4.72.16 IRC 430 Examination Guidelines

Manual Transmittal

November 05, 2019

Purpose

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

Material Changes

(1) IRM 4.72.16.1.2 (4), Authority, was updated to change the reference for Policy Statement 4-119 from IRM 1.2.13.1.36 to IRM 1.2.1.5.36.

(2) IRM 4.72.16.1.2 (5), Authority, was updated to change the reference for Delegation Order 8-3 from IRM 1.2.47.4 to IRM 1.2.2.9.3.

(3) IRM 4.72.16.3.1 (5), Valuation Date, was amended to refer to automatic approvals for changes in valuation date as described in Rev. Proc. 2017-56.

(4) IRM 4.72.16.4.1(10), Measurement of Assets for Pension Funding Purposes, was amended to refer to automatic approvals for changes in asset valuation method as described in Rev. Proc. 2017-56.

(5) IRM 4.72.16.4.3 (7), Actuarial Assumptions and Funding Methods, was amended to to automatic approvals for various changes in funding methods as described in Rev. Proc. 2017-56.

(6) IRM 4.72.16.4.3.2 (3), Mortality Assumptions, added static mortality tables for calendar year 2020.

(7) IRM 4.72.16.9.1 (5), Effective Dates, added reference to Bipartisan Budget Act of 2015.

(8) IRM 4.72.16.9.2, Reference Sources, was updated to add reference to Notice 2019-26, Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2020.

(9) Made editorial changes throughout.

Effect on Other Documents

This supersedes IRM 4.72.16 dated December 7, 2018.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(11-05-2019)


Catherine L. Jones
Acting Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM provides Employee Plans (EP) specialists examining single-employer defined benefit plans guidance 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. Determining the minimum required contribution for different types of pension plans requires a review of various applicable IRC Sections. Parallel requirements are in Part 3 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). These guidelines refer only to the provisions under IRC 412 and related IRC provisions, the related regulations, and related guidance; not the parallel ERISA provisions.

  2. A plan to which IRC 412 applies satisfies the minimum funding standards for a plan year if, for a DB plan or a money purchase (MP) plan (other than a multiemployer plan), the employer makes contributions that are not less than the minimum required contribution.

  3. Significant changes were made to the minimum funding requirements by the Pension Protection Act of 2006. As part of these changes, the minimum funding rules of IRC 412 were revamped. These guidelines incorporate these law changes:

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

    • 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
    Money purchase plan which is not a multiemployer plan Determined under the terms of the plan. See IRC 412(a)(2)

    See IRM 4.72.14.3.9, IRC 412 Rules for Multiemployer Plans, for rules under IRC 412 and IRC 431 for multiemployer plans.

  5. These guidelines address only the minimum funding standards of IRC 412 that apply to single employer defined benefit plans under IRC 430. Although the minimum funding standards of IRC 430 apply to multiple employer plans, these guidelines don’t address those plans.

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

    1. For a DB plan that is not a multiemployer plan or a CSEC plan, if the minimum funding requirements of IRC 412 apply, then the plan's trust is not qualified unless the plan meets the benefit limitation requirements of IRC 436. See IRC 401(a)(29).

    2. If a pension plan has a liquidity shortfall as described in IRC 430(j)(4), the plan's trust will not be treated as failing to meet qualification requirements merely because the plan, during the period of the shortfall, ceases to make certain benefit payments. See IRC 401(a)(32).

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

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

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

    6. ERISA section 101(f) requires plan administrators to furnish annual funding notices to plan participants and beneficiaries. 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 the plan's trust is or had been qualified under IRC 401(a) or the plan satisfies or is determined to have satisfied the requirements of IRC 403(a). See IRC 412(e)(1). 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 (8) below.

    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). Thus, the penalty for failure to satisfy the minimum funding standards does not include disqualification of the plan.

  8. IRC 412 does not apply to these plans. See IRC 412(e)(2).

    1. Profit-sharing or stock bonus plan.

    2. Insurance contract plan, as described in IRC 412(e)(3).

    3. Governmental plan, as described in IRC 414(d).

    4. Church plan, as described in IRC 414(e), with respect to which the election described in IRC 410(d) 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.

  9. 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). See PPA 2006 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. See IRM 4.72.16.9.1, Effective Dates.

  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. Policy Statement 4-119 states that the primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans. Plans will be examined to determine whether they meet the applicable qualification requirements in operation. IRM 1.2.1.5.36.

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

Responsibilities

  1. Examining a qualified single employer DB plan to substantiate compliance with IRC 430 generally involves:

    1. Reviewing a plan's documentation with respect to the plan’s minimum funding standards under IRC 430.

    2. Reviewing the determination of the plan’s minimum required contribution under IRC 430.

    3. Reviewing the contribution amount the employer made with respect to the minimum funding standards under IRC 430.

    4. Reviewing the plan with respect to the benefit limitations under IRC 436.

    5. Referral of non-compliance with the minimum funding standards under IRC 430 for potential assessment of excise tax penalties.

  2. Agents examine a plan to determine if the plan/plan sponsor:

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

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

    3. Reported information and excise tax liabilities correctly. See 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
    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)
    PPA 2006 Pension Protection Act of 2006
    WRERA Worker, Retiree, and Employer Recovery Act of 2008

Liability for Contributions

  1. In general, the amount of required contributions under IRC 430 must be paid by the employer responsible for making contributions under the plan. See 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. See IRC 412(b)(2).

Examination Steps

  1. Obtain all documents necessary 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 annual 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 Contribution

  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. All determinations for minimum required contributions for a plan year are made as of the plan's valuation date. See IRC 430(g)(1) and 26 CFR 1.430(g)-1(b)(1).

  2. Other than for plans with 100 or fewer participants (determined under IRC 430(g)(2)(B) and IRC 430(g)(2)(C)), the valuation date for a plan year must be the first day of the plan year. See IRC 430(g)(2), 26 CFR 1.430(g)-1(b)(1) and 26 CFR 1.430(g)-1(b)(2).

  3. Plans with 100 or fewer participants may designate any day during the plan year as the plan's valuation date.

  4. For purposes of applying 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 take into account only participants of the employer or member of the controlled group. See IRC 430(g)(2)(B) and 26 CFR 1.430(g)-1(b)(2).

  5. 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, a change of a plan's valuation date that is required by IRC 430 is treated as having been approved by the Commissioner. Thus, if a plan that ceases to be eligible for the small plan exception for a plan year because the number of participants exceeded 100 in the prior plan year, then the resulting change in the valuation date to the first day of the plan year is automatically approved by the Commissioner. See 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, provided 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. See Section 3.02 of Revenue Procedure 2017-56.

    Note:

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

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. See IRC 430(j)(1).

  2. See IRM 4.72.16.8.1, Excise Tax on Failure to Meet Minimum Funding Requirements, for the excise tax under IRC 4971 if a minimum required contribution remains unpaid as of the due date.

  3. See IRM 4.72.16.7.1, Quarterly Contributions, regarding 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 installments were required to be made).

  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. See 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. See IRC 430(j)(2) and 26 CFR 1.430(j)-1(b)(4). Except for a 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. See IRM 4.72.16.7.1, Quarterly Contributions, 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. The FTAP is used for various purposes, including to determine if the plan is in an at risk status.

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

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

  5. IRM 4.72.16.4.3, Actuarial Assumptions and Funding Methods, discusses actuarial assumptions and methods used in the measurement of a plan's funded status.

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

  7. IRM 4.72.16.6, Special Rules for At-Risk Plans, discusses special valuation rules that must be used for a plan in at-risk status.

Measurement of Assets for Pension Funding Purposes

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

  2. Or, a plan 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 regulations prescribed by the IRS.

    2. Doesn’t permit averaging of such 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 in the case of a valuation date that is not the first day of a month).

    3. Doesn’t result in a determination of the actuarial value of plan assets that, at any time, is lower than 90 percent or greater than 110 percent of the fair market value of plan assets as of 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)). The period of time between each determination date must be equal and that time period cannot exceed 12 months. Also, the earliest determination date cannot be earlier than the last day of the 25th month before the valuation date of the plan year. In a typical situation, the earlier determination dates will be the two immediately preceding valuation dates. However, these rules also permit the use of more frequent determination dates. For example, monthly or quarterly determination dates may be used.

  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, increased for contributions and reduced for benefits and all other amounts paid from plan assets during the period beginning with the prior determination date and ending immediately before the valuation date, and adjusted for expected earnings. See 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. If a contribution made after the valuation date for the current plan year is for a preceding plan year, take into account the present value (determined as of the valuation date for the current plan year, using the plan's effective interest rate for the preceding plan year) of the contributions made for the preceding plan year in determining the value of plan assets for the current plan year. See 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 any contributions for the current plan year are made before the valuation date, plan assets as of the valuation date must exclude those contributions and interest on those contributions (determined at the plan's effective interest rate for the plan year) for the period between the date paid and the valuation date. See IRC 430(g)(4)(B) and 26 CFR 1.430(g)-1(d)(2). Apply the rules for contribution receipts for paragraph (6) and paragraph (7) before applying the 90 to 110 percent corridor. Thus, a contribution receivable will increase the upper end of the corridor by 110 percent of the present value of the contribution. See 26 CFR 1.430(g)-1(c)(2)(iii).

  8. 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.

  9. 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. See IRC 430(l).

  10. 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 his/her specific prior approval. See 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 described in Section 3.01 of Revenue Procedure 2017-56, provided 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 purposes of the minimum funding standards of IRC 430, a plan's liability for a plan year is equal to the plan's funding target as of the plan's valuation date.

  2. The determination of funding target must take into account:

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

    2. Restrictions on payments under 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. See 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 to the extent that benefits were not paid or will not be paid because of a limitation that applied prior to the valuation date. See 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). See IRC 430(d)(1) and 26 CFR 1.430(d)-1(b)(2).

    Exception:

    a plan that is in at-risk status

  4. Generally, a plan's funding target for a plan year is determined based on plan provisions that are adopted no later than the valuation date for the plan year and effective on or before the last day of the plan year. If an amendment is adopted after the valuation date, but takes effect 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. See 26 CFR 1.430(d)-1(d)(1).

  5. However, for plan amendments not 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. Would not be permitted to take effect under the rules of IRC 436(c) if those rules were 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, and by taking 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, the determination of any present value or other computation under IRC 430 must be made on the basis of actuarial assumptions and funding methods each of which is reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best estimate of anticipated experience under the plan. See IRC 430(h)(1).

  2. See IRM 4.72.16.4.3.1, Interest Rates, for interest rates to be used for the determination of present values and other amounts under IRC 430.

  3. See IRM 4.72.16.4.3.2, Mortality Assumptions, for mortality assumptions to be used for the determination of 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 future benefit payments under the plan 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 approval of the IRS to make changes in actuarial assumptions.

  6. Although a single funding method must be used 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. See 26 CFR 1.430(d)-1(f)(1)(iv).

  7. In general, any change of funding method requires IRS approval. See IRC 412(d)(1), and Rev. Proc. 2017-57. to Rev. Proc. 2017-56 for a description of 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.

Interest Rates
  1. For purposes of determining the funding target and target normal cost of a plan 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 such month as determined by the IRS. See 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. See 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 provide 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 such 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. In lieu of the 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. See IRC 430(h)(2)(D)(ii) and Treas. Reg. 1.430(h)(2)-1(e)(4). If the plan sponsor makes an election, it may be revoked only with the IRS consent. Plans that are operating under this election aren’t subject to the stabilization rule with respect to their minimum funding determinations. However, if such an election was in effect on July 6, 2012, the plan sponsor may have revoked the election without IRS consent. The revocation election must have been made no later than July 5, 2013. See Notice 2012-61, 2012-42 IRB 479.

  5. The IRS calculates and publishes segment rates and monthly corporate bond yield curve to be used with respect to the month that includes a given valuation date. See IRC 430(h)(2)(F).

  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 in lieu 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 to be used to determine any present value under IRC 430. See 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 no projection of mortality is needed. See 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
    after 2020 Determine the applicable published guidance, and apply the relevant tables from that published guidance.
  4. For years prior to 2018 these tables are based on the RP-2000 mortality tables, using projection scale AA. For years 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 prior to 2018 for the 2018 plan year. See 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. The cumulative mortality improvement factor is determined based on the mortality improvement scale for the relevant year (as 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. See 26 CFR 1.430(h)(3)-1(a)(2) and see Notice 2019-26, 2019-15 IRB 943 for an example of the guidance on mortality improvement rates.

  6. See separate tables to use for annuitants and nonannuitants. The nonannuitant mortality table is applied to determine the probability of survival for a nonannuitant for the period before the nonannuitant is projected to commence receiving benefits. The annuitant mortality table is applied 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. If only a portion of a participant's benefit has commenced, the participant is treated as an annuitant with respect to the portion which has commenced and as a nonannuitant with respect to the balance of the benefit.

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

    Note:

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

  7. The IRS specifies separate mortality assumptions to use to determine present values for individuals entitled to benefits under the plan on account of disability. See IRC 430(h)(3)(D).

  8. A plan sponsor may request IRS approval to use substitute mortality assumptions. See 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 anticipated experience under the plan based on information determined as of the valuation date. See 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. Also, 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. See 26 CFR 1.430(d)-1(f)(4)(iii).

Prefunding Balance and Funding Standard Carryover Balance

  1. Certain funding balances - referred to as the prefunding balance and the funding standard carryover balance - may be used to reduce the otherwise applicable minimum required contribution for a plan year in certain situations. See IRC 430(f)(3).

  2. Maintaining either or both balance amounts is voluntary and at the plan sponsor’s election. See 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 as determined under IRC 412 for a plan as of the last day of the plan year beginning in 2007. It is reduced by applying all or a portion of the balance toward the minimum required contribution for a plan year or by electing to reduce the balance, and adjusted 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 to the extent the employer elects, decreased by applying all or a portion of the balance toward minimum required contribution for a plan year or by electing to reduce the balance, and adjusted further for investment experience and interest. See IRC 430(f)(6) and 26 CFR 1.430(f)-1(b)(1).

  5. The amount added to the prefunding balance cannot exceed the present value of the excess contribution for the preceding plan year increased with interest. See 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. The present value of the excess contribution for the preceding year is increased for interest accruing for the period between the valuation date for the preceding plan year and the first day of the current plan year. For this purpose, interest is determined by using the plan's effective interest rate for the preceding plan year. However, to the extent that 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. See 26 CFR 1.430(f)-1(b)(3).

  8. For purposes of the prefunding balance, disregard contributions required to avoid a benefit restriction under IRC 436 in determining the extent to which contributions for a plan year exceed the minimum required contribution for the plan year. See 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, Quarterly Contributions, 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 with respect to the plan's prefunding balance or funding standard carryover balance to satisfy the quarterly contribution requirements or minimum required contribution is irrevocable. An election is permitted to 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 due date (including extensions) of the Schedule SB. See 26 CFR 1.430(f)-1(f)(3).

  12. The prefunding balance or funding standard carryover balance can only be used 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 percent of the funding target (determined without regard to the at-risk rules of IRC 430(i)) for that preceding plan year. See IRC 430(f)(3)(C) and 26 CFR 1.430(f)-1(d)(3).

  13. The prefunding balance and the funding standard carryover balance as of the first day of a plan year must be adjusted for actual investment return on plan assets for the preceding plan year. See 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 is permitted to elect to reduce those balances. The elections are deemed to occur on the 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 an election 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) has been made prior to the election to reduce the prefunding balance or funding standard carryover balance, then the amount available for use to offset the otherwise applicable minimum required contribution for the plan year will be retroactively reduced. See IRC 430(f)(5), 26 CFR 1.430(f)-1(e) and 26 CFR 1.430(f)-1(d)(1)(ii)(B).

  15. No amount of the prefunding balance can be used to offset the minimum required contribution while the funding standard carryover balance is greater than zero. In other words, the funding standard carryover balance must be used up first, before the prefunding balance can be used to offset the minimum required contribution. See 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. See 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. See Part I line 2a of Schedule SB.

  2. Identify the actuarial value of the plan assets being used to make determinations for IRC 430 purposes. See Part I line 2b of Schedule SB.

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

  4. Identify the mortality assumptions used to determine the funding target. See Part V line 23 of Schedule SB.

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

  6. Review any change in actuarial assumptions or funding method. See Part VI lines 24 and 25 of Schedule SB.

  7. Identify whether the actuarial assumptions or the funding method have been changed since the preceding plan year. See Part VI lines 24 and 25 of Schedule SB. If changes have been made, review the required attachments to the Schedule SB.

  8. Identify the funding target for the plan. See Part I line 3 of Schedule SB.

  9. Identify and analyze the amounts and activity for any prefunding balance and the funding standard carryover balance. See Part II of Schedule SB.

  10. Assess the plan's FTAP determination. See Part III of Schedule SB.

Minimum Required Contribution

  1. IRC 430(a) provides that 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 the plan's funding target. See IRM 4.72.16.4.1, Measurement of Assets for Pension Funding Purposes, for measurement of plan assets. See IRM 4.72.16.4.2, Measurement of Liability for Pension Funding Purposes, for determination of 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 standard carryover balance) over the plan's funding target. See IRC 430(a)(2) and 26 CFR 1.430(a)-1(b)(3).

Target Normal Cost

  1. Prior to amendment by 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 under the plan during the plan year (with any increase in any benefit attributable to services performed in a preceding plan year by reason 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 the amount of plan-related expenses expected to be paid from plan assets during the plan year, and (b) subtract the amount of mandatory employee contributions expected to be made during the plan year. A plan sponsor is permitted to elect to apply this modification beginning with the first plan year beginning on or after January 1, 2008. See IRC 430(b)(1) and section 101(b)(2) of WRERA.

  3. Similar to the determination of the funding target, the determination of target normal cost must not take into account the benefit limitations under IRC 436, the restrictions on payments under 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 for restrictions on benefits with annuity starting dates before the valuation date.

  4. The same rule regarding plan provisions that are taken into account in determining the funding target is applicable in determining the target normal cost.

  5. In the instance of a short plan year, the determination of target normal cost must reflect benefits and expenses expected to accrue during the short plan year. A simple proration is not acceptable. For example, compensation (including bonuses) may not be earned evenly throughout a year and this should be reflected in expected compensation for the plan year. Also benefits may accrue after a participant accrues 1,000 hours of service and this could be considered in the short plan year. And finally expenses, such as payments of PBGC premiums may not occur uniformly throughout the year and the timing of these expenses must also be considered. See 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 has not been fully amortized. See 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)). See 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 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), any shortfall amortization bases for preceding plan years (and any associated shortfall amortization installments) are eliminated. See 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. For this purpose, the prefunding balance is subtracted from the value of plan assets only if an election to use that prefunding balance to offset the minimum required contribution is made for the plan year. However, the funding standard carryover balance is not subtracted from the value of 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. See 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. See 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. A transition rule applies for plan years beginning before 2011, under which only a specified percentage of the plan's funding target is taken into account in determining the plan's shortfall amortization base or whether the plan is exempted from establishing a shortfall amortization base for the plan year. The specified percentage is 92 percent for plan years beginning in 2008, 94 percent for plan years beginning in 2009 and 96 percent for plan years beginning in 2010. The transition rule does not apply to a plan that is not in effect for 2007 or to a plan that is subject to the pre-PPA 2006 deficit reduction contribution rules for 2007 (that is, a plan covering more than 100 participants and with a funded current liability below the applicable threshold). See 26 CFR 1.430(a)-1(h)(4).

  8. 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. See IRC 430(c)(2)(A) and 26 CFR 1.430(a)-1(c)(1).

  9. PRA 2010 provides funding relief for sponsors of DB plans. Under PRA 2010, a plan sponsor may elect 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 falls 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.

  10. 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. See 26 CFR 1.430(h)(2)-1(f)(2).

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

  12. See 26 CFR 1.430(a)-1(b)(2)(ii)(B) for rules for the treatment of installments in subsequent plan years to take into account the proration of installments for short plan years and any change in valuation date.

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. See 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. See 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. See 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). See 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 with respect to a waiver amortization base are determined using the interest rates that apply for the plan year for which the waiver is granted (even though the first installment with respect to the waiver amortization base is not due until the subsequent plan year) and are not redetermined in subsequent plan years to reflect changes in interest rates under IRC 430(h)(2) for the subsequent plan years.

  6. In the case of a plan that received a funding waiver under IRC 412 for a plan year for which IRC 430 was not yet effective with respect to the plan, contribution requirements include the amounts needed to amortize that waiver over the original schedule as previously established. See 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), any waiver amortization bases for preceding plan years (and any associated waiver amortization installments) are eliminated. See IRC 430(e)(5) and 26 CFR 1.430(a)-1(e)(2).

Examination Steps

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

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

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

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

  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 treated as being in at-risk status for a plan year if the plan had 500 or fewer participants on each day during the preceding plan year. See 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:

    1. The FTAP for the preceding plan year is less than 80 percent; and

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

    Note:

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

  4. The 80 percent test is phased in, with 65 percent in effect for the 2008 plan year, 70 percent for the 2009 plan year, 75 percent for the 2010 plan year and 80 percent for the 2011 plan year and thereafter. See IRC 430(i)(4)(B) and 26 CFR 1.430(i)-1(f)(4).

  5. If the plan has been in at-risk status for five consecutive years, including the current plan year, the funding target of the plan 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).

  6. 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 without regard to 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).

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

    1. All employees who are not otherwise assumed to retire 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 earliest retirement date under the plan (but no earlier than the end of the plan year for which the at-risk funding target is being determined), and

    2. All employees must be assumed to elect the optional form of retirement benefit available under the plan at the assumed retirement age which would result in the highest present value of benefits.

    Note:

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

  8. 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 sum of (a) the present value of all benefits which are expected to accrue or to be earned under the plan during the plan year, determined using the additional actuarial assumptions used to determine the funding target, plus (b) the amount of plan-related expenses expected to be paid from plan assets during the plan year; over

    2. The amount of mandatory employee contributions expected to be made during the plan year.

    Note:

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

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

  10. The minimum at-risk funding target is equal to the plan's funding target as determined without taking at-risk status into account. Similarly, the minimum at-risk target normal cost is the plan's target normal cost, 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).

  11. If a plan that is in at-risk status has been in at-risk status for fewer than five consecutive plan years (including the current plan year), then the applicable amounts for the funding target and target normal cost of the plan are determined 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 percent 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, the loading factors are not taken into account if the plan has not been in at-risk status for two or more of the preceding four plan years.

    Note:

    See 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. IRM 4.72.16.7.1, Quarterly Contributions, provides guidance regarding payment of quarterly contributions.

  2. IRM 4.72.16.7.2, Liquidity Requirements, provides 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. See 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 percent of the required annual payment. See 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 percent of the minimum required contribution under IRC 430 for the plan year, or

    2. 100 percent of the minimum required contribution under IRC 430 (determined without regard to 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. For this purpose, minimum required contributions are determined under IRC 430 as of the valuation date for each year, with no adjustment for interest, and without regard to use of the prefunding balance or funding standard carryover balance in the current year or any prior year.

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

  6. Any increases made under IRC 430(c)(7) are to be disregarded for purposes of the determination of the required annual payment with respect to the rules for quarterly installments. See IRC 430(j)(3)(F).

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

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

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

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

    • 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 a 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. For example, if the first day of a plan year is January 15, then a plan month starts on the 15th of each calendar month. The rules for due dates in IRM 4.72.16.7.1 (7), above, apply accordingly. See 26 CFR 1.430(j)-1(e)(7)(ii).

  9. If the plan has a short plan year, then an installment is due 15 days after the close of that short plan year. In addition, an installment is required for each due date that falls within the short plan year. For example, if the short plan year ends before the 15th day of the 4th plan month of the plan year, there will be only one installment for that short plan year, and that installment will be due on the 15th day after the close of the short plan year.

  10. The amount of each installment is equal to the required annual payment for the short plan year divided by the number of required installments during the short plan year.

  11. In the case of a short plan year, 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:

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

  12. If a quarterly installment is not paid in full by its due date, the amount of the underpayment equals the excess of the required installment over the amount (if any) of the installment contributed on or before the due date. See IRC 430(j)(3)(B)(i).

  13. 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.

  14. For underpayment of a quarterly installment, the interest adjustment that applies for the period of underpayment is determined using the plan's effective interest rate plus five percentage points. See IRC 430(j)(3)(A) and 26 CFR 1.430(j)-1(b)(4)(ii).

  15. For underpayment of a quarterly installment, the period for which the interest adjustment is applied on any portion of the underpayment begins on the due date for the installment and ends on the date on which that portion is contributed to or under the plan. See IRC 430(j)(3)(B)(ii) and 26 CFR 1.430(j)-1(b)(4).

  16. Contributions are to be credited against unpaid required installments in the order in which those installments were required to be paid. See IRC 430(j)(3)(B)(iii) and 26 CFR 1.430(j)-1(c)(3)(i).

  17. 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 funding balances.

  18. However, If the election is made after the 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 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 six percent, and the installment is satisfied by an election to apply the funding standard carryover balance that is made on July 1 (2 1/1 months after the April 15 due date). 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, the additional adjustment is applied to determine the amount used to offset the minimum required contribution, but the normal adjustment described above is used 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, Prefunding Balance and Funding Standard Carryover Balance, for restrictions on using a funding balance to satisfy quarterly contribution requirements.

  19. See IRM 4.72.16.7.2, Liquidity Requirements, for additional quarterly contributions that may be necessary in order 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. See IRC 430(j)(4) and 26 CFR 1.430(j)-1(d)(1)(i).

  2. Generally, 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.

  3. A plan sponsor that does not satisfy this liquidity requirement is treated as failing to make the required quarterly contribution. This plan is required to stop making certain types of accelerated payments under IRC 401(a)(32)(B) (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. See 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.

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 those contributions made on or prior to the due date for the plan year, other than employer contributions allocable to the minimum required contribution for previous plan years.

  2. Subject to certain conditions, some or all of the prefunding balance or the funding standard carryover balance may be used 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 failure to meet the minimum funding requirements under IRC 430 is 10 percent 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 of mailing of a notice of deficiency for the 10 percent tax or the date on which the 10 percent tax is assessed. See IRC 4971(b)

  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) (81/2 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 percent of the amount of the unpaid liquidity shortfall is imposed 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).

Lien on Failure to Meet Minimum Funding Requirements

  1. A lien is placed on the employer (and on any member of the employer's controlled group) that is liable for minimum required contributions to the plan under IRC 430 if:

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

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

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

  2. The plan is responsible for reporting 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. See IRC 430(k)(4)(A).

  3. Any lien created under IRC 430(k) may be perfected and enforced only by or through the PBGC. See 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 has enforcement responsibility with respect to a lien, the examining specialist has no action to take with respect to the lien rules under IRC 430(k).

Examination Steps

  1. Taking into account all relevant determinations and adjustments, assess the minimum required contribution determination for the plan year. See Part VIII line 34 of Schedule SB.

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

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

Effective Dates and Reference Sources

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

  2. IRM 4.72.16.9.2, Reference Sources, provides a listing of key references that are used in these guidelines.

Effective Dates

  1. IRC 430 as introduced by PPA 2006 (together with associated amendments under IRC 412) generally applies to plan years beginning on or after January 1, 2008.

  2. Amendments made by MAP-21 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. Amendments made by HATFA 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. The amendments made to IRC 4971 by PPA 2006 section 114 apply to taxable years beginning on or after January 1, 2008, but only with respect to plan years that end with or within any such taxable year. See 26 CFR 54.4971(c)-1(g)(1).

  5. Amendments made by BBA 2015 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(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

    • T.D. 9419, 2008-40 IRB 790 - Mortality Tables for Determining Present Value

    • T.D. 9467, 2009-50 IRB 760 - Measurement of Assets and Liabilities for Pension Funding Purposes, Benefit Restrictions for Underfunded Pension Plans

    • T.D. 9732, 2015-39 IRB 371 Determination of Minimum Required Pension Contributions

    • REG-108508-08, 2008-19 IRB 923 - Determination of Minimum Required Pension Contributions

    • Rev. Proc. 2008-62, 2008-42 IRB 935 - procedure by which the sponsor of a DB plan, other than a multiemployer plan, may request and obtain approval for the use of plan-specific substitute mortality tables in accordance with IRC 430(h)(3)(C)

    • Rev. Proc. 2017-55, 2017-43 IRB 373 - update of Rev. Proc. 2008-62

    • Rev. Rul. 95-31, 1995-15 IRB 7 - Guidance regarding liquidity requirements

    • 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.

    • 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