n-08-21.pdf

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Part III – Administrative, Procedural and Miscellaneous

Transition Guidance for New Funding Rules and Funding-Related Benefit
Limitations under PPA ‘06

Notice 2008-21

I. PURPOSE

This notice announces a later effective date than originally proposed for certain
proposed regulations under §§ 430 and 436 of the Internal Revenue Code (Code), as
added by the Pension Protection Act of 2006, Public Law 109-280 (PPA). In addition,
this notice provides transitional guidance for 2008 under § 436 for small plans with end-
of-year valuation dates.

II. BACKGROUND

Section 412 provides minimum funding requirements that generally apply for defined
benefit pension plans. Section 430, which was added by PPA, specifies the minimum
funding requirements that apply to single employer pension plans (including multiple
employer plans) pursuant to § 412.

Section 430(h)(3) provides rules regarding the mortality tables to be used for purposes
of determining any present value or making any other computation under § 430.
Section 430(h)(3)(C) provides rules for a plan sponsor’s use, with the approval of the
Secretary, of employer-specific substitute mortality tables in lieu of the standard
mortality tables that are otherwise used under § 430(h)(3)(A). On May 31, 2007,
proposed regulations under § 430(h)(3)(C) were published in the Federal Register as
§ 1.430(h)(3)-2 (72 FR 29456). Rev. Proc. 2007-37, 2007-25 I.R.B. 1433, sets forth
standards and procedures for obtaining approval to use substitute mortality tables.

Section 430(f) provides for certain funding balances referred to as the prefunding
balance and the funding standard carryover balance to be used to reduce the otherwise
applicable minimum required contribution for a plan year. On August 31, 2007,
proposed regulations under § 430(f) were published in the Federal Register as
§ 1.430(f)-1 (72 FR 50544).

Section 401(a)(29) requires that a defined benefit plan (other than a multiemployer plan)
satisfy the requirements of § 436. Section 436 sets forth a series of limitations on the
accrual and payment of benefits under an underfunded plan. Section 436(b) places
limitations on the payment of plant shutdown benefits and other unpredictable
contingent event benefits, § 436(c) places limitations on plan amendments that increase

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liabilities for benefits, § 436(d) places limitations on the payment of accelerated benefit
distributions, and § 436(e) places limitations on benefit accruals. These limitations are
applied based on the plan’s adjusted funding target attainment percentage (AFTAP) for
the plan year, as certified by the plan’s enrolled actuary.

Section 436(j) provides definitions that are used under § 436, including the definition of
a plan’s AFTAP. In general, a plan’s AFTAP is based on the plan’s funding target
attainment percentage (FTAP) under § 430(d)(2) for the plan year. However, the plan’s
AFTAP is determined by adding the aggregate amount of purchases of annuities for
employees other than highly compensated employees (within the meaning of § 414(q))
made by the plan during the two preceding plan years to the numerator and the
denominator of the fraction used to determine the FTAP.

Section 436(h) sets forth a series of presumptions that apply during the portion of the
plan year that is before the plan’s enrolled actuary has certified the plan’s AFTAP for the
year. Under § 436(h)(3), if any of the § 436 limitations did not apply to the plan for the
preceding year, but the AFTAP of the plan for the preceding year was not more than 10
percentage points greater than the percentage that would have caused a limitation to
apply to the plan for the preceding year and, as of the first day of the 4th month of the
current plan year, the enrolled actuary of the plan has not certified the actual AFTAP for
the current plan year, then, until the enrolled actuary certifies the plan’s actual AFTAP
for the current plan year, the plan’s AFTAP for the current plan year is presumed to be
equal to 10 percentage points less than the AFTAP of the plan for the preceding plan
year. Under § 436(h)(2), if the plan’s enrolled actuary has not certified the plan’s
AFTAP by the first day of the 10th month of the current plan year, the plan’s AFTAP for
the current plan year is conclusively presumed to be less than 60 percent as of that day.

Section 430(g)(1) provides that all determinations made under § 430 for a plan year
(including the determination of a plan’s FTAP and AFTAP) must be made as of the
plan’s valuation date. Section 430(g)(2) provides that, other than for small plans with
100 or fewer participants (determined as provided in § 430(g)(2)(B) and (C)), the
valuation date for a plan year must be the first day of the plan year.

Section 436(k) provides that, for purposes of § 436, in the case of plan years beginning
in 2008, the FTAP for the preceding plan year may be determined using such methods
of estimation as the Secretary may provide.

Proposed regulations under § 436 were published as § 1.436-1 on August 31, 2007 (72
FR 50544)).
1
Section 1.436-1(j)(2) and (3) of the proposed regulations would provide
rules for determining the FTAP and AFTAP for purposes of applying the § 436 benefit
limitations. Section 1.436-1(j)(3)(iii)(B) provides that, for purposes of determining the
plan’s AFTAP for the first year § 436 applies to the plan, the adjusted funding target is
equal to the current liability determined pursuant to § 412(l)(7) as of the plan’s valuation
date for the plan year that precedes the first plan year for which § 436 applies to the

1
A correction notice was published with respect to this notice of proposed rulemaking in the Federal
Register dated November 9, 2007 (72 FR 63528).

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plan, increased by the aggregate amount of purchases of annuities for employees other
than highly compensated employees (as defined in § 414(q)) which were made by the
plan during the preceding 2 plan years.

Proposed § 1.436-1(j)(3)(iv) provides that, in any case in which the plan’s enrolled
actuary has not issued a certification of the AFTAP of the plan for the plan year
preceding the plan year § 436 first applies to the plan (the pre-effective plan year), the
AFTAP of the plan for the plan year is presumed to be less than 60 percent until the
AFTAP of the plan for that pre-effective plan year has been certified. Under the
proposed regulations, this rule applies for purposes of § 1.436-1(b) and (c) at the
beginning of the first plan year that § 436 applies to the plan and applies for purposes of
§ 1.436-1(d) and (e) as of the first day of the fourth month of the first plan year that
§ 436 applies to the plan. The guidance set forth in the proposed § 436 regulations with
respect to application of these presumptions does not address how the rules of § 436(h)
apply to a plan with a valuation date that is not the first day of the plan year. See
proposed § 1.436-1(h)(5).

On December 31, 2007, proposed regulations under §§ 430(d), 430(g), 430(h), and
430(i) were published in the Federal Register (72 FR 74215). Those regulations are
proposed to apply to plan years beginning on or after January 1, 2009.

III. TRANSITIONAL GUIDANCE

A. Delay of effective date of regulations under §§ 430(f), 430(h)(3)(C), and
436

In order to maintain a uniform effective date for guidance under § 430, this notice
announces that, when regulations proposed under § 1.430(f)-1 (regarding maintenance
of certain funding balances) and § 1.430(h)(3)-2 (regarding substitute mortality tables)
are finalized, those final regulations will not apply to plan years beginning before
January 1, 2009.
2
In addition, because of the close interaction between the § 430 and
§ 436 rules and requirements, when regulations proposed under § 1.436-1 are finalized,
those final regulations also will not apply to plan years beginning before January 1,
2009. For plan years beginning during 2008, taxpayers must follow applicable statutory
provisions and can rely on the proposed regulations for compliance with those statutory
provisions. Taking into account the items with respect to which guidance is provided in
this Part III(A), the Service will not challenge a reasonable interpretation of an
applicable statutory provision under § 430 or 436 for plan years beginning during 2008.

In applying the statutory provisions of §§ 430 and 436 for plan years beginning during
2008, taxpayers should note the following:

2
It is planned that, when proposed § 1.430(h)(3)-1 (which provides generally applicable mortality tables)
is finalized, that section will apply to plan years beginning on or after January 1, 2008, as originally
proposed.

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●Although § 1.430(h)(3)-2 will not apply to plan years beginning before January 1, 2009,
taxpayers can use substitute mortality tables for plan years beginning during 2008 only
if those mortality tables are approved by the Service under the procedures set forth in
Rev. Proc. 2007-37.

●Under § 430(g)(3)(B), the use of averaging methods in determining the value of plan
assets is permitted only in accordance with methods prescribed in Treasury regulations.
Accordingly, under current law, for plan years beginning in 2008, taxpayers cannot use
asset valuation methods other than fair market value (as described in § 430(g)(3)(A))
except as provided in the Treasury regulations. The final regulations will permit the
averaging method set forth in the proposed regulations to apply for plan years beginning
during 2008.

● Under § 436(k), for purposes of § 436, in the case of plan years beginning in 2008,
the FTAP for the preceding plan year may be determined using such methods of
estimation as the Secretary may provide. Thus, methods of estimating the FTAP for the
2007 plan year can be used for purposes of applying the rules of § 436 for the 2008
plan year only if those methods are permitted in Treasury regulations. Final regulations
will permit the estimation methods set forth in the proposed regulations to be used for
the 2008 plan year, and will also permit the rules set forth in Part III(B) to be used for
this purpose for small plans with end-of-year valuation dates. Taxpayers should not
assume that other methods will be permitted except as set forth in published guidance.

For plan years beginning during 2008, benefit restrictions under § 436(d) and (e) will
apply beginning with the first day of the fourth month of the plan year if no certification of
the plan’s AFTAP for either the prior plan year or the current plan year is received by
that date. In addition, in the case of a plan amendment or plant shutdown or other
unpredictable contingent event occurring on or after the first day of a plan year
beginning during 2008, the benefit limitations of § 436(b) and (c) must be applied based
on the AFTAP certified for the current plan year, or, if no such certification has yet been
received, on the AFTAP certified for the prior plan year except as provided under
§ 436(h)(2) or § 436(h)(3). Without the transition guidance provided in Part III(B) of this
notice, the enrolled actuary’s certification of the prior year AFTAP for a small plan with
an end of year valuation date could not readily be made before these rules would apply.
Therefore, in the absence of such transition guidance, the AFTAP of such a plan for the
plan year beginning in 2008 would be presumed to be less than 60 percent as of the
first day of the fourth month of that plan year for purposes of the limitations under
§ 436(d) and (e) (and the AFTAP of such a plan would generally be considered to be
less than 60 percent in the case of a plan amendment or plant shutdown or similar
event as of the first day of the 2008 plan year pursuant to the rules of § 436(b) and (c)).

B. Transition rule for application of § 436 benefit limitations by small plans
with end of the plan year valuation dates

In the case of a plan that, under § 430(g), has a valuation date that is the last day of the
plan year for each of the plan years beginning in 2006, 2007, and 2008, for purposes of

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applying the benefit limitations of § 436 for the plan year beginning during 2008, a
certification of the plan’s AFTAP for the prior plan year (the 2007 plan year) is permitted
to be made by determining the FTAP for the 2007 plan year as follows:

●The FTAP for the 2007 plan year is equal to a fraction (expressed as a percentage),
the numerator of which is the value of net plan assets as determined below, and the
denominator of which is the plan’s current liability determined pursuant to § 412(l)(7) on
the valuation date for the second plan year that begins before 2008 (the 2006 plan
year), including the increase in current liability for the 2006 plan year.

●For purposes of determining the FTAP for the 2007 plan year, the value of net plan
assets is determined as the value of plan assets under § 412(c)(2) as in effect for the
2006 plan year, adjusted as follows: (1) contributions made for the 2006 plan year are
taken into account, regardless of whether those contributions are made during the plan
year or after the end of the plan year and within the period specified under § 412(c)(10);
(2) the value of plan assets taking into account the amount of contributions made for the
2006 plan year is increased or decreased, as necessary, so that it is neither less than
90 percent of the fair market value of plan assets nor greater than 110 percent of the
fair market value of plan assets on the valuation date for the 2006 plan year (taking into
account assets attributable to contributions for the 2006 plan year); and (3) the plan’s
funding standard account credit balance as of the end of the 2006 plan year is
subtracted (unless the value of plan assets is greater than or equal to 90 percent of the
plan’s current liability determined under § 412(l)(7) on the valuation date for the 2006
plan year).

A plan that determines the prior year AFTAP for the 2008 plan year in accordance with
the rules of this Part III(B) cannot increase plan assets for purposes of this computation
through elective reduction of the 2008 prefunding balance. If the plan sponsor wishes
to increase plan assets for purposes of determining the prior year AFTAP through
elective reduction of the prefunding balance, the plan sponsor should use generally
applicable rules for determination of the prior year AFTAP (which would require use of
the plan’s 2007 valuation rather than the plan’s 2006 valuation).

IV. COMMENTS REQUESTED AND FUTURE REGULATIONS

The transitional guidance provided in Part III applies for plan years beginning in 2008.
Section 2(c)(2)(F) of both S. 1974 (passed by the Senate on December 19, 2007) and
H.R. 3361 (as introduced in the House of Representatives), which would provide
technical corrections to provisions enacted under PPA, would add a new provision to
§ 436 to provide the Secretary of the Treasury with authority to prescribe rules for the
application of § 436 to plans with valuation dates other than the first day of the plan
year. If statutory authority similar to that in these technical correction provisions is
enacted, the IRS and the Treasury Department are considering including rules in the
final regulations substantially similar to those set forth in Part III(B) for the determination
of the prior year AFTAP for a plan with an end-of-year valuation date with respect to
plan years after 2008. Similarly, if such authority is enacted, the IRS and the Treasury

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Department are considering including rules in the final regulations under which the
certification of an AFTAP as of the last day of the prior plan year will be treated as the
certification of the AFTAP for the current plan year for a plan with an end-of-year
valuation date. The IRS and the Treasury Department are not contemplating any
additional special rules under § 436 for small plans that have a valuation date other than
the first day of the plan year. Thus, a plan with a mid-year valuation date may have
difficulty in obtaining the required actuarial certification in time to avoid the imposition of
benefit limitations under § 436. Comments are requested regarding the proposals set
forth in this Part IV and whether there is a need for any other special rules for plans with
valuation dates other than the first day of the plan year.

Written comments should be submitted by April 21, 2008. Send submissions to
CC:PA:LPD:DRU (Notice 2008-21), Room 5203, Internal Revenue Service, POB 7604
Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered
between the hours of 8 a.m. and 4 p.m., Monday through Friday, to CC:PA:LPD:DRU
(Notice 2008-21), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC, or sent electronically via the Federal eRulemaking portal at
http://www.regulations.gov (Notice 2008-21). All comments will be available for public
inspection.

DRAFTING INFORMATION

The principal authors of this notice are David Ziegler of the Employee Plans, Tax
Exempt and Government Entities Division, and Lauson C. Green and Linda S. F.
Marshall of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities). For further information regarding this notice, please contact
Mr. Ziegler via e-mail at RetirementPlanQuestions@irs.gov, or you may contact Mr.
Green and Ms. Marshall at (202) 622-6090 (not a toll-free number).