The Pension Protection Act of 2006 added Section 436 to the Internal Revenue Code (the Code), to limit benefit accruals and benefits payable under a single-employer defined benefit plan if the funded percentage of the plan falls below certain levels. Although plans have been required to operate in accordance with Section 436 since Jan. 1, 2008, plan amendments for Section 436 were not required to be made until the first plan year that begins on or after Jan. 1, 2011. Recently the IRS issued Notice 2011-96 (the Notice), which extends the amendment deadline and provides a sample plan amendment.
Section 436 applies to single-employer defined benefit pension plans and limits payments and accruals of benefits under an underfunded plan. If such a plan’s “adjusted funding target attainment percentage” (AFTAP) for a plan year is less than 60 percent, several restrictions are activated:
- Participants and beneficiaries may not be permitted to elect, and the plan may not pay, an optional form of benefit that includes a “prohibited payment” with an annuity starting date on or after the applicable measurement date. To determine whether a payment is a “prohibited payment,” the payment is measured against the monthly amount paid under a single-life annuity (with some adjustments). If the payment exceeds the amount payable in the form of a single-life annuity, it is a prohibited payment. Certain annuities purchased from insurers to pay benefits are also prohibited payments.
- Benefit accruals under the plan must cease as of the applicable measurement date. They may resume when the plan sponsor makes certain contributions described in the final regulations (in addition to any minimum required contribution for that plan year).
- If the plan provides for any “unpredictable contingent event benefit” (such as special benefits paid on a plant shutdown), the benefit may not be paid if the plan’s AFTAP for the plan year is less than 60 percent, taking into account the benefits attributable to the unpredictable contingent event. (However, a plan sponsor may circumvent this restriction by making a sufficient special contribution to the plan that is in addition to any minimum required contribution for that plan year.)
If the plan’s AFTAP is between 60 percent and 80 percent, in general participants and beneficiaries may not elect, and the plan may not pay, an optional form of benefit that includes a prohibited payment with an annuity starting date on or after the applicable measurement date (i.e., the date on which the AFTAP was determined).
In addition, a plan may not make a prohibited payment with an annuity starting date that is during a plan year in which the plan sponsor is a debtor under Chapter 11 of the Bankruptcy Code. This restriction is lifted when such a plan’s actuary certifies that the plan’s AFTAP is at least 100 percent.
Plans were required to comply with these requirements by no later than Jan. 1, 2008. Before the Notice, the deadline for amending a plan to comply with Section 436 was the last day of the first plan year beginning on or after Jan. 1, 2011. The final regulations under Section 436 have been effective since Jan. 1, 2010.
Under the Notice, the deadline to amend a plan to comply with Section 436 has been extended to the earlier of:
- The last day of the first plan year that begins on or after Jan. 1, 2012; or
- The date on which the plan is submitted for a favorable determination letter.
The IRS has indicated that if a plan is submitted for a determination letter, it must incorporate into the plan an amendment to comply with Section 436. As a result, filing an application for a determination letter before the extended deadline in the Notice would effectively accelerate the deadline for adopting a Section 436 amendment.
The Notice includes sample plan amendment language that complies with Section 436. The sample amendment has three parts:
- The first part contains provisions that are applicable to all plans and includes the requirements set forth above. The first part also contains provisions regarding the resumption of payments and accruals and the treatment of amendments that were not allowed to take effect on their effective dates after a relevant limitation ceases to apply.
- The second part applies to multiple-employer plans and contains alternate provisions that should be adopted depending on whether the plan is subject to Code Section 413(c)(4)(A) or Code Section 413(c)(4)(B).
- The third part consists of four optional provisions that may be used to modify the first part of the sample amendment. The first two provisions allow a participant or beneficiary who is otherwise prohibited from electing certain accelerated distribution options to make a new election of a previously prohibited form of benefit payment after the relevant limitation ceases to apply. The third provision expands the choices of timing and form of distribution available to participants and beneficiaries during a period when accelerated distribution options are limited. The fourth provision provides for the automatic restoration of benefit accruals that were not permitted to accrue during the limitation period. A plan sponsor may choose to incorporate any or all of the optional provisions.
The Notice provides that a plan sponsor that adopts the sample amendment by the extended deadline has reliance that the form of the amended plan satisfies the Section 436 requirements. A plan sponsor may change the organization or terminology of the sample amendment without it affecting the plan sponsor’s reliance, as long as the changes do not materially modify the meaning of any provision of the amendment.
Now that the IRS has provided model language for an amendment, plan sponsors should assume that there will be no further extensions of the Section 436 amendment deadline. For sponsors of single-employer defined benefit plans with a plan year that is the calendar year, this means that a Section 436 amendment must be adopted no later than Dec. 31, 2012 (or, if earlier, the date on which the plan next files for a determination letter).
Plan sponsors that have already amended their plans for Section 436 should determine whether there are any material differences between existing plan provisions and the model amendment and amend their plans accordingly before the deadline.
For further information, please contact the authors or any other members of McGuireWoods’ Employee Benefits Team.