n-06-75.pdf

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Part III --- Administrative, Miscellaneous, and Procedural

Weighted Average Interest Rate Modification

Notice 2006-75

This notice provides guidance as to the determination of the weighted average
interest rate and the resulting permissible range of interest rates used to calculate
current liability for the purpose of the additional funding requirements under
§ 412(l) of
the Internal Revenue Code (Code) and the minimum full funding limitation of
§ 412(c)(7)(E), and the corresponding requirements and limitation under sections
302(c)(7)(E) and 302(d) of the Employee Retirement Income Security Act of 1974
(ERISA), as in effect for plan years beginning in 2006 and 2007. This notice implements
changes to the rules regarding those interest rates that were enacted by § 301 of the
Pension Protection Act of 2006 (PPA ’06).

BACKGROUND

Section 412 of the Code, and the corresponding requirements of section 302 of
ERISA, set forth minimum funding standards that apply to certain plans. Title I of
PPA ’06, enacted on August 17, 2006, makes extensive changes to the rules of § 412 of
the Code and section 302 of ERISA, generally applicable to plan years beginning on or
after January 1, 2008. In addition, section 301 of PPA ’06 makes certain changes to the
minimum funding rules that apply to earlier plan years. For purposes of this notice, all
references to § 412 refer to § 412 of the Code without regard to the amendments made
by Title I of PPA ’06.

PRIOR LAW

Under
§ 412(b)(5)(A), the funding standard account (and items therein) must be
charged or credited with interest at the appropriate rate consistent with the rate or rates
of interest used under the plan to determine costs.

Section 412(b)(5)(B) provides special rules for the interest rate that is used to
determine a plan’s current liability for purposes of
§ 412(l) and for purposes of the
minimum full funding limitation under
§ 412(c)(7)(E). In general, that interest rate must
fall within a specified corridor based on the weighted average of the rates of interest on
30-year Treasury constant maturities during the 4-year period ending on the last day
before the beginning of the plan year, as published monthly in the Internal Revenue
Bulletin. See Notice 88-73, 1988-2 C.B. 383, and Notice 2006-8, 2006-5 I.R.B. 386.

Section 412(b)(5)(B)(ii) provides a special rule that applies for plan years
beginning in 2004 and 2005. Under that special rule, the interest rate used to determine
current liability must not be above and must not be more than 10 percent below the
weighted average of the rates of interest on amounts invested conservatively in long-
term investment-grade corporate bonds during the 4-year period ending on the last day
before the beginning of the plan year. In Notice 2004-34, 2004-1 C.B. 848, the Treasury
Department prescribed the method for periodically determining the corporate rates, and

made the permissible range, indices and methodology used to determine the average
rate publicly available.

Section 412(l)(7)(C)(i)(II) generally provides that, for plan years beginning after
1999, the interest rate used to determine the deficit reduction contribution must be not
more than 105% of the weighted average interest rate (or 120% of the weighted average
interest rate for plan yeas beginning in 2002 and 2003). Section 412(l)(7)(C)(i)(IV)
provided that, for plan years beginning in 2004 and 2005, the interest rate used to
determine current liability for purposes of determining the deficit reduction contribution
must be the same as the rate used under § 412(b)(5).

PENSION PROTECTION ACT OF 2006

Section 301(b) of PPA ’06 amends
§ 412(b)(5)(B)(ii)(II) to extend the use of the
corporate bond weighted average for plan years beginning in 2006 and 2007. Section
412(l)(7)(C)(i)(IV) is also amended by extending the use of the corporate bond weighted
average for plan years beginning in 2006 and 2007. Corresponding changes were made
to the parallel ERISA provisions.

This notice provides the composite corporate bond rates from December, 2005
through July, 2006, and the resulting corporate bond weighted averages for plan years
beginning in the months from January, 2006 through August, 2006. These interest rates
have been computed in accordance with the methodology and using the indices set forth
in Notice 2004-34.

Composite Corporate
For Plan Years Corporate Bond
Beginning in Bond Weighted Permissible Range

Month Year Rate Average 90% 100%

December 2005 5.72

January 2006 5.65 5.77 5.19 5.77
February 2006 5.73 5.75 5.18 5.75
March 2006 5.89 5.75 5.17 5.75

April 2006 6.18 5.74 5.17 5.74
May 2006 6.29 5.74 5.17 5.74
June 2006 6.31 5.75 5.18 5.75

July 2006 6.30 5.77 5.19 5.77
August 2006 5.78 5.20 5.78

DRAFTING INFORMATION

The principal author of this notice is Tony Montanaro of the Employee Plans, Tax
Exempt and Government Entities Division. For further information regarding this notice,
please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-
829-5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern
time, Monday through Friday. Mr. Montanaro may be reached at 1-202-283-9714 (not a
toll-free number).