IRS Issues Sample Amendment for Section 436 and Postpones Date for Amending Single-Employer Pension Plans
In Notice 2011-96, the Internal Revenue Service ("IRS") has issued a sample amendment that single-employer defined benefit pension plans (including multiple employer pension plans1) may use to implement the statutory restrictions on lump-sum payments, plan amendments, and benefit accruals if the plan is significantly underfunded. The restrictions are contained in section 436 of the Internal Revenue Code of 1986 ("Code") and in title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The restrictions apply, depending on the Adjusted Funding Target Attainment Percentage ("AFTAP"). Final regulations under section 436 were issued in October 2009 and apply for plan years beginning in 2010 and later years. Plans must be amended to include the provisions of section 436, which is generally effective for the plan year that begins in 2008.
Brief Description of Section 436 Rules
Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. In general, when a plan's adjusted funding target attainment percentage (AFTAP) for the plan year is less than 60 percent, the law prohibits any payment in excess of a single life annuity, (including single sum distributions), and requires benefit accruals under the plan to cease. The law also prohibits the payment of an unpredictable contingent event benefit (e.g., shut-down benefits) if the plan's AFTAP for the plan year is less than 60 percent or would be less than 60 percent, taking into account the occurrence of the event.
When a plan's AFTAP for the plan year is less than 80 percent but not less than 60 percent, the law generally (1) limits the portion of a benefit that may be paid in a single sum or other prohibited payment and (2) prohibits a plan amendment from taking effect if the amendment increases the liabilities of the plan by increasing benefits and the plan's AFTAP for the plan year is less than 80 percent or would be less than 80 percent, taking into account the amendment. In addition, the law generally prohibits the payment of prohibited payments from a plan while the plan's sponsor is in bankruptcy, unless the plan's AFTAP is certified to be at least 100 percent.
The requirement to apply any of these limitations ceases if the plan sponsor makes a contribution, in the amount specified in the relevant subsection, that is in excess of the plan's minimum required contribution.
In order for a pension plan to be considered a qualified plan under the Internal Revenue Code, the provisions and limitations of section 436 must be part of the plan document. Similarly, the provisions of title I of ERISA require that the plan language provides for the limitations.
Delay in Amendment Date
Notice 2011-96 extends the date for adopting a conforming section 436 amendment until the last day of the plan year that begins in 2012, or the later of the last day of the plan year for which section 436 is first effective or the due date of the employer's tax return for the tax year that contains the first day of the plan year for which section 436 is first effective for the plan. The notice also provides that any reduction in benefits (e.g., adding a restriction on payment of lump-sums) will not violate the anti-cutback rules of section 411(d)(6) of the Code if the sample amendment is adopted by the deadline for amending the plan, (2) the terms of the sample amendment are not modified, except as permitted or required by the notice, and (3) the plan is operated in accordance with the amendment from and after the effective date of the amendment.
Cheiron Observation: For the typical single-employer plan with a calendar plan year, the deadline for amendment will be December 31, 2012. Special rules apply for eligible charity plans, as defined, and those plans will need to be carefully reviewed for when amendments are needed.
The sample amendment has three separate parts. The first part of the sample amendment applies to all plans. The second part applies to multiple employer plans, and the third part contains four optional rules that permit participants to re-elect benefit forms if the plan was prohibited from paying the form elected, and to restart accruals when the restrictions contained in the amendment no longer apply.
Generally, the sample amendment follows the provisions of the law and regulations, and incorporates by reference many of the definitions in the regulations. Notice 2011-96 permits a plan amendment to change the wording of the sample amendment without losing the anti-cutback relief, but only if the deviation is made to conform to a plan's terminology and operation and does not materially modify the sample amendment by altering its meaning.
ACTION: Administrators and consultants should review the IRS sample amendment with Counsel and adopt it or another amendment by the last day of the plan year beginning in 2012 unless a later date applies. A decision will need to be made on which, if any, of the optional provisions in part 3 of the amendment they wish to adopt, and whether the provisions conflict with existing provisions of the plan. They also need to make sure the effective date they use is appropriate for the plan.
Cheiron Observation: Notice 2011-96 makes it clear that the IRS expects to issue additional guidance under section 436 to address changes of law that were not addressed in the October 2009 regulations as well as other issues. Plans should consider the current plan language, the terms of the sample amendment, and possible changes in the regulations when deciding whether or not the sample amendment needs to be adopted. Legal counsel should be consulted in making changes to the plan.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.
1A multiemployer pension plan is not subject to the rules of section 436.