of title IV of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, administered by the Pension Benefit Guaranty Corporation (PBGC), the termination date for section 430 is the termination date established under section 4048 of ERISA. For all other defined benefit plans, the termination date for section 430 is the last date on which all actions needed to terminate the plan have taken place other than distribution of assets, provided that the distribution of assets is made as soon as administratively feasible after that date. A plan is not treated as failing to meet the requirement to distribute assets as soon as administratively feasible after the proposed termination date if the delay is attributable to the period of time necessary to obtain a determination letter upon plan termination.
  3. Allocation of Contributions to Plan Years - The final regulations provide that a contribution is first (and automatically) allocated to correct an unpaid minimum required contribution starting with the earliest plan year for which there is an unpaid minimum. Also, once a contribution or portion of a contribution has been attributed to a plan year on the Schedule SB, its allocation may not be changed to a different year.
  4. Standing Election to Meet Quarterly Contribution Requirements - The final regulations allow a plan sponsor to make a standing election to use the prefunding and carryover funding balances to satisfy any quarterly installments that are due. The election is made in writing addressed to the plan actuary. The contribution credit attributable to the election is deemed made on the later of the due date for the contribution or the date of the election.2 The election may only be changed or suspended in writing. There are nuances in using a standing election, and a standing election to apply balances to quarterly contributions may need to be revised once the minimum required contribution for the year is determined. In particular, the interaction with an election (including a standing election) to apply balances to satisfy the minimum required contribution for the prior year needs to be considered.
  5. Liquidity Shortfall Requirements - The final regulations make a substantial change from the proposed regulations with respect to liquidity shortfalls (generally where the value of liquid assets at the end of a plan quarter were less than three times the benefit payments during the past 12 months). Under the proposed regulations, liquidity shortfalls could only be corrected through contributions, and the excise tax would apply for every quarter until the liquidity shortfall for a quarter was corrected through contributions. The final regulations provide (in response to comments) that a payment of the liquidity shortfall is treated as unpaid until the end of the quarter in which the due date occurs. The regulations do provide a special rule under which additional interest is added to the minimum required contribution as an interest charge with respect to the amount of liquidity shortfall that is no longer considered unpaid at the end of a quarter.

Cheiron Comment: Accordingly, each quarter will stand on its own, and there will be a correction of an earlier liquidity shortfall if the plan has sufficient liquid assets at the end of a succeeding quarter so that there is no longer a liquidity shortfall. The interest charge avoids treating a plan sponsor that waits until after the end of the quarter to make a contribution more favorably than a plan sponsor that makes the contribution after the due date but before the end of the quarter.

The final regulations made other changes that the plan's actuary will need to take into account in determining the minimum required contribution and the impact on the funding standard carryover balance and prefunding balance.

More Regulations in the Future

The final regulations did not address all of the issues or changes made since the passage of PPA '06. The treatment of mergers and spin-offs was not addressed. Many of the changes made by WRERA were not addressed as well. It is expected that future proposed regulations will address the outstanding questions.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

1The rules for a short plan year were finalized as proposed.

2Many commentators had requested that the final regulations provide for such standing elections.