4.72.16 IRC 430 Examination Guidelines

Manual Transmittal

December 08, 2020

Purpose

(1) This transmits revised IRM 4.72.16, Employee Plans Technical Guidelines, IRC 430 Examination Guidelines.

Material Changes

(1) Added IRM 4.72.16.3.1 (5), Valuation Date, to address changes in valuation date due to plan termination.

(2) Amended IRM 4.72.16.4.3 (6), Actuarial Assumptions and Funding Methods, to state that generally, no methods may be changed after the Schedule SB is filed.

(3) Amended IRM 4.72.16.4.5 (4), Examination Steps, to state that approval letters should be obtained for use of substitute mortality tables and to describe some of the issues to consider.

(4) Amended IRM 4.72.16.4.5 (6), Examination Steps, to refer to approvals for changes in funding methods.

(5) Added IRM 4.72.16.7.1 (12), Quarterly Contributions, to address quarterly requirements for full plan years where prior year was a short plan year.

(6) Edited IRM 4.72.16.7.1 (18), Quarterly Contributions, to clarify interest adjustment if funding balances are used toward quarterly contribution requirements.

(7) Added IRM 4.72.16.8.1 (6), Excise Tax on Failure to Meet Minimum Funding Requirements, to address 100% excise tax on outstanding unpaid liquidity shortfall installments.

(8) Updated IRM 4.72.16.9.2 (1), Reference Sources, to add reference to Notice 2019-67, Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2021, [and to remove duplicative references to regulations].

(9) Updated for plain language and editorial changes.

Effect on Other Documents

This supersedes IRM 4.72.16 dated November 5, 2019.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(12-08-2020)


Eric D. Slack
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM offers guidance for Employee Plans (EP) specialists examining single-employer defined benefit plans for compliance with the minimum funding standards under IRC 430.

  2. Audience: EP examiners and other specialists

  3. Policy Owner: Director, EP

  4. Program Owner: EP

  5. Program Goal: To ensure continued compliance with the IRC 430 minimum funding standards.

Background

  1. IRC 412 prescribes minimum funding standards for certain retirement plans qualified under IRC 401. To determine the minimum required contribution for different types of pension plans, we must review various applicable IRC sections. Parallel requirements are in the Employee Retirement Income Security Act of 1974 (ERISA), Title I, Part 3. The guidelines in this IRM refer only to the provisions under IRC 412 and related IRC sections, related regulations, and related guidance; not the parallel ERISA provisions. They also do not address the temporary relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136.

  2. A plan to which IRC 412 applies satisfies the minimum funding standards for a plan year, if the employer makes at least the minimum required contribution to its DB plan or a money purchase (MP) plan (other than a multiemployer plan).

  3. The Pension Protection Act of 2006 made significant changes to the minimum funding requirements and revamped the minimum funding rules of IRC 412. These guidelines incorporate these law changes:

    • Pension Protection Act of 2006, Pub. Law 109-280 (PPA ‘06)

    • Worker, Retiree and Employee Recovery Act of 2008, Pub. Law 110-458 (WRERA)

    • Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 Pub. Law 111-192 (PRA 2010)

    • Moving Ahead for Progress in the 21st Century Act, Pub. Law 112-141 (MAP-21)

    • Highway and Transportation Funding Act of 2014, Pub. Law 113-159 (HATFA)

    • Bipartisan Budget Act of 2015, Public Law 114-74 (BBA 2015)

  4. To determine the minimum required contribution for IRC 412:

    Plan type Determine under:
    Defined benefit plan which is not a multiemployer plan or a Cooperative and Small Employer Charity Pension Flexibility Act (CSEC) plan (as defined under IRC 414(y)) IRC 430
    Multiemployer defined benefit plan IRC 431
    CSEC plan IRC 433
    Community newspaper plan IRC 430(m)*
    Money purchase plan which is not a multiemployer plan Determined under the terms of the plan. See IRC 412(a)(2)

    Note:

    * These guidelines don’t address funding rules for community newspaper plans under IRC 430(m).

    Note:

    See IRM 4.72.14.3.9, Employee Plans Technical Guidelines, Multiemployer Plan Examination Guidelines, for rules under IRC 412 and IRC 431 for multiemployer plans.

  5. This IRM addresses only the minimum funding standards of IRC 412 that apply to single employer defined benefit plans under IRC 430, and not multiple employer plans nor community newspaper plans.

  6. Other provisions relate to the minimum funding standards under IRC 412. However, except where specifically cited, this IRM doesn’t cover these related provisions:

    1. For a DB plan other than a multiemployer plan or a CSEC plan, if the minimum funding requirements of IRC 412 apply, disqualify the plan's trust unless the plan meets the benefit limitation requirements of IRC 436 and IRC 401(a)(29).

    2. If a pension plan has a liquidity shortfall per IRC 430(j)(4), the plan's trust won’t fail to meet qualification requirements merely because the plan, during the shortfall period, ceases to make certain required ERISA section 206(e) benefit payments, IRC 401(a)(32).

    3. The amount of an employer contribution to a retirement plan that is deductible depends, in part, on the amount needed to satisfy the minimum funding standards under IRC 412, IRC 404(a)(1).

    4. An excise tax applies to a plan that fails to satisfy the plan’s minimum funding standard, IRC 4971.

    5. A plan administrator must periodically file an actuarial report for a plan to which IRC 412 applies, IRC 6059.

    6. Plan administrators must furnish annual funding notices to plan participants and beneficiaries (ERISA section 101(f)). The annual funding notice includes information determined under IRC 430.

  7. Except as noted in the exceptions described below, IRC 412 applies to a plan if either

    • the plan's trust is or had been qualified under IRC 401(a).

    • the plan satisfies or is determined to have satisfied the requirements of IRC 403(a), See IRC 412(e)(1)

  8. Essentially, the funding standard of IRC 412 applies to qualified DB pension plans, MP plans and target benefit plans, except for the plans listed in IRM 4.72.16.1.1 (9)

    Note:

    Although the minimum funding standards of IRC 412 apply to qualified DB plans, the IRC 412 minimum funding standards are not themselves a qualification requirement under IRC 401(a) or IRC 403(a). Therefore, if a plan doesn’t satisfy the minimum funding standards, we don’t disqualify the plan.

  9. IRC 412 does not apply to these plans:

    1. Profit-sharing or stock bonus plan.

    2. An IRC 412(e)(3) insurance contract plan.

    3. An IRC 414(d) governmental plan.

    4. An IRC 414(e) church plan for which the IRC 410(d) election has not been made.

    5. Plan which has not provided for employer contributions at any time after September 2, 1974.

    6. Plan established and maintained by a society, order or association described in IRC 501(c)(8) or IRC 501(c)(9), if no part of the contributions to or under the plan are made by employers of the plan's participants.

    See IRC 412(e)(2)

  10. Special funding rules apply to a plan maintained by a commercial passenger airline, or by an employer whose principal business is providing catering services to a commercial passenger airline, PPA ‘06 Section 402.

Authority

  1. A plan is qualified if it meets the requirements of IRC 401(a) in form and operation.

  2. The principal reference source for these guidelines is IRC 412 and IRC 430, as amended, IRM 4.72.16.9.1.

  3. See IRM 4.72.16.9.2, Reference Source, for a listing of other key reference sources relevant to the material in this IRM.

  4. The primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans (Policy Statement 4-119). EP examines plans to determine whether they meet the applicable qualification requirements in operation, IRM 1.2.1.5.36.

  5. The Director, Employee Plans, has the authority to enter into and approve a written agreement with any person for their tax liability. (Delegation Order 8-3 and IRM 1.2.2.9.3).

Responsibilities

  1. Examine a qualified single employer DB plan to verify it complies with IRC 430:

    1. Review the plan’s documentation for the plan’s minimum funding standards under IRC 430.

    2. Review the calculation of the plan’s minimum required contribution under IRC 430.

    3. Review the contribution amount the employer made for the minimum funding standards under IRC 430.

    4. Review the plan for the benefit limitations under IRC 436.

    5. Refer plans that don’t comply with the minimum funding standards under IRC 430 for potential assessment of excise tax penalties.

  2. Examine a plan to determine if the plan/plan sponsor:

    1. Meets the qualification requirement of IRC Sections 401(a) and 501(a), IRM 4.71.1.3 and IRM 4.71.1.4.

    2. Filed all required tax and information returns, IRM 4.71.1.14.

    3. Reported information and excise tax liabilities correctly, IRM 4.71.1.4

Definitions and Acronyms

  1. The table lists commonly used acronyms and their definitions.

    Acronym Definition
    BBA 2015 Bipartisan Budget Act of 2015
    DB Defined benefit plan
    EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001
    ERISA Employee Retirement Income Security Act of 1974
    FTAP Funding target attainment percentage
    HATFA Highway and Transportation Funding Act of 2014
    IRC Internal Revenue Code of 1986, as amended
    MAP-21 Moving Ahead for Progress in the 21st Century Act (2012)
    MP plan Money Purchase plan
    PPA ‘06 Pension Protection Act of 2006
    PRA 2010 Pension Relief Act of 2010
    WRERA Worker, Retiree, and Employer Recovery Act of 2008

Liability for Contributions

  1. In general, the responsible employer must pay the amount of required contributions under IRC 430, IRC 412(b)(1).

  2. If the employer responsible for making contributions under the plan is a member of a controlled group of employers, then each member of the controlled group is jointly and severally liable for payment of contributions under the plan, IRC 412(b)(2).

Examination Steps

  1. Obtain all documents needed to examine the minimum required contribution for the plan for the plan year under review and the preceding plan year, including the:

    • plan document

    • plan's actuarial valuation report

    • plan's Form 5500, including its Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information, and all attachments.

  2. Identify the plan for which the minimum required contribution under IRC 430 is being determined. See Schedule SB lines A and B.

  3. Identify the plan sponsor. See Schedule SB lines C and D.

  4. Confirm that IRC 430 applies to the plan and identify any special rules that apply for certain classes of employers.

  5. If the plan sponsor is a member of a controlled group of employers, identify the controlled group.

General Rules for Contributions

  1. IRM 4.72.16.3.1, Valuation Date, has guidance on plan's valuation date.

  2. IRM 4.72.16.3.2, Timing of Contributions, explains when the plan sponsor should make the required contribution.

Valuation Date

  1. A plan’s minimum required contribution for a plan year is determined as of the plan's valuation date, IRC 430(g)(1) and 26 CFR 1.430(g)-1(b)(1).

  2. The first day of the plan year is the plan’s valuation date, IRC 430(g)(2), and 26 CFR 1.430(g)-1(b)(2).

    Exception:

    Plans with 100 or fewer participants (determined under IRC 430(g)(2)(B) and IRC 430(g)(2)(C)), may designate any day during the plan year as the plan's valuation date.

  3. To apply the 100-participant threshold, treat all DB plans (other than multiemployer plans) maintained by the employer, a predecessor employer, or by any member of the employer's controlled group as a single plan, but count only participants of the employer or member of the controlled group, IRC 430(g)(2)(B) and 26 CFR 1.430(g)-1(b)(2).

  4. The selection of a plan's valuation date is part of the plan's funding method and, accordingly, may only be changed with the consent of the Commissioner. However, treat a change of a plan's valuation date required by IRC 430 as approved by the Commissioner. So, when a plan exceeds 100 participants in the prior year, and ceases to be eligible for the small plan exception, the valuation date changes to the first day of the plan year and is automatically approved by the Commissioner, 26 CFR 1.430(g)-1(b)(2)(iv). For plan years beginning in 2018 or later, automatic approval is granted for the following changes in valuation date, if the valuation date was not changed in any of the four preceding plan years.

    1. Change to the first day of the plan year; or

    2. Change to the last day of the plan year, if there was a change in plan year and the valuation date of the prior plan year was the last day of that plan year, Revenue Procedure 2017-56 Section 3.02.

    Note:

    Taxpayers may elect to apply this revenue procedure for earlier plan years.

  5. Terminating plans eligible to designate any date in the plan year as its valuation date (i.e., a plan with fewer than 100 participants as described in paragraphs (2) and (3)), may change the valuation date to the date of plan termination or the first day of the plan year. Automatic approval is granted if the plan is fully funded (assets as of termination date are sufficient to satisfy all benefit liabilities) and the plan sponsor filed a timely notice of intention to terminate with the PBGC per ERISA Section 4041(b)(2)(A) (if applicable), Revenue Procedure 2017-56, Section 4.04.

Timing of Contributions

  1. The due date to pay a minimum required contribution for a plan year is generally 81/1 months after the end of the plan year, IRC 430(j)(1). If there is a short plan year, the deadline is moved accordingly.

  2. See IRM 4.72.16.8.1, for the excise tax under IRC 4971 if a minimum required contribution is not paid by due date.

  3. See IRM 4.72.16.7.1, for quarterly deadlines for contributions for a plan with a funding shortfall for the preceding plan year (including rules to credit contributions in the order in which the plan sponsor was required to make installments).

  4. An employer can’t pay the minimum required contribution under IRC 430 for a plan year any earlier than the first day of the plan year, 26 CFR 1.430(j)-1(b)(1).

  5. Adjust any payment made on a date other than the valuation date for the plan year for interest for the period between the valuation date and the payment date, IRC 430(j)(2) and 26 CFR 1.430(j)-1(b)(4).

    1. Except for failure to make sufficient quarterly contributions, use the plan's effective interest rate under IRC 430(h)(2)(A) for the plan year for this adjustment.

    2. Use the rate in IRM 4.72.16.7.1, for the interest adjustment for failure to make sufficient quarterly contributions.

Examination Steps

  1. Identify the plan year for which the plan is determining the minimum required contribution. See information on Schedule SB immediately below its header.

  2. Identify the valuation date as of which determinations are made for the plan year. See Part I line 1 on Schedule SB.

  3. Identify the dates and amounts of contributions that the plan sponsor has made to the plan for the plan year. See Part IV of Schedule SB.

Funding Target Attainment Percentage

  1. A plan's funding target attainment percentage (FTAP) for a plan year equals the ratio (expressed as a percentage) of:

    1. The value of plan assets for the plan year (reduced by the prefunding balance and the funding standard carryover balance); divided by

    2. The funding target of the plan for the plan year (determined without regard to the at-risk rules).

    Note:

    See IRC 430(d)(2) and 26 CFR 1.430(d)-1(b)(3)(i).

  2. FTAP is used for various purposes, including to determine if the plan is in an at risk status and whether the sponsor may use funding balances to offset the minimum required contribution.

  3. See IRM 4.72.16.4.1 Measurement of Assets for Pension Funding Purposes, for measurement of assets under the plan.

  4. See IRM 4.72.16.4.2, Measurement of Liability for Pension Funding Purposes, for measurement of liabilities under the plan.

  5. See IRM 4.72.16.4.3, Actuarial Assumptions and Funding Methods, for actuarial assumptions and methods used to measure a plan's funded status.

  6. See IRM 4.72.16.4.4, Prefunding Balance and Funding Standard Carryover Balance, for the prefunding balance and the funding standard carryover balance.

  7. See IRM 4.72.16.6, Special Rules for At-Risk Plans, for special valuation rules that plans must use if in at-risk status.

Measurement of Assets for Pension Funding Purposes

  1. In general, for the minimum funding standards of IRC 430, plans must use the fair market value of plan assets, IRC 430(g)(3)(A) and 26 CFR 1.430(g)-1(c)(1)(i).

  2. Or, plans may measure plan assets as the actuarial value of assets based on the average of fair market values, but only if the method:

    1. Is permitted under IRS regulations.

    2. Doesn’t permit averaging of these values over more than the period beginning on the last day of the 25th month preceding the month in which the valuation date occurs and ending on the valuation date (or a similar period for valuation dates other than the first day of a month).

    3. Doesn’t result in an actuarial value of plan assets that, at any time, is lower than 90% or greater than 110% of the plan assets fair market value on the valuation date.

    Note:

    See IRC 430(g)(3)(B).

  3. A plan is permitted to determine the value of plan assets on the valuation date as the average of the fair market value of assets on the valuation date and the adjusted fair market value of assets determined for one or more earlier determination dates (26 CFR 1.430(g)-1(c)).

    1. The period of time between each determination date must be equal and that time period can’t exceed 12 months.

    2. The earliest determination date can’t be earlier than the last day of the 25th month before the plan year valuation date. In a typical situation, the earlier determination dates will be the two immediately preceding valuation dates. However, these rules also permit plans to use more frequent determination dates.

      Example:

      Plans may use, monthly or quarterly determination dates.

  4. The adjusted fair market value of plan assets for a prior determination date is the fair market value of plan assets on that date, plus contributions, minus benefits and all other amounts paid from plan assets from the prior determination date to immediately before the valuation date, and adjusted for expected earnings, 26 CFR 1.430(g)-1(c)(2).

  5. The assumed rate of return for a period must be the actuary's best estimate of the anticipated annual rate of return on plan assets from the valuation date until all benefits are expected to be paid, limited to:

    1. The third segment rate applicable under IRC 430(h)(2)(C)(iii) if either the funding target or target normal cost for a plan year is determined using the three segment interest rates described in IRC 430(h)(2)(C), or

    2. The average of the third segment rates for the 24-month period ending with the month preceding the month that contains the valuation date for the plan year if the plan doesn’t use the three segment interest rates to determine liabilities.

    Note:

    See Notice 2009-22, 2009-14 IRB 741.

  6. A plan sponsor may make contributions after the current plan year valuation date designated for the prior plan year. When determining the value of plan assets (as of the valuation date) for the current plan year, you must consider those contributions (as a contribution receivable).

    1. First, calculate the present value of contribution(s) by discounting to the current year valuation date with the plan’s effective interest rate for the prior year.

    2. Then, add the discounted value to the value of plan assets as of the current year valuation date, IRC 430(g)(4)(A) and 26 CFR 1.430(g)-1(d)(1)(i).

  7. For a small plan that uses a valuation date after the first day of the plan year: If a plan sponsor makes any contributions for the current plan year before the valuation date, they must exclude those contributions (and interest on them determined at the plan’s effective interest rate for the plan year) from plan assets as of the valuation date for the period between the date paid and the valuation date, IRC 430(g)(4)(B) and 26 CFR 1.430(g)-1(d)(2).

  8. Apply the rules for contribution receipts for paragraph (6) and paragraph (7) before applying the 90% to 110% corridor. So, a contribution receivable will increase the upper end of the corridor by 110% of the present value of the contribution, 26 CFR 1.430(g)-1(c)(2)(iii).

  9. To determine the minimum required contribution under IRC 430(a), reduce the value of plan assets for certain funding balances per IRC 430(f)(4)(B), See IRM 4.72.16.4.4, Prefunding Balance and Funding Standard Carryover Balance, for discussion of funding balances.

  10. If a qualified transfer has been made under IRC 420 to health benefit accounts, then don’t include any transferred assets in the value of plan assets for the minimum funding standards of IRC 430 and IRC 430(l).

  11. The method of determining the value of assets is part of the plan's funding method and, accordingly, may only be changed with the consent of the Commissioner. However, any change in a plan's asset valuation method made for either the first plan year beginning in 2008, 2009, or 2010 is treated as having been approved by the Commissioner and doesn’t require specific prior approval, 26 CFR 1.430(g)-1(c)(2) and 26 CFR 1.430(g)-1(f)(3). For plan years beginning in 2018 or later, automatic approval is granted for one of three changes in the asset valuation method in Revenue Procedure 2017-56, Section 3.01, if the asset valuation method was not changed in any of the four preceding plan years.

    Note:

    Taxpayers may elect to apply this revenue procedure for earlier plan years.

Measurement of Liability for Pension Funding Purposes

  1. For the minimum funding standards of IRC 430, a plan's liability for a plan year equals the plan's funding target as of the plan's valuation date.

  2. The determination of funding target must consider:

    1. Benefit limitations under IRC 436, but only for benefits with annuity starting dates before the valuation date, 26 CFR 1.430(d)-1(c)(1)(iii).

    2. Restrictions on payments under ERISA Section 206(e) and IRC 401(a)(32) on account of a liquidity shortfall (as defined in IRC 430(j)(4)(E)(i)) for periods preceding the valuation date, 26 CFR 1.430(d)-1(c)(1)(iv)(A).

    3. Restrictions on payments under 26 CFR 1.401(a)(4)-5(b) to highly compensated employees if benefits weren’t paid or won’t be paid because of a limitation that applied before the valuation date, 26 CFR 1.430(d)-1(c)(1)(iv)(B).

  3. A plan's funding target for a plan year is the present value (determined as of the valuation date) of all benefits accrued or earned under the plan as of the beginning of the plan year (even if the valuation date is a date other than the first day of the plan year), IRC 430(d)(1) and 26 CFR 1.430(d)-1(b)(2). Use special assumptions to measure the funding target if the plan is in at-risk status, IRC 430(i) and 26 CFR 1.430(i)-1.

  4. Generally, a plan's funding target for a plan year is determined based on plan provisions that are adopted by the plan’s valuation date for the plan year and effective on or before the last day of the plan year. If the plan sponsor adopts an amendment after the valuation date, but it’s effective during the plan year, and the plan administrator makes an election under IRC 412(d)(2), then treat the amendment as adopted by the valuation date, and take it into account, 26 CFR 1.430(d)-1(d)(1).

  5. However, for plan amendments not otherwise required to be taken into account in determining a plan's funding target for the plan year because they’re adopted after the valuation date for the plan year, take the plan amendment into account if it:

    1. Takes effect by the last day of the plan year;

    2. Increases the liabilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual or changing the rate at which benefits become nonforfeitable; and

    3. Wouldn’t be permitted to take effect under the rules of IRC 436(c). Those rules are applied by treating the increase in the target normal cost for the plan year attributable to the amendment as if the increase were an increase in the funding target for the plan year. Take into account all unpredictable contingent event benefits permitted to be paid for unpredictable contingent events that occurred during the current plan year and all plan amendments that took effect in the current plan year.

    Note:

    See 26 CFR 1.430(d)-1(d)(2).

Actuarial Assumptions and Funding Methods

  1. Except as otherwise required, in determining a present value or other computation under IRC 430, you must use reasonable actuarial assumptions and funding methods (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best estimate of the plan’s anticipated experience, IRC 430(h)(1).

  2. See IRM 4.72.16.4.3.1, for interest rates to use to determine the present values and other amounts under IRC 430.

  3. See IRM 4.72.16.4.3.2, for mortality assumptions to use to determine the present values and other amounts under IRC 430.

  4. Determination of present values and other amounts under IRC 430 must take into account:

    1. The probability that the plan’s future benefit payments will be made in the form of optional forms of benefits provided under the plan, including lump sum distributions, determined on the basis of the plan's experience and other related assumptions, and

    2. Any difference in the present value of the future benefit payments from using actuarial assumptions that differ from the assumptions otherwise used to determine amounts under IRC 430.

    Note:

    See IRC 430(h)(4).

  5. Plans that meet the requirements of IRC 430(h)(5)(B) require IRS approval to change actuarial assumptions. Employers can’t change assumptions after they file Schedule SB unless the IRS approves a change in assumptions.

  6. Although an employer must use a single funding method under IRC 430 for any single-employer DB plan, an employer may vary the way it’s applied. A plan's funding method includes not only the overall funding method the plan uses, but also each specific computation method it uses in applying the overall method, 26 CFR 1.430(d)-1(f)(1)(iv). The employer can’t change the funding method after they file the Schedule SB unless the IRS approves a change in funding method or finds the method to be unreasonable.

  7. In general, any change of funding method requires IRS approval.

    Exception:

    Employers may have automatic approvals for certain changes in funding method as a result of: changes in asset valuation method, changes in valuation date, change in treatment of benefits funded through insurance contracts, takeover plans, changes in valuation software, selection of data elements, fully funded terminated plans, and plan mergers, IRC 412(d)(1) and Rev. Proc. 2017-57.

Interest Rates
  1. To determine the plan’s funding target and target normal cost for any plan year, use the following interest rates in determining the present value of benefits:

    1. For benefits reasonably determined to be payable during the 5-year period beginning on the valuation date, the first segment rate;

    2. For benefits reasonably determined to be payable during the 15-year period beginning five years after the valuation date, the second segment rate; and

    3. For benefits reasonably determined to be payable later than 20 years after the valuation date, the third segment rate.

    Note:

    See IRC 430(h)(2)(B) and 26 CFR 1.430(h)(2)-1(b).

  2. The segment rates for each month are calculated based on the average of the monthly corporate bond yield curves on investment grade corporate bonds for the 24-month period ending with the month preceding that month as determined by the IRS, IRC 430(h)(2)(C) and 26 CFR 1.430(h)(2)-1(c). A plan sponsor may elect to use the segment rates for any of the four months that precede the month that includes the valuation date for the plan, IRC 430(h)(2)(E) and 26 CFR 1.430(h)(2)-1(e)(2).

  3. Segment rate stabilization rule (post-2011 plan years). To achieve pension funding relief, MAP-21 added IRC 430(h)(2)(C)(iv) to give a minimum and maximum percentage for each of the three segment rates. The stabilization rule was extended by HATFA and again by BBA 2015. For each plan year for which the segment rate stabilization rule is in effect, compare the applicable segment rate to a corresponding average segment rate. The average segment rate reflects the average of the segment rates over a 25-year period ending with September 30 of the calendar year preceding the calendar year in which the plan year begins. If the applicable segment rate is less than an applicable minimum percentage, or more than the applicable maximum percentage of the corresponding average segment rate, then the segment rate is the applicable minimum percentage or the applicable maximum percentage of their average, whichever is closest.

    Calendar year in which the plan year begins Applicable Minimum Percentage Applicable Maximum Percentage
    2012 through 2020 90% 110%
    2021 85% 115%
    2022 80% 120%
    2023 75% 125%
    After 2023 70% 130%

    Note:

    See IRC 430(h)(2)(C)(iv).

  4. Instead of using segment rates, a plan sponsor may elect to use interest rates under the monthly corporate bond yield curve for the month preceding the month that includes the valuation date to determine amounts under IRC 430, IRC 430(h)(2)(D)(ii) and 26 CFR 1.430(h)(2)-1(e)(4). If the plan sponsor makes an election, it may be revoked only with the IRS consent. Plans operating under this election aren’t subject to the stabilization rule for their minimum funding determinations. However, if they had this election in effect on July 6, 2012, the plan sponsor was permitted to revoke the election without IRS consent. The revocation election must have made July 5, 2013, Notice 2012-61, 2012-42 IRB 479.

  5. The IRS calculates and publishes segment rates and monthly corporate bond yield curve for plans to use for the month that includes a given valuation date, IRC 430(h)(2)(F). See pages on IRS.gov for:

    • Funding Table Three on the “Funding Yield Curve Segment Rates” page for the adjusted and unadjusted segment rates for a given valuation date.

    • Monthly yield curve tables published on the “Monthly Yield Curve Tables.” page.

  6. A plan's effective interest rate for a plan year is the single interest rate that, if used to determine the present value of the benefits taken into account in determining the plan's funding target for the plan year, instead of the interest rates under IRC 430(h)(2)(B), would result in an amount equal to the plan's funding target determined for the plan year under IRC 430(d)(1). See IRC 430(h)(2)(A) and 26 CFR 1.430(h)(2)-1(f)(1).

Mortality Assumptions
  1. In general, the IRS prescribes and publishes the mortality assumptions for plans to use to determine any present value under IRC 430, IRC 430(h)(3)(A) and IRC 430(h)(3)(B).

  2. Plans can use the static mortality tables, which the IRS updates annually. The static table incorporates projection of mortality improvement, so the plan doesn’t need to add mortality projections, 26 CFR 1.430(h)(3)-1(a)(3).

  3. See below for the static mortality tables to use to determine IRC 430 present value:

    Use static mortality table for valuation dates in Legal authority
    Plan years that begin in 2008 26 CFR 1.430(h)(3)-1(e)
    Calendar years 2009 through 2013 Notice 2008-85, 2008-42 IRB 905
    Calendar years 2014 and 2015 Notice 2013-49, 2013-32 IRB 127
    Calendar year 2016 Notice 2015-53, 2015-33 IRB 190
    Calendar year 2017 Notice 2016-50, 2016-38 IRB 371
    Calendar year 2018 Notice 2017-60, 2017-43 IRB 365
    Calendar year 2019 Notice 2018-02, 2018-2 IRB 281
    Calendar year 2020 Notice 2019-26, 2019-15 IRB 943
    Calendar year 2021 Notice 2019-67, 2019-15 IRB 1510
    After 2021 Determine the applicable published guidance, and apply the relevant tables from that published guidance.

  4. For years:

    • before 2018 these tables are based on the RP-2000 mortality tables, using projection scale AA.

    • after 2017 the tables are based on RP-2014 mortality tables adjusted using mortality improvement scales. Under certain circumstances plans may apply mortality tables based on the rules in effect for years before 2018 for the 2018 plan year, Notice 2017-60.

  5. Plans can also use the generational mortality tables, in which the probability of an individual's death at a particular age is determined as the individual's base mortality rate multiplied by a cumulative mortality improvement factor.

    1. The cumulative mortality improvement factor is determined based on the mortality improvement scale for the relevant year (in published guidance) for the individual’s gender and for that age, for the period from the base year of the table (2006, for the standard mortality tables) through the calendar year in which the individual is projected to reach the particular age.

    2. See 26 CFR 1.430(h)(3)-1(a)(2) and see Notice 2019-26, 2019 IRB 943 for an example of the guidance on mortality improvement rates.

  6. See separate tables to use for annuitants and nonannuitants. Actuaries apply:

    1. nonannuitant mortality table to determine the probability of survival for a nonannuitant for the period before the nonannuitant is projected to commence receiving benefits.

    2. annuitant mortality table to determine the present value of benefits for each annuitant, and for each nonannuitant for the period beginning when the nonannuitant is projected to commence receiving benefits.

      Note:

      If only a portion of a participant's benefit has commenced, the participant is treated as an annuitant for the portion which has commenced and as a nonannuitant for the balance of the benefit.

    Example 1:
    Participant A is a 45-year-old active participant who is projected to start receiving an annuity at age 55. The funding target would be determined using the nonannuitant mortality table for the period before Participant A attains age 55 and the annuitant mortality table for the period Participant A is age 55 and above.

    Note:

    See 26 CFR 1.430(h)(3)-1(b)(1).

  7. The IRS specifies separate mortality assumptions, which plans may use to determine present values for individuals receiving disability benefits, IRC 430(h)(3)(D).

  8. A plan sponsor may request IRS approval to use substitute mortality assumptions, IRC 430(h)(3)(C) and 26 CFR 1.430(h)(3)-2.

Other Assumptions
  1. For actuarial assumptions other than interest and mortality assumptions, each of the actuarial assumptions must be reasonable (taking into account the experience of the plan and reasonable expectations) and must, in combination, offer the plan's enrolled actuary's best estimate of the plan’s anticipated experience based on information determined as of the valuation date, 26 CFR 1.430(d)-1(f)(3).

  2. If a distribution is subject to IRC 417(e)(3) (for example, single-sum distribution), and is determined using the applicable interest rates and mortality table under IRC 417(e)(3), the present value of the annuity (either deferred or immediate annuity) must be determined using special actuarial assumptions.

    For the period beginning with the expected annuity starting date for the distribution, Substitute the current applicable mortality table under IRC 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date for the mortality table under IRC 430(h)(3) that otherwise would be used.
    Use the valuation interest rates under IRC 430(h)(2) for all periods, not the interest rates under IRC 417(e)(3), which the plan uses to determine the amount of the benefit. This is known as the annuity substitution rule.
    Adjust for any difference between the plan rates and the IRC 417(e)(3) rates (for example, if a plan offers a lump sum equal to the greater of an amount calculated using plan factors or the amount determined using IRC 417(e)(3) applicable interest and mortality, adjust for this calculation). See 26 CFR 1.430(d)-1(f)(4)(iii).

Prefunding Balance and Funding Standard Carryover Balance

  1. Plan sponsors may use certain funding balances - the prefunding balance and the funding standard carryover balance - to reduce the minimum required contribution for a plan year in certain situations, IRC 430(f)(3).

  2. Maintaining either or both balance amounts is voluntary and at the plan sponsor’s election, IRC 430(f)(1)(A) and IRC 430(f)(1)(B).

  3. The funding standard carryover balance is based on the funding standard account credit balance determined under IRC 412 for a plan on the last day of the plan year beginning in 2007. Reduce the funding standard carryover balance by either:

    1. Applying all or a portion of the balance toward the minimum required contribution for a plan year.

    2. Electing to reduce the balance, and adjusting further for investment experience.

    Note:

    See IRC 430(f)(1)(B)(ii), IRC 430(f)(7) and 26 CFR 1.430(f)-1(b)(2).

  4. In general, the prefunding balance is the accumulation of the employer contributions for a plan year that exceed the minimum required contribution for the year. The prefunding balance starts with a beginning balance of zero:

    • Increased by excess contributions only if the employer elects,

    • Decreased by all or part of the balance toward minimum required contribution for a plan year or electing to reduce the balance, and adjusting further for investment experience and interest, IRC 430(f)(6) and 26 CFR 1.430(f)-1(b)(1).

  5. The amount added to the prefunding balance can’t exceed the present value of the excess contribution for the preceding plan year increased with interest, 26 CFR 1.430(f)-1(b)(1)(ii).

  6. The present value of excess contribution for the preceding year is the excess (if any) of:

    1. The present value of employer contributions for the preceding plan year determined as of the valuation date for the preceding plan year, using the plan's effective interest rate, over

    2. The minimum required contribution for the preceding year.

    Note:

    See 26 CFR 1.430(f)-1(b)(1)(ii)(B) and 26 CFR 1.430(f)-1(b)(1)(iv)(B).

  7. Increase the present value of the excess contribution for the preceding year for interest accruing from the valuation date for the preceding plan year to the first day of the current plan year. Interest for this calculation, is determined by using the plan's effective interest rate for the preceding plan year. However, if a contribution is included in the present value of excess contributions solely because the plan sponsor elects to use all or a portion of the prefunding balance or the funding standard carryover balance to offset the minimum required contribution for the prior plan year, adjust the contribution for actual investment return instead, 26 CFR 1.430(f)-1(b)(3).

  8. For the prefunding balance, disregard contributions required to avoid a benefit restriction under IRC 436 to determine if plan year contributions exceed the minimum required contribution for the plan year, IRC 430(f)(6)(B)(iii).

  9. If a plan sponsor elects to use all or a portion of the prefunding balance or funding standard carryover balance to offset the minimum required contribution for the plan year, offset the minimum required contribution as of the valuation date by the amount so used.

  10. See IRM 4.72.16.7.1, for special rules that apply if the plan sponsor elects to use the funding balances to satisfy the quarterly contributions or late quarterly contributions.

  11. In general, a plan sponsor's election for the plan's prefunding balance or funding standard carryover balance to satisfy the quarterly contribution requirements or minimum required contribution is irrevocable. An election may be revoked only if the amount the plan sponsor elected to use exceeds the minimum required contribution for the plan year. The deadline for revoking the election is the Schedule SB due date (including extensions), 26 CFR 1.430(f)-1(f)(3).

  12. The plan sponsor can only use the prefunding balance or funding standard carryover balance to reduce the minimum required contribution for a plan year if the value of plan assets for the preceding plan year (after subtracting the prefunding balance) was at least 80% of the funding target (determined not considering the at-risk rules of IRC 430(i)) for that preceding plan year, IRC 430(f)(3)(C) and 26 CFR 1.430(f)-1(d)(3).

  13. You must adjust the prefunding balance and the funding standard carryover balance as of the first day of a plan year for actual investment return on plan assets for the preceding plan year, IRC 430(f)(8) and 26 CFR 1.430(f)-1(b)(3).

  14. To minimize the impact of the requirement to subtract the prefunding balance and funding standard carryover balance from plan assets, an employer may elect to reduce those balances. The elections are deemed to be on valuation date for the plan year before any election to use a funding balance to offset the minimum required contribution (including an election to satisfy a quarterly contribution requirement) for the plan year. Accordingly, if the employer elects to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for the plan year (including an election to satisfy the quarterly contribution requirement) before electing to reduce the prefunding balance or funding standard carryover balance, then they retroactively reduce the amount available to use to offset the otherwise applicable plan year minimum required contribution, IRC 430(f)(5), 26 CFR 1.430(f)-1(e) and 26 CFR 1.430(f)-1(d)(1)(ii)(B).

  15. Employers can’t use the prefunding balance to offset the minimum required contribution while the funding standard carryover balance is greater than zero. In other words, they must first use up the funding standard carryover balance before they use the prefunding balance to offset the minimum required contribution, IRC 430(f)(3)(B) and 26 CFR 1.430(f)-1(d)(2).

  16. Similarly, an employer can’t elect to reduce the prefunding balance while the funding standard carryover balance is greater than zero, IRC 430(f)(5)(B) and 26 CFR 1.430(f)-1(e)(2).

  17. See 26 CFR 1.430(f)-1(f) for method and timing of elections to increase prefunding balances, reduce funding standard carryover balance and prefunding balance, and use the funding balances to offset the minimum required contribution.

Examination Steps

  1. Identify the market value of the plan assets, Schedule SB, Part I, line 2a.

  2. Identify the actuarial value of the plan assets used for IRC 430 purposes, Schedule SB, Part I, line 2b.

  3. Identify the interest rates used to determine the funding target. See the discount rates in Schedule SB, Part V, line 21.

  4. Identify the mortality assumptions the plan used to determine the funding target, Schedule SB, Part V, line 23. If a plan us using a substitute mortality table:

    1. Obtain and review a copy of the ruling letter approving the tables.

    2. Verify whether the ruling letter applies to the plan being examined.

    3. Verify whether the rates used in the actuarial valuation report match the rates that were approved for the plan, and whether the plan is still able to use those tables.

    4. Ask the field actuary if the plan has had a significant change in its population, such as an annuity purchase, lump sum window or spin-off that removes a significant number of participants from the plan, or if there has been a merger or other transaction that adds a significant number of participants to the plan.

  5. Identify other actuarial assumptions the plan used to determine the funding target, Schedule SB, Part V, line 23 and the plan's actuarial report.

  6. Identify whether the plan changed the actuarial assumptions or the funding method since the preceding plan year, and see if they got any required IRS approvals, Schedule SB, Part VI lines 24 and 25. If the plan has changed either, review the required attachments to the Schedule SB.

    Note:

    Plan mergers and spin-off generally result in a change in method, and only certain changes are automatically approved, Rev. Proc. 2017-56.

  7. Identify the plan’s funding target, Schedule SB Part I, line 3 of Schedule SB.

  8. Identify and analyze any prefunding balance and the funding standard carryover balances’ amounts and activity, Schedule SB, Part II.

  9. Assess the plan's FTAP determination, Schedule SB, Part III.

Minimum Required Contribution

  1. A plan's minimum required contribution for a plan year is determined under one of two rules, depending on the comparison between the value of plan assets and its funding target (IRC 430(a). See IRM 4.72.16.4.1, for measurement of plan assets. See IRM 4.72.16.4.2, for determining the funding target.

  2. If the value of plan assets (reduced by the sum of the plan's prefunding balance and funding standard carryover balance) is less than the funding target, the minimum required contribution is the sum of:

    1. The target normal cost;

    2. Any shortfall amortization charge; and

    3. Any waiver amortization charge.

    Note:

    See IRC 430(a)(1) and 26 CFR 1.430(a)-1(b)(2).

  3. If the value of plan assets (reduced by the sum of the plan's prefunding balance and funding standard carryover balance) equals or exceeds the funding target, the minimum required contribution is the plan's target normal cost, reduced (but not below zero) by the excess of the value of plan assets (reduced by the sum of the plan’s prefunding balance and funding carryover balance) over the plan’s funding target, IRC 430(a)(2) and 26 CFR 1.430(a)-1(b)(3).

Target Normal Cost

  1. Before WRERA, a plan's target normal cost for a plan year was defined as the present value of all benefits expected to accrue or be earned during the plan year (with any increase in any benefit attributable to services performed in a preceding plan year, because of a compensation increase during the current plan year, treated as having accrued during the current plan year).

  2. Effective for plan years beginning on or after January 1, 2009, the definition of a plan's target normal cost was amended to: (a) add plan-related expenses the plan expects to pay from assets during the plan year, and (b) subtract mandatory employee contributions the plan expects to make during the plan year.

    Note:

    A plan sponsor could have elected this change beginning with the first plan year beginning on or after January 1, 2008, IRC 430(b)(1) and WRERA Section 101(b)(2)

    .

  3. Like the funding target computation, don’t consider the following to calculate target normal cost:

    • benefit limitations under IRC 436,

    • the restrictions on payments under ERISA 206(e) and IRC 401(a)(32) on account of liquidity shortfall, and

    • the restrictions on payments under 26 CFR 1.401(a)(4)-5(b) to highly compensated employees, except the restrictions on benefits with annuity starting dates before the valuation date.

  4. The same rules for plan provisions that are considered to determine the funding target are applicable to determine the target normal cost.

  5. For a short plan year: determine the target normal cost by taking into account benefits and expenses expected to accrue during the short plan year. A simple proration is not acceptable.

    Example:

    Participant A earns his compensation (including bonuses) sporadically throughout the year. DB Plan must use A’s expected compensation for the plan year.

    Example:

    DB Plan requires participants to work 1,000 hours of service before accruing benefits. DB Plan must consider this when determining the benefits that are expected to be earned in a short plan year.

    Example:

    DB Plan may not pay PBGC premiums uniformly throughout the year and the timing of these expenses must also be considered, 26 CFR 1.430(d)-1(b)(1).

Shortfall Amortization Charge

  1. A plan's shortfall amortization charge is the total (not less than zero) of the shortfall amortization installments for the plan year with respect to any shortfall amortization base for the plan year and the preceding plan years which haven’t been fully amortized, IRC 430(c)(1).

  2. For a plan, a shortfall amortization base is determined for a plan year based on the plan's funding shortfall for the plan year. The funding shortfall is the amount (if any) by which the plan's funding target for the year exceeds the value of the plan's assets (as reduced by the funding standard carryover balance and prefunding balance under IRC 430(f)(4)(B)), IRC 430(c)(4)and 26 CFR 1.430(a)-1(f)(2).

  3. If a plan's funding shortfall for a plan year is zero (that is, if the value of plan assets, minus the funding standard carryover balance and prefunding balance under IRC 430(f)(4)(B), is at least equal to the plan's funding target for the year), then any shortfall amortization bases for preceding plan years (and any associated shortfall amortization installments) are eliminated, IRC 430(c)(6) and 26 CFR 1.430(a)-1(e)(1).

  4. A shortfall amortization base is not established for a plan year if the value of a plan’s assets is at least equal to the plan's funding target for the plan year.

    1. For this purpose, the prefunding balance is subtracted from the value of plan assets only if the sponsor made an election to use that prefunding balance to offset the minimum required contribution for the plan year.

    2. However, the funding standard carryover balance is not subtracted from the value plan assets regardless of whether any portion of either the funding standard carryover balance or the prefunding balance is used to offset the minimum required contribution for the plan year, IRC 430(c)(5) and 26 CFR 1.430(f)-1(c)(2).

  5. The shortfall amortization base for a plan year is the plan's funding shortfall, minus the present value (determined using the interest rates under IRC 430(h)(2)) of the total of the shortfall amortization installments and waiver amortization installments determined for the plan year and any succeeding plan year for any shortfall amortization bases and waiver amortization bases for preceding plan years, IRC 430(c)(3) and 26 CFR 1.430(a)-1(c)(2).

  6. The shortfall amortization base for a plan year can be either positive or negative.

  7. The shortfall amortization installments for a shortfall amortization base established for a plan year are the amounts necessary to amortize the shortfall amortization base in level annual installments over seven plan years beginning with that plan year, IRC 430(c)(2)(A) and 26 CFR 1.430(a)-1(c)(1).

  8. PRA 2010 provides funding relief for DB plan sponsors. Under PRA 2010, a plan sponsor could have elected to apply one of two modified amortization schedules to the shortfall amortization base for any plan year that begins in 2008, 2009, 2010 or 2011, but only if the due date for the minimum required contribution for the plan year was on or after June 25, 2010. The two modified amortization schedules are the 2 plus 7 amortization schedule and the 15-year amortization schedule. See IRC 430(c)(2)(D) and Notice 2011-3; 2011-2, IRB 263. These modified installment amounts may be required to be accelerated as described in IRC 430(c)(7).

  9. Shortfall amortization installments are determined assuming that the installments are paid on the valuation date for each plan year, using the interest rates applicable under IRC 430(h)(2)(C) or IRC 430(h)(2)(D). The shortfall amortization installments are determined using the interest rates that apply for the plan year for which the shortfall amortization base is established and are not redetermined in subsequent plan years to reflect changes in interest rates under IRC 430(h)(2) for those subsequent plan years, 26 CFR 1.430(h)(2)-1(f)(2).

  10. For a short plan year, amortization installments are prorated, 26 CFR 1.430(a)-1(b)(2)(ii)(A).

  11. In plan years after the short plan year, installments with respect to a shortfall amortization base or waiver amortization base continue to be taken into account under paragraphs (b)(2)(i)(B) and (C) of 26 CFR 1.403(a)-1 until the total amount of those installments, as originally determined when the base was established, have been taken into account, 26 CFR 1.430(a)-1(b)(2)(ii)(B)

Waiver Amortization Charge

  1. The waiver amortization charge for a plan year is the total of the waiver amortization installments for the plan year for any waiver amortization bases for the five preceding plan years, IRC 430(e)(1).

  2. A waiver amortization base is established for each plan year for which a waiver of the minimum funding standard has been granted. The waiver amortization base for a plan year is the amount of the waived funding deficiency (if any) for that plan year, IRC 430(e)(4) and 26 CFR 1.430(a)-1(d)(2).

  3. The waiver amortization installments for a waiver amortization base established for a plan year are the amounts necessary to amortize the waiver amortization base in level annual installments over five plan years beginning with the succeeding plan year, IRC 430(e)(2) and 26 CFR 1.430(a)-1(d)(1).

  4. Waiver amortization installments are determined assuming that the installments are paid on the valuation date for each plan year and using the interest rates applicable under IRC 430(h)(2) and 26 CFR 1.430(h)(2)-1(f)(2).

    Note:

    If the plan is using segment rates, waiver amortization installments are determined by applying the first segment rate to the first four installments and the second segment rate to the fifth (and final) installment.

  5. The waiver amortization installments established for a waiver amortization base are determined:

    1. using the interest rates that apply for the plan year for which the waiver is granted (even though the first installment for the waiver amortization base isn’t due until the subsequent plan year), and

    2. aren’t redetermined in subsequent plan years for changes in IRC 430(h)(2) interest rates for the subsequent plan years.

  6. If a plan received a funding waiver under IRC 412 for a plan year for which IRC 430 wasn’t yet effective, the plan sponsor must contribute the amounts needed to amortize that waiver over the original schedule, 26 CFR 1.430(a)-1(h)(3).

  7. If a plan's funding shortfall for a plan year is zero (that is, if the value of the plan's assets, reduced by the funding standard carryover balance and prefunding balance to the extent provided under IRC 430(f)(4)(B), is at least equal to the plan's funding target for the year), then any waiver amortization bases for preceding plan years (and any associated waiver amortization installments) are eliminated, IRC 430(e)(5) and 26 CFR 1.430(a)-1(e)(2).

Examination Steps

  1. Assess the target normal cost determination, Schedule SB, Part VIII, line 31.

  2. Assess, if the plan sponsor elected, any reliance on pension funding relief under PRA 2010, Schedule SB, Part IX.

  3. Assess the shortfall amortization charge determination, if any, Schedule SB, Part VIII, line 32a.

  4. Assess the waiver amortization charge determination, if any. Schedule SB, Part VIII, lines 32b and 33.

  5. Review any adjustments made for a short plan year, if relevant.

Special Rules for At-Risk Plans

  1. If a plan is in at-risk status, its funding target and target normal cost must be determined according to special rules for measurement and phase-in of those amounts.

  2. A plan is not in at-risk status for a plan year if it had 500 or fewer participants on each day during the preceding plan year, IRC 430(i)(6) and 26 CFR 1.430(i)-1(b)(2).

  3. A plan with more than 500 participants is in at-risk status for a plan year if:

    • The FTAP for the preceding plan year is less than 80%, (ignoring the at-risk assumptions), and

    • The FTAP for the preceding plan year (determined by using the additional actuarial assumptions required for at-risk plans) is less than 70%.

    Note:

    See IRC 430(i)(4) and 26 CFR 1.430(i)-1(b)(1).

  4. If the plan has been in at-risk status for five consecutive years, including the current plan year, the plan’s funding target for the plan year is equal to the sum of:

    1. The present value of all benefits accrued or earned under the plan as of the beginning of the plan year, as determined by using additional actuarial assumptions specified for at-risk plans; and

    2. A specified loading factor.

    Note:

    See IRC 430(i)(1)(A) and 26 CFR 1.430(i)-1(c).

  5. The loading factor for a plan year is the sum of:

    1. $700, times the number of participants in the plan; and

    2. Four percent of the plan's funding target (determined not considering the at-risk rules) for the plan year.

    Note:

    See IRC 430(i)(1)(C) and 26 CFR 1.430(i)-1(c)(2)(ii).

  6. The additional actuarial assumptions required for a plan in at-risk status are:

    1. All employees who aren’t retiring as of the valuation date but who will be eligible to elect benefits during the plan year and the 10 succeeding plan years must be assumed to retire at the plan’s earliest retirement date (but no earlier than the end of the plan year for which the at-risk funding target is being determined), and,

    2. Assume all employees elect the plan’s optional form of retirement benefit available under the plan, at the assumed retirement age, which has the highest present value of benefits.

    Note:

    See IRC 430(i)(1)(B) and 26 CFR 1.430(i)-1(c)(3).

  7. If the plan has been in at-risk status for five consecutive years, including the current plan year, the target normal cost of the plan for the plan year is equal to the excess of:

    1. The present value of all plan benefits which are expected to accrue or to be earned during the plan year, determined using the additional actuarial assumptions used to determine the funding target amount, plus plan-related expenses the plan expects to pay from plan assets during the plan year; minus

    2. The amount of mandatory employee contributions the plan expects to make during the plan year.

    Note:

    See IRC 430(i)(2)(A) and 26 CFR 1.430(i)-1(d)(2)(i).

  8. The target normal cost (as determined above) is further increased by a loading factor equal to 4% of the present value of all plan benefits which are expected to accrue or to be earned during the plan year determined without using the special at-risk assumptions, IRC 430(i)(2)(B) and 26 CFR 1.430(i)-1(d)(2)(ii).

  9. The minimum at-risk funding target equals the plan's funding target and the minimum at-risk target normal cost is the plan's target normal cost, both determined without taking at-risk status into account. See IRC 430(i)(3), 26 CFR 1.430(i)-1(c)(2)(iii) and 26 CFR 1.430(i)-1(d)(2)(iii).

  10. If a plan has been in at-risk status for fewer than five consecutive plan years (including the current plan year), then determine the plan funding target and target normal cost by phasing in the at-risk amounts over the period of consecutive plan years during which the plan has been in at-risk status. The transition percentage is 20% for each consecutive plan year that the plan is in at-risk status. However, when calculating the at-risk funding target and at-risk target normal cost, don’t consider the loading factors if the plan has not been in at-risk status for two or more of the preceding four plan years, IRC 430(i)(5) and 26 CFR 1.430(i)-1(e)

Examination Steps

  1. Assess the plan's determination of at-risk status for the current plan year and for any relevant preceding plan years.

  2. If the plan is in at-risk status for the current plan year, assess the determinations of the adjusted amounts for the funding target and the target normal cost for the plan.

Quarterly Contributions and Liquidity Requirements

  1. See IRM 4.72.16.7.1, Quarterly Contributions, for guidance on payment of quarterly contributions.

  2. See IRM 4.72.16.7.2, Liquidity Requirements, for guidance regarding liquidity requirements.

Quarterly Contributions

  1. Quarterly contributions must be made during a plan year if the plan had a funding shortfall for the preceding plan year, IRC 430(j)(3)(A), 26 CFR 1.430(j)-1(c)(1) and 26 CFR 1.430(j)-1(e)(4).

  2. Each quarterly installment is 25% of the required annual payment, IRC 430(j)(5)(D)(i) and 26 CFR 1.430(j)-1(c)(5)(i).

  3. The required annual payment is equal to the lesser of:

    1. 90% of the minimum required contribution under IRC 430 for the plan year, or

    2. 100% of the minimum required contribution under IRC 430 (determined not considering any waiver under IRC 412) for the preceding plan year.

    Note:

    See IRC 430(j)(5)(D)(ii) and 26 CFR 1.430(j)-1(c)(3)(ii).

  4. The second clause of the definition of the required annual payment, in (3) above, (relating to the preceding plan year) applies only if that preceding plan year was a 12 month year.

  5. Determine minimum required contributions under IRC 430 as of the valuation date for each year. Do not adjust them for interest or the prefunding balance or funding standard carryover balance in the current year or any prior year.

  6. Disregard any increases made under IRC 430(c)(7) (installment acceleration amounts under PRA 2010) to determine the required annual payment for the quarterly installments rules, IRC 430(j)(3)(F).

  7. Due dates for the four required quarterly installments for a full plan year are:

    1. The first installment is due on the 15th day of the 4th plan month,

    2. The second installment is due on the 15th day of the 7th plan month,

    3. The third installment is due on the 15th day of the 10th plan month, and

    4. The fourth installment is due on the 15th day following the close of the plan year.

    Note:

    See IRC 430(j)(3)(C), IRC 430(j)(3)(E) and 26 CFR 1.430(j)-1(c)(6).

  8. In the case of a plan year that does not begin on the first day of the calendar month, the first day of each plan month is the day of the calendar month that corresponds to the day of the calendar month that is the first day of the plan year.

    Example:

    The first day of the plan year is August 10, 2017. A plan month begins on the 10th day of each calendar month. Accordingly, the due dates for the required installments for that plan year are November 24, 2017, February 24, 2018, May 24, 2018 and August 24, 2018. The deadline for the final contribution for the plan year is April 24, 2019, 26 CFR 1.430(j)-1(e)(7)(ii)

  9. For short plan years, an installment is due 15 days after the end of the short plan year. In addition, an installment is required for each due date that falls with that short plan year.

    Example:

    Plan A, a calendar year plan, has a short plan year ending April 14, 2020. Plan A has only one installment for that short plan year, due April 29, 2020 (the 15th day after the close of the short plan year).

  10. Each short plan year installment is the required annual payment for the short plan year divided by the number of required installments during the short plan year.

  11. For short plan years, the required annual payment for the preceding plan year (as described in paragraph (3)(b) above) is the required annual payment for that preceding year, multiplied by a fraction, the numerator of which is the duration of the short plan year and the denominator is one year. However, if the preceding year was also a short plan year, the denominator is the duration of the preceding year’s short plan year.

    Note:

    IRC 430(j)(3)(E)(ii).and 26 CFR 1.430(j)-1(c)(7)(ii)

  12. If the current year is a full plan year, but the prior year was a short plan year, the required annual payment is the lesser of:

    1. 90% of the minimum required contribution under IRC 430 for the plan year, or

    2. 100% of the minimum required contribution under IRC 430 (determined not considering waivers under IRC 412) for the preceding plan year, multiplied by a fraction, the numerator of which is 1 year and the denominator of which is the duration of the short plan year.

  13. If the plan sponsor doesn’t pay a quarterly installment in full by its due date, the amount of the underpayment is the required installment minus the amount (if any) of the installment the sponsor contributed on or before the due date, IRC 430(j)(3)(B)(i).

  14. See IRM 4.72.16.7.2, Liquidity Requirements, relating to requirements to increase the amount of any required installment when a plan has a liquidity shortfall.

  15. Determine the interest adjustment for underpayment of a quarterly installment, for the period of underpayment, using the plan's effective interest rate plus 5%, IRC 430(j)(3)(A) and 26 CFR 1.430(j)-1(b)(4)(ii).

  16. Apply the interest adjustment to quarterly installment underpayments beginning on the due date for the installment and ending on the date the sponsor contributes that portion of the underpayment to the plan, IRC 430(j)(3)(B)(ii) and 26 CFR 1.430(j)-1(b)(4).

  17. Credit contributions against unpaid required installments in the order in which the sponsor was required to pay those installments, IRC 430(j)(3)(B)(iii) and 26 CFR 1.430(j)-1(c)(3)(i).

  18. If the plan sponsor elects to use all or a portion of a funding balance to satisfy a quarterly contribution requirement, the respective balances are increased from the beginning of the year to the date of the election (using the plan’s effective interest rate for the plan year) to determine the amount available to offset the required quarterly installment. The amounts used to offset the required quarterly installments are then discounted from that date to the first day of the plan year (using the effective interest rate for the plan year) to be subtracted from the available fund balances.

  19. However, if the sponsor elects to use all of part of the funding balance for the quarterly contribution after its due date for the quarterly contribution, then the amount used to offset the minimum required contribution for the plan year is the portion of the balance so used, discounted from the date of the election to the due date of the required installment at the effective interest rate plus five percentage points, and then further adjusted from the installment due date to the valuation date at the effective interest rate.

    Example 2:
    Election is made after quarterly contribution is due. A quarterly contribution of $20,250 is due on April 15 for a calendar year plan with a valuation date of January 1 and an effective interest rate of 6%. The installment is satisfied by the sponsor electing on July 1st (2 1/1 months after the April 15 due date) to apply the funding standard carryover balance. The amount used to offset the minimum required contribution for the plan year is $19,481 ($20,250 ÷1.11(2.5/12) ÷1.06(3.5/12)). However, the amount by which the funding standard carryover balance is reduced is $19,669 ($20,250 ÷ 1.06(6/12)). In other words, you apply the additional adjustment to determine the amount to offset the minimum required contribution, but you use the normal adjustment described above to calculate the appropriate decrease to the funding standard carryover balance.

    Note:

    See 26 CFR 1.430(f)-1(b)(5) and 26 CFR 1.430(f)-1(d)(1)(i)(B)(1).

    Note:

    See rules under IRM 4.72.16.4.4, for restrictions on using a funding balance to satisfy quarterly contribution requirements.

  20. See IRM 4.72.16.7.2, for additional quarterly contributions that may be needed to satisfy liquidity requirements.

Liquidity Requirements

  1. If a plan sponsor (other than a small plan with 100 or fewer participants as described in IRC 430(g)(2)(B)) is required to make quarterly contribution for a plan year, then the plan sponsor is treated as failing to pay the full amount of the required installment for a quarter, to the extent that the value of the liquid assets paid in the required installment after the end of that quarter and on or before the due date for the installment, is less than the liquidity shortfall for that quarter, IRC 430(j)(4) and 26 CFR 1.430(j)-1(d)(1)(i).

  2. For purposes of the liquidity requirement, the required minimum level of liquid assets is the amount of liquid assets needed to pay for three years of benefits. If this minimum level is not met, then the quarterly contribution is increased to meet this minimum level. See IRC 430(j)(4)(E)(ii)(II), IRC 430(j)(4)(E)(iv), and 26 CFR 1.430(j)-1(e)(2) for adjustments for lump sum, annuity payments and certain nonrecurring circumstances.

  3. A plan sponsor that doesn’t satisfy this liquidity requirement is treated as failing to make the required quarterly contribution, and the plan is required to stop making certain types of accelerated payments under IRC 401(a)(32)(B) and ERISA section 206(e).

  4. The portion of an installment that is treated as not made because of the liquidity requirement continues to be treated as unpaid until the close of the quarter that contains the due date for the contribution, even if it is made before or after that date, IRC 430(j)(4)(C) and 26 CFR 1.430(j)-1(d)(3)(ii).

  5. The plan can’t use funding balances or contribute illiquid assets to satisfy the liquidity requirements.

  6. Special rules apply for interest adjustments if liquidity installments are late or unpaid. See 26 CFR 1.430(j)-1(d)(3)(iv)(B)

Examination Steps

  1. Assess the plan's determinations and employer contributions for the quarterly contribution requirements.

  2. Assess the plan's determinations and employer contributions for the liquidity requirements.

Contributions to Meet Minimum Funding Requirements

  1. Employer contributions to meet minimum required contributions for the plan are contributions the sponsor makes on or before the due date for the plan year, other than employer contributions allocable to the minimum required contributions for previous plan years. A contribution is allocable for a previous plan year if it’s reported as such on a Schedule SB. Once reported on the Schedule SB, it can’t be moved or reallocated to another plan year.

  2. Subject to certain conditions, the sponsor may use some or all of the prefunding balance or the funding standard carryover balance to satisfy some or all of the minimum required contribution.

Excise Tax on Failure to Meet Minimum Funding Requirements

  1. An excise tax applies for failure to meet minimum funding requirements. See IRC 4971(a).

  2. For a single employer plan, the excise tax for failing to meet the minimum funding requirements under IRC 430 is 10% of the aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year ending with or within a taxable year.

  3. An additional 100 percent excise tax applies when the minimum funding requirements remain unsatisfied on the earlier of the date the IRS:

    • mails a notice of deficiency for the 10% tax or

    • assesses the 10% tax.

  4. A plan's unpaid minimum required contribution for any plan year is any minimum required contribution under IRC 430 for the plan year that is not paid on or before the due date for the plan year under IRC 430(j)(1) (81/1 months after the close of the plan year). See IRC 4971(c)(4) and 26 CFR 54.4971(c)-1(c)(1).

  5. An excise tax of 10% of the amount of the unpaid liquidity shortfall is imposed on the employer for a quarter in which a liquidity contribution is not paid by the due date for the installment for that quarter. See IRC 4971(f).

  6. An excise tax of 100% of the amount of the unpaid liquidity shortfall is imposed on the employer if it’s still not paid as of the close of the four quarters after the quarter in which the shortfall first occurred.

Lien on Failure to Meet Minimum Funding Requirements

  1. A lien is placed on the employer (and any members of its controlled group) that is liable for the plan’s minimum required contributions under IRC 430 for any of these situations:

    1. The plan is covered by the Pension Benefit Guaranty Corporation (PBGC) and the plan's FTAP is less than 100%, IRC 430(k)(2),

    2. Any amount of the minimum required contribution under IRC 412 and IRC 430 is unpaid after the contribution due date, IRC 430(k)(1)(A), and

    3. The contribution’s (including interest) unpaid balance plus the aggregate prior unpaid balance (including interest), exceeds $1,000,000, IRC 430(k)(1)(B).

  2. The plan must report to the PBGC an incident giving rise to a lien under IRC 430(k) within 10 days of the due date for the required contribution payment, IRC 430(k)(4)(A).

  3. Any lien created under IRC 430(k) may be perfected and enforced only by or through the PBGC, IRC 430(k)(5).

  4. Because the employer has no reporting requirements to the IRS under the lien rules of IRC 430(k), and because the PBGC enforces liens, you, as the examining specialist, don’t have to take any action with respect to the lien rules under IRC 430(k).

Examination Steps

  1. Consider all relevant determinations and adjustments and assess the minimum required contribution determination for the plan year, Schedule SB, Part VIII, line 34.

  2. Assess the plan’s use of carryover or prefunding balances to meet the minimum required contribution for the plan year, Schedule SB, Part VIII, line 35.

  3. Assess the determination of any remaining unpaid amounts of minimum required contribution, Schedule SB, Part VIII, lines 39 and 40 of Schedule SB.

Effective Dates and Reference Sources

  1. See IRM 4.72.16.9.1, Effective Dates, for relevant IRC 430 effective dates.

  2. See IRM 4.72.16.9.2, Reference Sources, for a list of key references used in these guidelines.

Effective Dates

  1. IRC 430 as introduced by PPA ‘06 (and amendments under IRC 412) generally applies to plan years beginning on or after January 1, 2008.

  2. MAP-21 amendments apply to plan years beginning after December 31, 2011. A plan sponsor may elect to postpone the effective date of the MAP-21 stabilization rule to the 2013 plan year.

  3. HAFTA amendments apply to plan years beginning after December 31, 2012. A plan sponsor may postpone the effective date of the HATFA amendments to the MAP-21 rule to the 2014 plan year.

  4. PPA ‘06, Section 114 amendments to IRC 4971 apply to taxable years beginning on or after January 1, 2008, but only for plan years that end with or within any such taxable year, 26 CFR 54.4971(c)-1(g)(1).

  5. BBA 2015 amendments apply to plan years beginning after December 31, 2015.

Reference Sources

  1. These reference sources contain content relevant to this guidance -

    • Pub. Law 109-280 - Pension Protection Act of 2006 (PPA 2006)

    • Pub. Law 110-458 - Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)

    • Pub. Law 111-192 - Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010)

    • Pub. Law 112-141 - Moving Ahead for Progress in the 21st Century Act (MAP-21)

    • Pub. Law 113-159 - Highway and Transportation Funding Act of 2014 (HATFA)

    • Pub. Law 114-74 - Bipartisan Budget Act of 2015

    • IRC 412 - Minimum funding standards

    • IRC 430 - Minimum funding standards for single-employer defined benefit pension plans

    • 26 CFR 1.430(a)-1 - Determination of minimum required contributions

    • 26 CFR 1.430(d)-1 - Determination of target normal cost and funding target

    • 26 CFR 1.430(f)-1 - Effect of prefunding balance and funding standard carryover balance

    • 26 CFR 1.430(g)-1 - Valuation date and valuation of plan assets

    • 26 CFR 1.430(h)(2)-1 - Interest rates used to determine present value

    • 26 CFR 1.430(h)(3)-1 - Mortality tables used to determine present value

    • 26 CFR 1.430(h)(3)-2 - Plan-specific substitute mortality tables used to determine present value

    • 26 CFR 1.430(i)-1 - Special rules for plans in at-risk status

    • 26 CFR 1.430(j)-1 - -Payment of minimum required contributions

    • Notice 2008-85, 2008-42 IRB 905 - Updated static mortality tables for the years 2009 through 2013

    • Notice 2009-22, 2009-14 IRB 741 - Asset Valuation under Section 430(g)(3)(B) as amended by WRERA

    • Notice 2010-55, 2010-33 IRB 253 - Alternative Amortization Schedule for Single-Employer Plans under PRA 2010

    • Notice 2011-3, 2011-2 IRB 263 - Funding Relief for Single-Employer Pension Plans under PRA 2010

    • Notice 2012-61, 2012-42 IRB 479 - Guidance on Pension Funding Stabilization under the Moving Ahead for Progress in the 21st Century Act

    • Notice 2013-49, 2013-32 IRB 127 - Updated Static Mortality Tables for the Years 2014 and 2015

    • Notice 2014-53, 2014-43 IRB 737 - Guidance on Pension Funding Stabilization under the Highway and Transportation Funding Act of 2014

    • Notice 2015-53, 2015-33 IRB 190 - Updated Static Mortality Tables for Defined Benefit Pension Plans for 2016

    • Notice 2016-50, 2016-38 IRB 371 - Updated Static Mortality Tables for Defined Benefit Pension Plans for 2017

    • Notice 2017-60, 2017-43 IRB 365 - Updated Static Mortality Tables for Defined Benefit Pension Plans for 2018

    • Notice 2018-02, 2018-2 IRB 281 - Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2019

    • Notice 2019-26, 2019-15 IRB 943, Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2020.

    • Notice 2019-67, 2019 IRB 1510 - Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plan for 2021

    • Announcement 2010-3, 2010-4 IRB 333 - Automatic Approval of Changes in Funding Method for Takeover Plans and Changes in Pension Valuation Software

    • Announcement 2015-3, 2015-3 IRB 328 - Automatic Approval of Change in Funding Method for Takeover Plans

    • Rev. Proc. 2017-56, 2017-44 IRB 465- Automatic Approval for Certain Funding Method Changes Under IRC 430

    • Rev. Proc. 2017-57, 2017-44 IRM 474- General Information on the Procedure for Requesting Approval for Certain Funding Method Changes under IRC 430

    • Form 5500 Schedule SB and instructions - Single Employer Defined Benefit Plan Actuarial Information