Code Section 430
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 430 | ***12/31/2011 | Moving Ahead for Progress in the 21st Century Act | Pension funding stabilization | 20,019 |
| 430 | **8/31/2009 | Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 1055 | Lookback for credit balance rule for plans maintained by charities | *See section 430 |
| 430 | 12/31/2007 | Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 1055 | Extended period for single-employer defined benefit plans to amortize certain shortfall amortization bases | 1,309 |
***Note on Effective Date
The provision is generally effective for plan years beginning after December 31, 2011. Under a special rule, an employer may elect, for any plan year beginning before January 1, 2013, not to have the provision apply either (1) for all purposes for which the provision would otherwise apply, or (2) solely for purposes of determining the plan’s adjusted funding target attainment percentage (used in applyingthe benefit restrictions) for that year. A plan is not treated as failing to meet the requirements of the anti-cutback rules solely by reason of an election under the special rule.
**Note on Effective Date
The provision is generally effective for plan years beginning after August 31, 2009. For plans with valuation dates other than the first day of the plan year, the provision is effective for plan years beginning after December 31, 2008.
*Note on Revenue Estimate
See section 430, provision: Extended period for single-employer defined benefit plans to amortize certain shortfall amortization bases.
Pension funding stabilization
Explanation of Provision
The provision revises the rules for determining the segment rates under the single-employer plan funding rules by adjusting a segment rate if the rate determined under the regular rules is outside a specified range of the average of the segment rates for the preceding 25-year period (‘‘average’’ segment rates). In particular, if a segment rate determined for an applicable month under the regular rules is less than the applicable minimum percentage, the segment rate is adjusted upward to match that percentage. If a segment rate determined for an applicable month under the regular rules is more than the applicable maximum percentage, the segment rate is adjusted downward to match that percentage. For this purpose, the average segment rate is the average of the segment rates determined under the regular rules for the 25-year period ending September 30 of the calendar year preceding the calendar year in which the plan year begins. The Secretary is to determine average segment rates on an annual basis and may prescribe equivalent rates for any years in the 25-year period for which segment rates determined under the regular rules are not available. The Secretary is directed to publish the average segment rates each month.
The applicable minimum percentage and the applicable maximum percentage depend on the calendar year in which the plan year begins as shown by the following table:
2012: minimum- 90 percent, maximum- 110 percent
2013: minimum- 85 percent, maximum- 115 percent
2014: minimum- 80 percent, maximum- 120 percent
2015: minimum- 75 percent, maximum- 125 percent
2016 or later: minimum- 70 percent, maximum- 130 percent
Thus, for example, if the first segment rate determined for an applicable month under the regular rules for a plan year beginning in 2012 is less than 90 percent of the average of the first segment rates determined under the regular rules for the 25-year period ending September 30, 2011, the segment rate is adjusted to 90 percent of the 25-year average.
Under the provision, if, as of the date of enactment, an employer election is in effect to use a monthly yield curve in determining minimum required contributions, rather than segment rates, the employer may revoke the election (and use segment rates, as modified by the provision) without obtaining IRS approval. The revocation must be made at any time before the date that is one year after the date of enactment, and the revocation will be effective for the first plan year to which the amendments made by the provision apply and all subsequent plan years. The employer is not precluded from making a subsequent election to use a monthly yield curve in determining minimum required contributions in accordance with present law.
The change in the method of determining segment rates under the provision generally applies for the purposes for which segment rates are used under present law, except for purposes of minimum and maximum lump-sum benefits,47 limits on deductible contributions to single-employer defined benefit plans, qualified transfers of excess pension assets to retiree medical accounts,48 PBGC variable-rate premiums,49 and 4010 reporting to the PBGC.
Annual funding notice
The provision requires additional information to be included in the annual funding notice in the case of an applicable plan year. For this purpose, an applicable plan year is any plan year beginning after December 31, 2011, and before January 1, 2015, for which (1) the plan’s funding target, determined using segment rates as adjusted to reflect average segment rates (‘‘adjusted’’ segment rates), is less than 95 percent of the funding target determined without regard to adjusted segment rates (that is, segment rates determined without regard to the provision), (2) the plan has a funding shortfall, determined without regard to adjusted segment rates, greater than $500,000 and (3) the plan had 50 or more participants on any day during the preceding plan year.
The additional information that must be provided is:
• a statement that MAP–21 modified the method for determining the interest rates used to determine the actuarial value of benefits earned under the plan, providing for a 25-year average of interest rates to be taken into account in addition to a 2-year average;
• a statement that, as a result of MAP–21, the plan sponsor may contribute less money to the plan when interest rates are at historical lows, and
• a table showing, for the applicable plan year and each of the two preceding plan years, the plan’s funding target attainment percentage, funding shortfall, and the employer’s minimum required contribution, each determined both using adjusted segment rates and without regard to adjusted segment rates (that is, as under present law). In the case of a preceding plan year beginning before January 1, 2012, only the plan’s funding target attainment percentage, funding shortfall, and the employer’s minimum required contribution provided determined without regard to adjusted segment rates (that is, determined as under present law before enactment of the provision) are required to be provided.
As under present law, a funding notice may also include any additional information that the plan administrator elects to include to the extent not inconsistent with regulations. For example, a funding notice may include a statement of the amount of the employer’s actual or planned contributions to the plan.
The Secretary of Labor is directed to modify the model funding notice required so that the model includes the additional information in a prominent manner, for example, on a separate first page before the remainder of the notice.
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Lookback for credit balance rule for plans maintained by charities
Explanation of Provision
Under the provision, for any plan year beginning on or after August 31, 2009, and before September 1, 2011, for purposes of determining whether the plan is sufficiently funded so as to be permitted to credit all or a portion of its funding standard carryover balance or prefunding balance against the minimum required contribution for the plan year, the plan may use the greater of: (1) its funding target attainment percentage (determined without regard to the provision) for the prior plan year, or (2) the funding target attainment percentage for the plan year beginning after August 31, 2007 and before September 1, 2008, as determined under rules prescribed by the Secretary. Thus, the provision temporarily permits plans whose funded status for the lookback year was at least equal to 80 percent to offset their minimum required contributions by a credit balance, even if the plan would not otherwise be permitted to do so.
For plans with valuation dates other than the first day of the plan year, the provision applies for any plan year beginning after December 31, 2007, and before January 1, 2010, and the plan may use the funding target attainment percentage for the last plan year beginning before September 1, 2007, as determined under rules prescribed by the Secretary.
The provision applies only to plans maintained exclusively by one or more charitable organizations exempt from tax under section 501(c)(3).
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Extended period for single-employer defined benefit plans to amortize certain shortfall amortization bases
Explanation of Provision
- Election of extended amortization period
- Increase in required installments for certain plans
- Installment acceleration amount
- Excess employee compensation
- Extraordinary dividends and redemptions
- Limitations on installment acceleration amounts
- Total installments limited to the present value of the shortfall amortization base
- Reporting requirement
- Regulations and guidance
1. Election of extended amortization period
The provision permits the plan sponsor of a single-employer defined benefit pension plan to elect to determine the shortfall amortization installments with respect to the shortfall amortization base for not more than two eligible plan years under two alternative extended amortization schedules.
Under the provision, the sponsor of a single-employer defined benefit plan may elect to amortize the shortfall amortization base for an eligible plan year over a nine-year period beginning with the election year (‘‘two plus seven amortization schedule’’). The shortfall amortization installments for the first two plan years in the nine-year period are equal to the interest on the shortfall amortization base for the election year, determined by using the effective interest rate for the election year.1072 The shortfall amortization installments for the last seven plan years in the nine-year period are equal to the amounts necessary to amortize the remaining balance of the shortfall amortization base for the election year in level annual installments over the seven-year period, determined by using the segment rates for the election year.
Alternatively, the sponsor of a single-employer defined benefit plan may elect to amortize the shortfall amortization base for an election year in level annual installments over a fifteen-year period beginning with the election year (‘‘fifteen-year amortization schedule’’).
For purposes of the provision, an eligible plan year is a plan year beginning in 2008, 2009, 2010, or 2011, but only if the due date for the payment of the minimum required contribution for the plan year occurs on or after the date of enactment of the provision. A plan sponsor is not required to elect to use an extended amortization schedule for more than one eligible plan year or to make such election for consecutive eligible plan years; however, a plan sponsor who does make an election for two eligible plan years is required to elect the same extended amortization schedule for each year. For example, a plan sponsor who elects to use the fifteen-year amortization schedule for the plan year beginning in 2009 can make an election to use that same extended amortization schedule for the plan year beginning in 2010 or 2011; however, the plan sponsor is not permitted to elect the two plus seven amortization schedule for either of those subsequent eligible plan years.
Plans sponsored by certain government contractors that are not subject to the PPA minimum funding rules until the plan year beginning in 2011 may only elect an extended amortization schedule for the plan year beginning in 2011.
An election to use an extended amortization schedule may be revoked only with the consent of the Secretary. Prior to granting a revocation request the Secretary must provide the PBGC an opportunity to comment on the conditions applicable to the treatment of any portion of the election year shortfall amortization base that remains unamortized as of the revocation date.
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2. Increase in required installments for certain plans
In general
Under the provision, any plan year in a restriction period is a year in which the shortfall amortization installment otherwise determined and payable for that year pursuant to an election to use an extended amortization period may be increased, subject to certain limits described below, by an ‘‘installment acceleration amount’’. The length of the restriction period following an election to use an extended amortization schedule depends on the extended amortization schedule elected by the plan sponsor for the eligible plan year. For a plan sponsor who elects to use the two plus seven amortization schedule for an eligible plan year, the restriction period is the three year period beginning with the election year or, if later, the first plan year beginning after December 31, 2009. For a plan sponsor who elects to use the fifteen-year amortization schedule for an eligible plan year, the restriction period is the five year period beginning with the election year or, if later, the first plan year beginning after December 31, 2009.
For example, for a plan sponsor who elects to use the two plus seven amortization schedule for the plan year beginning in 2009, the restriction period with respect to that election is the three year period during the 2010, 2011 and 2012 plan years. If the same plan sponsor then elects to use the two plus seven amortization schedule for the plan year beginning in 2011, the separate restriction period with respect to that election is the three year period during the 2011, 2012 and 2013 plan years.
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3. Installment acceleration amount
The ‘‘installment acceleration amount’’ with respect to any plan year in a restriction period is the aggregate amount of excess employee compensation with respect to all employees for the plan year and the aggregate amount of extraordinary dividends and redemptions for the plan year. For purposes of the provision, ‘‘plan sponsor’’ includes any member of the plan sponsor’s controlled group (as determined for purposes of the minimum funding rules).
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4. Excess employee compensation
Excess employee compensation is compensation (as defined below) with respect to any employee (including a self-employed individual treated as an employee under section 401(c)) for any plan year in excess of $1,000,000. Beginning in 2011, the $1,000,000 threshold is indexed to the Consumer Price Index for Urban Consumers, rounded to the next lowest $1,000. For purposes of determining excess employee compensation, ‘‘compensation’’ includes all amounts attributable to services performed by an employee for a plan sponsor after February 28, 2010 that are includable in the employee’s income as remuneration during the calendar year in which the plan year begins, regardless of whether the services were performed during such calendar year. Compensation for any employee during a calendar year also includes any amount that the plan sponsor directly or indirectly sets aside or reserves in, or transfers to, a trust (or other arrangement specified by the Secretary) during the calendar year for purposes of paying deferred compensation to the employee under a nonqualified deferred compensation plan (as defined in section 409A) of the plan sponsor, unless such amount is otherwise includable in income as remuneration by the employee in that calendar year. To the extent that an amount is taken into account when set aside,
reserved or transferred to a trust or other arrangement, that amount is not taken into account in calculating the excess employee compensation with respect to the employee in any subsequent calendar year. The rule for amounts set aside, reserved or transferred to a trust or other arrangement applies without regard to whether the related compensation is attributable to services performed by an employee for a plan sponsor before or after February 28, 2010.
Compensation does not include any amount otherwise includable in the employee’s income with respect to the granting of service recipient stock (as defined for purposes of section 409A) after February 28, 2010 that is, at the time of grant, subject to a substantial risk of forfeiture (within the meaning of section 83(c)(1)) for at least five years following the date of grant. A grant would not fail to satisfy this requirement if the grant were vested upon death, disability, or involuntary termination of employment before the end of the five-year period. Under the provision, the Secretary may provide for the application of this exception for restricted service recipient stock to persons other than corporations. In addition, compensation does not include any remuneration payable to an employee on a commission basis solely on account of income directly generated by that employee’s individual performance. Finally, compensation does not include any remuneration consisting of nonqualified deferred compensation, restricted stock, restricted stock units, stock options, or stock appreciation rights payable or granted under a binding written contract in effect on March 1, 2010 and not modified in any material respect before the remuneration is paid.
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5. Extraordinary dividends and redemptions
The aggregate amount of extraordinary dividends and redemptions for a plan year is equal to the amount by which the sum of the dividends declared during the plan year by the plan sponsor and the aggregate amount paid for the redemption of stock of the plan sponsor redeemed during the plan year exceeds the greater of (1) the plan sponsor’s adjusted net income (within the meaning of section 4043 of ERISA) for the preceding plan year, determined without regard for any reduction by reason of interest, taxes, depreciation or amortization or (2) for a plan sponsor who determined and declared dividends in the same manner for at least five consecutive years immediately preceding the plan year, the aggregate amount of dividends determined and declared for the plan year in that manner. It is intended that dividends would be deemed to be determined in the same manner for the prior five years if they are at the same level or rate as dividends in the previous five consecutive years. For purposes of the provision, only dividends declared and redemptions occurring after February 28, 2010 are taken into account in determining the amount of dividends and redemptions for a plan year.
In calculating the dividends declared and amounts paid for the redemption of stock during the plan year, the following amounts are disregarded: (1) dividends paid by one member of the plan sponsor’s controlled group to another member of the controlled group; (2) redemptions made pursuant to an employee benefit plan or that are made on account of the death, disability or termination of employment of an employee or shareholder; and (3) dividends and redemptions with respect to applicable preferred stock on which dividends accrue at a specified rate in all events and without regard to the plan sponsor’s income and with respect to which interest accrues on any unpaid dividends. Applicable preferred stock is preferred stock originally issued before March 1, 2010 (including any preferred stock originally issued prior to that date that is subsequently reissued with otherwise identical terms) and preferred stock issued after March 1, 2010 that is held by an employee benefit plan subject to Title I of ERISA.
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6.Limitations on installment acceleration amounts
Annual Limitations
Under the provision, the installment acceleration amount for a plan year is limited to the aggregate amount of funding relief received by the plan sponsor in prior years as a result of an election to use an extended amortization period for an eligible plan year. To the extent that an installment acceleration amount is limited by application of this rule, the excess installment acceleration amount is generally carried over to the succeeding plan year.
Thus, under the provision, the installment acceleration amount for any plan year may not exceed the excess (if any) of (1) the sum of the shortfall amortization installments for that plan year and all prior plan years in the nine or fifteen year amortization period, as elected, with respect to the shortfall amortization base for the election year, that would have been determined and payable by the plan sponsor with respect to that shortfall amortization base in the absence of an election to use an extended amortization period over (2) the sum of the shortfall amortization installments for such plan years, determined under the two and seven or fifteen year amortization schedule, as elected by the plan sponsor, including any installment acceleration amount from a preceding plan year (‘‘annual limit’’).
To the extent that a carryover of excess installment acceleration amounts from a preceding plan year, when added to other installment acceleration amounts for a plan year (as determined prior to application of the annual limit on installment acceleration amounts) would cause the shortfall amortization installment for the plan year to exceed the annual limit, the excess is similarly carried over to the next succeeding plan year. Under the provision, the following ordering rule applies in applying the annual limit for a plan year: the installment acceleration amounts for the plan year, determined prior to the addition of any carryover installment acceleration amount from a preceding year, is applied first against the annual limit and then any installment acceleration amounts carried over to the plan year are applied against the annual limit on a first-in, first-out basis.
The carryover rules apply during the restriction period with respect to an election year and for a limited number of years following the expiration of the restriction period with respect to an election year. Under the provision, no amount is carried over to a plan year that begins after the first plan year following the last plan year in the restriction period applicable to a two plus seven amortization schedule and no amount is carried over to a plan year that begins after the second plan year following the last plan year in the restriction period applicable to a fifteen year amortization schedule.
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7. Total installments limited to the present value of the shortfall amortization base
Two additional rules (subject to rules prescribed by the Secretary) apply under the provision to insure that the addition of an installment acceleration amount to a shortfall amortization installment for a plan year results only in an acceleration of the payment of amounts that would otherwise be included in subsequent shortfall amortization installments with respect to the shortfall amortization base for the election year and not in the amortization of an amount in excess of that shortfall amortization base.
Under the first rule, if the shortfall amortization installment with respect to the shortfall amortization base for an election year is required to be increased by any installment acceleration amount, the remaining shortfall amortization installments with respect that shortfall amortization base are reduced, in reverse order of the otherwise required installments, to the extent necessary to limit the present value of the remaining installments to the present value of the remaining unamortized shortfall amortization base. Under the second rule, the increase for any plan year is limited to the amount that does not cause the amount of the installment to exceed the present value of the installment and all succeeding installments with respect to the shortfall amortization base for the election year (determined without regard to the installment acceleration amount, but after application of the first rule reducing the remaining shortfall amortization installments to reflect any installment acceleration amount).
Under the provision, any installment acceleration amount is disregarded for purposes of determining a plan’s quarterly contributions.
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8. Reporting requirement
The provision requires a plan sponsor who elects to use an extended amortization schedule to give notice of the election to participants and beneficiaries of the plan and to inform the PBGC of the election in such form and manner as the Director of the PBGC may require.
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9. Regulations and guidance
The Secretary is directed to provide rules for the application of the provisions governing installment acceleration amounts to plan sponsors who elect an extended amortization schedule for two or more plans, including rules for the ratable allocation of any installment acceleration amount among electing plans on the basis of each plan’s relative reduction in its shortfall amortization installment for the first plan year in the extended amortization period.
The Secretary is also directed to provide rules for the application of those provisions and the provisions governing the election of an extended amortization schedule in any case where there is a merger or acquisition involving an electing plan sponsor.
47- The provision does not provide a specific exception for determining maximum lump sum benefits. However, because the interest rates used in determining minimum lump sums apply also in determining maximum lump sums, the exception for minimum lump sums applies indirectly to maximum lump sums.
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48- Sections 40241 and 40242 of the Act extend to December 31, 2021, the ability to make a qualified transfer and allow qualified transfers to be made to provide group-term life insurance benefits. See Part One, Section C.4, below.
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49- Sections 40221 and 40222 of the Act revise PBGC flat-rate and variable-rate premiums. See Conference Report to accompany H.R. 4348, the Moving Ahead for Progress in the 21st Century Act, H.R. Rep. No. 112–557, June 28, 2012, pp. 662–663, for an explanation of the PBGC premium changes.
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1055- H.R. 3962. The bill originated as the Affordable Health Care for America Act and passed the House on November 7, 2009. The Senate passed the bill with an amendment substituting the text of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 by unanimous consent on June 18, 2010. The House agreed to the Senate amendment on June 24, 2010. The President signed the Act on June 25, 2010.
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1072-The effective interest rate with respect to a plan for a plan year is the single rate of interest which, if used to determine the present value of the benefits taken into account in determining the plan’s funding target for the year, would result in an amount equal to the plan’s funding target (as determined using the first, second, and third segment rates). Sec.430(h)(2)(A).
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