50544 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

1Section 302 of the Employee Retirement Income 

Security Act of 1974, as amended (ERISA) sets forth 

funding rules that are parallel to those in section 

412 of the Code, section 303 of ERISA sets forth 

additional funding rules for defined benefit plans 

(other than multiemployer plans) that are parallel 

to those in section 430 of the Code, and section 

206(g) of ERISA sets forth funding-based limitations 

for defined benefit plans (other than multiemployer 

plans) that are parallel to those in section 436 of 

the Code. Under section 101 of Reorganization Plan 

No. 4 of 1978 (43 FR 47713) and section 302 of 

ERISA, the Secretary of the Treasury has 

interpretive jurisdiction over the subject matter 

addressed in these proposed regulations for 

purposes of ERISA, as well as the Code. Thus, these 

proposed Treasury regulations issued under 

sections 430(f) and 436 of the Code apply as well 

for purposes of ERISA sections 303(f) and 206(g), 

respectively. 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–113891–07] 

RIN 1545–BG72 

Benefit Restrictions for Underfunded 

Pension Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations providing 

guidance regarding the use of certain 

funding balances maintained for defined 

benefit pension plans and regarding 

benefit restrictions for certain 

underfunded defined benefit pension 

plans. The proposed regulations reflect 

changes made by the Pension Protection 

Act of 2006. These regulations affect 

sponsors, administrators, participants, 

and beneficiaries of single employer 

defined benefit pension plans. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by November 29, 2007. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–113891–07), room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. to 4 

p.m. to CC:PA:LPD:PR (REG–113891– 

07), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–113891– 

07). 

FOR FURTHER INFORMATION CONTACT: 

Lauson C. Green or Linda S.F. Marshall 

at (202) 622–6090; concerning 

submissions and requests for a public 

hearing, contact Kelly Banks at (202) 

622–7180 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collections of information should be 

sent to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

October 30, 2007. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collections of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

The collection of information in this 

proposed regulation is in § 1.430(f)–1(f) 

and §§ 1.436–1(f) and 1.436–1(h). This 

information is required in order for a 

qualified defined benefit plan’s enrolled 

actuary to provide a timely certification 

of the plan’s AFTAP for each plan year 

to avoid certain benefit restrictions. In 

addition, these proposed regulations 

provide for several written elections to 

be made by the plan sponsor upon 

occasion. This information is voluntary 

to obtain a benefit. The likely 

respondents are qualified retirement 

plan sponsors and enrolled actuaries. 

Estimated total annual reporting 

burden: 60,000 hours. 

Estimated average annual burden 

hours per respondent: 0.75 hours. 

Estimated number of respondents: 

80,000. 

Estimated annual frequency of 

responses: occasional. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains proposed 

Income Tax Regulations (26 CFR part 1) 

under sections 430(f) and 436, as added 

to the Code by the Pension Protection 

Act of 2006 (PPA ’06), Public Law 109– 

280, 120 Stat. 780. 

Section 412 contains minimum 

funding rules that generally apply to 

defined benefit plans.1 The minimum 

funding rules that apply specifically to 

single employer defined benefit plans 

(including multiple employer plans 

within the meaning of section 413(c)) 

are set forth in new section 430. 

Section 430 generally provides that 

the minimum required contribution for 

a year is the sum of the target normal 

cost for the year and the shortfall and 

waiver amortization charges. Under 

section 430(f)(3), certain funding 

balances referred to as the prefunding 

balance and the funding standard 

carryover balance are permitted to be 

used to reduce the otherwise applicable 

minimum required contribution for a 

plan year in certain situations. Under 

section 430(f)(7), the funding standard 

carryover balance is based on the 

funding standard account credit balance 

as determined under section 412 for a 

plan as of the last day of the last plan 

year beginning in 2007. Under section 

430(f)(6), the prefunding balance 

represents the accumulation of the 

contributions that an employer makes 

for a plan year that exceed the minimum 

required contribution for the year. Thus, 

an employer that makes additional 

contributions for a plan year is 

permitted in certain circumstances to 

use those excess contributions in order 

to satisfy the minimum funding 

requirement in a subsequent plan year. 

The treatment of these balances under 

section 430 reflects congressional 

concern with the treatment of a funding 

standard account credit balance under 

the section 412 rules in effect prior to 

PPA ’06. Accordingly, section 430(f)(3) 

sets forth new limits on the ability of a 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 50545 

poorly funded plan to use the 

prefunding balance and the funding 

standard carryover balance for a plan 

year. In addition, section 430(f)(4) 

requires that the prefunding balance and 

the funding standard carryover balance 

be subtracted from the value of plan 

assets for certain purposes (including 

the determination of the plan’s funding 

target attainment percentage (FTAP), as 

defined under section 430(d)(2)) and 

section 430(f)(8) requires that the 

prefunding balance and the funding 

standard carryover balance be adjusted 

for actual investment return on the plan 

assets. In order to give employers the 

opportunity to minimize the impact of 

the requirement to subtract the 

prefunding balance and funding 

standard carryover balance from the 

plan assets, section 430(f)(5) permits an 

employer to elect to reduce the 

balances. 

Section 401(a)(29) requires that a 

defined benefit plan (other than a 

multiemployer plan) satisfy the 

requirements of section 436. Section 436 

sets forth a series of limitations on the 

accrual and payment of benefits under 

an underfunded plan. Under section 

436(g), these limitations (other than the 

limitations on accelerated benefit 

payments under section 436(d)) do not 

apply to a plan for the first 5 plan years 

of the plan, taking into account any 

predecessor plan. 

Section 436(b) sets forth a limitation 

on plant shutdown and other 

unpredictable contingent event benefits 

in situations where the plan’s adjusted 

funding target attainment percentage 

(AFTAP) for the plan year is less than 

60 percent or would be less than 60 

percent taking into account the 

occurrence of the event. For this 

purpose, an ‘‘unpredictable contingent 

event benefit’’ means any benefit 

payable solely by reason of (1) a plant 

shutdown (or a similar event) or (2) an 

event other than attainment of age, 

performance of service, receipt or 

derivation of compensation, or the 

occurrence of death or disability. Under 

section 436(b)(2), the limitation does not 

apply for a plan year if the plan sponsor 

makes a specified contribution (in 

addition to any minimum required 

contribution). If the AFTAP for a plan 

year is less than 60 percent, then the 

specified contribution is equal to the 

amount of the increase in the plan’s 

funding target for the plan year 

attributable to the occurrence of the 

event. If the AFTAP for a plan year is 

60 percent or more but would be less 

than 60 percent taking into account the 

occurrence of the event, then the 

specified contribution is the amount 

sufficient to result in an AFTAP of 60 

percent taking into account the 

occurrence of the event. 

Under section 436(c), a plan 

amendment that has the effect of 

increasing the liabilities of the plan by 

reason of any increase in benefits 

(including changes in vesting) may not 

take effect if the plan’s AFTAP for the 

plan year is less than 80 percent or 

would be less than 80 percent taking 

into account the amendment. Under 

section 436(c)(2), the limitation does not 

apply for a plan year if the plan sponsor 

makes a specified contribution (in 

addition to any minimum required 

contribution). If the plan’s AFTAP for 

the plan year is less than 80 percent, 

then the specified contribution is equal 

to the amount of the increase in the 

plan’s funding target for the plan year 

attributable to the amendment. If the 

plan’s AFTAP for the plan year is 80 

percent or more but would be less than 

80 percent taking into account the 

amendment, then the specified 

contribution is the amount sufficient to 

result in an AFTAP of 80 percent taking 

into account the amendment. In 

addition, under section 436(c)(3), the 

limitation does not apply to an 

amendment that provides for a benefit 

increase under a formula not based on 

compensation, but only if the rate of 

increase does not exceed the 

contemporaneous rate of increase in 

average wages of the participants 

covered by the amendment. 

Under section 436(d), a plan is 

required to set forth certain limitations 

on accelerated benefit distributions. If 

the plan’s AFTAP for a plan year is less 

than 60 percent, the plan must not make 

any prohibited payments after the 

valuation date for the plan year. If the 

plan’s AFTAP for a plan year is at least 

60 percent but is less than 80 percent, 

the plan must not pay any prohibited 

payment to the extent the payment 

exceeds the lesser of (1) 50 percent of 

the amount otherwise payable under the 

plan and (2) the present value of the 

maximum PBGC guarantee with respect 

to a participant. In addition, if the plan 

sponsor is in bankruptcy proceedings, 

the plan may not pay any prohibited 

payment unless the plan’s enrolled 

actuary certifies that the AFTAP of the 

plan is at least 100 percent. However, 

section 436(d) does not apply to a plan 

for a plan year if the terms of the plan 

provide for no benefit accruals with 

respect to any participant for the period 

beginning on September 1, 2005, and 

extending throughout the plan year. 

Under section 436(d)(5), a ‘‘prohibited 

payment’’ is (1) any payment, in excess 

of the monthly amount paid under a 

single life annuity (plus any social 

security supplements that are provided 

under the plan), to a participant or 

beneficiary, (2) any payment for the 

purchase of an irrevocable commitment 

from an insurer to pay benefits (an 

annuity contract), or (3) any other 

payment specified by the Secretary by 

regulations. 

Under section 436(e), a plan is 

required to provide that if the plan’s 

AFTAP is less than 60 percent for a plan 

year, all future benefit accruals under 

the plan must cease as of the valuation 

date for the plan year. Under section 

436(e)(2), the limitation ceases to apply 

with respect to any plan year, effective 

as of the first day of the plan year, if the 

plan sponsor makes a contribution (in 

addition to any minimum required 

contribution for the plan year) equal to 

the amount sufficient to result in an 

AFTAP of 60 percent. 

Section 436(f) sets forth a series of 

rules under which the limitations of 

section 436 will not apply to a plan. 

Under section 436(f)(1), an employer is 

permitted to provide security to the plan 

(in the form of a surety bond, cash, or 

other forms satisfactory to the Treasury 

Department and the parties involved) 

that is treated as an asset of the plan for 

purposes of determining the plan’s 

AFTAP. Under section 436(f)(2), if an 

employer uses the option in section 

436(b)(2), 436(c)(2), or 436(e)(2) to make 

the specified contribution that would 

avoid a limitation under section 436, the 

specified contribution must be an actual 

contribution and the employer may not 

use a prefunding balance or funding 

standard carryover balance in lieu of 

making the specified contribution. In 

addition, a contribution to avoid a 

benefit limitation is disregarded in 

determining whether the minimum 

required contribution under section 430 

has been made and in determining the 

plan’s prefunding balance. 

Section 436(f)(3) describes certain 

situations in which an employer is 

deemed to have made the election in 

section 430(f)(5) to reduce the plan’s 

funding standard carryover balance or 

prefunding balance. Such an election 

has the effect of increasing the plan’s 

FTAP (because the result of the election 

is a higher asset value used to determine 

the FTAP) and could lead to the plan 

not being subject to a benefit limitation 

under section 436. In particular, if the 

limitation under section 436(d) would 

otherwise apply to a plan, the plan 

sponsor is treated as having made an 

election (a deemed election) to reduce 

any prefunding balance or funding 

standard carryover balance by the 

amount necessary to prevent the benefit 

limitation from applying. A comparable 

rule applies to the other benefit 

limitations under sections 436(b), 


pwalker on PROD1PC71 with PROPOSALS3
50546 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

2Proposed regulation §§ 1.430(h)(3)–1 and 

1.430(h)(3)–2, relating to the mortality tables used 

to determine liabilities under section 430(h)(3), 

were issued May 29, 2007 (REG–143601–06, 72 FR 

29456). 

436(c), and 436(e), but only in the case 

of a plan maintained pursuant to a 

collective bargaining agreement. In 

either case, this deeming rule applies 

only if the prefunding balance and 

funding standard carryover balances are 

large enough to avoid the application of 

a section 436 limitation. 

Section 436(h) sets forth a series of 

presumptions that apply during the 

portion of the plan year that is before 

the plan’s enrolled actuary has certified 

the plan’s AFTAP for the year. Under 

section 436(h)(1), if a plan was subject 

to a limitation under section 436(b), 

436(c), 436(d), or 436(e) for the plan 

year preceding the current plan year, the 

plan’s AFTAP for the current year is 

presumed to be the same as for the 

preceding year until the plan’s enrolled 

actuary certifies the plan’s AFTAP for 

the current year. Under section 

436(h)(3), if any of these limitations did 

not apply to the plan for the preceding 

year, but the plan’s AFTAP for the 

preceding year was within 10 

percentage points of the limitation’s 

threshold, the plan’s AFTAP is 

presumed to be reduced by 10 

percentage points as of the first day of 

the 4th month of the current plan year, 

unless the plan’s enrolled actuary has 

certified the plan’s AFTAP for the 

current year by that day (and that day 

is deemed to be the plan’s valuation 

date for purposes of applying the benefit 

limitations). If the plan’s enrolled 

actuary has not certified the plan’s 

AFTAP by the first day of the 10th 

month of the current plan year, section 

436(h)(2) provides that the plan’s 

AFTAP is conclusively presumed to be 

less than 60 percent as of that day (and 

that day is deemed to be the valuation 

date for purposes of applying the benefit 

limitations). 

Under section 436(i), unless the plan 

provides otherwise, if a limitation on 

prohibited payments or future benefit 

accruals under section 436(d) or (e) 

ceases to apply to a plan, all such 

payments and benefit accruals resume, 

effective as of the day following the 

close of the limitation period. 

Section 436(j) provides definitions 

that are used under section 436, 

including the plan’s AFTAP. In general, 

the plan’s AFTAP is based on the plan’s 

FTAP for the plan year. However, the 

plan’s AFTAP is determined by adding 

the aggregate amount of purchases of 

annuities for employees other than 

highly compensated employees (within 

the meaning of section 414(q)) made by 

the plan during the two preceding plan 

years to the numerator and the 

denominator of the fraction used to 

determine the FTAP. 

In addition, section 436(j)(3) provides 

a special rule which applies to certain 

well-funded plans under which the 

plan’s FTAP for purposes of section 436 

(and hence the plan’s AFTAP) is 

determined by using the plan’s assets 

without reduction for the prefunding 

balance and the funding standard 

carryover balance. Section 436(j)(3)(B) 

sets forth a transition rule for 

determining eligibility for this special 

rule. 

Section 436(k) provides that, for plan 

years that begin in 2008, the 

determination of the plan’s FTAP for the 

preceding year is to be made pursuant 

to guidance issued by the Secretary. 

Explanation of Provisions 

I. Section 430(f)—Effect of Prefunding 

Balance and Funding Standard 

Carryover Balance 

A. Overview 

1. In general. The proposed 

regulations would be the second in a 

series of proposed regulations under 

new section 430.2 These regulations 

would provide guidance on the 

application of section 430(f), relating to 

the establishment and maintenance of a 

funding standard carryover balance and 

a prefunding balance for purposes of 

sections 430 and 436. The Treasury 

Department and the IRS intend to issue 

additional proposed regulations relating 

to other portions of the rules under 

section 430 later in 2007. 

2. Multiple employer plans. The 

proposed regulations under section 

430(f) apply to plans subject to section 

412 that are maintained by one 

employer or a controlled group of 

employers and to multiple employer 

plans within the meaning of section 

413(c). In the case of a multiple 

employer plan to which section 

413(c)(4)(A) applies, the rules under the 

proposed regulations would be applied 

separately for each employer under the 

plan, as if each employer maintained a 

separate plan. Thus, each employer 

under such a multiple employer plan 

may have a separate funding standard 

carryover balance and a prefunding 

balance for the plan. In the case of a 

multiple employer plan to which 

section 413(c)(4)(A) does not apply (that 

is, a plan described in section 

413(c)(4)(B) that has not made the 

election for section 413(c)(4)(A) to 

apply), the proposed regulations under 

section 430(f) would apply as if all 

participants in the plan were employed 

by a single employer. 

B. Establishment of Prefunding Balance 

and Funding Standard Carryover 

Balance 

The proposed regulations would 

provide that an employer is permitted to 

establish a prefunding balance for a plan 

that represents the accumulation of 

contributions made for plan years 

beginning on or after the effective date 

of section 430 with respect to the plan 

(the first effective plan year) that are in 

excess of the minimum required 

contributions (determined without 

regard to the prefunding balance and 

funding standard carryover balance) for 

those plan years. Specifically, for the 

first effective plan year of a plan, the 

prefunding balance is initialized at zero 

dollars and an employer is permitted to 

elect to add some or all of the excess 

contributions made to a plan for each 

plan year to the prefunding balance as 

of the first day of the next plan year. For 

this purpose, the excess contributions 

are generally determined as the amount 

by which the employer contributions to 

the plan for the plan year exceed the 

minimum required contribution for the 

plan year, with appropriate adjustments 

for interest determined at the effective 

interest rate under section 430(h)(2)(A). 

However, the proposed regulations 

would provide that any contribution 

that is made to avoid the application of 

a benefit limitation under section 436 is 

not taken into account in determining 

the amount of excess contributions. 

The proposed regulations would also 

provide that the minimum required 

contribution for purposes of 

determining the amount of excess 

contributions for the year is determined 

without regard to any offset of the 

minimum required contribution for the 

year as a result of the use of the 

prefunding or funding standard 

carryover balances. Accordingly, an 

employer would not be permitted to add 

to the prefunding balance any amount of 

contributions that are ‘‘excess’’ by 

reason of an offset of the minimum 

required contribution for the year 

through the use of the prefunding 

balance or funding standard carryover 

balance. This prohibition precludes an 

employer from avoiding the requirement 

to adjust the prefunding balance and 

funding standard carryover balance by 

the actual rate of return on plan assets 

in the situation where the plan assets 

have experienced a loss (or a rate of 

return that is lower than the effective 

interest rate that is used for interest 

adjustments with respect to minimum 

required contributions for the plan 

year). 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 50547 

The proposed regulations would 

provide that the funding standard 

carryover balance is initialized as the 

balance in the funding standard account 

as of the last day of the last plan year 

before section 430 applies to a plan (the 

pre-effective plan year). This is 

generally the last plan year beginning in 

2007, but could be a later year in the 

case of a plan to which a delayed 

effective date applies under the rules of 

sections 104 through 106 of PPA ’06. 

C. Maintenance of Prefunding Balance 

and Funding Standard Carryover 

Balance 

The proposed regulations would 

provide that a plan’s prefunding balance 

and funding standard carryover balance 

as of the beginning of a plan year are 

adjusted to reflect the actual rate of 

return on plan assets for the plan year. 

This calculation of the actual rate of 

return on plan assets for the plan year 

is determined on the basis of fair market 

value and must take into account the 

amount and timing of all contributions, 

distributions, and other plan payments 

made during the year. The adjustment 

for investment return is applied to the 

prefunding balance and funding 

standard carryover balance after any 

reductions to those balances as 

described under the following two 

headings in this preamble. In addition, 

the proposed regulations would provide 

special rules in the case of a plan with 

a valuation date that is not the first day 

of the plan year. 

D. Use of Prefunding Balance and 

Funding Standard Carryover Balance To 

Offset Minimum Funding Requirements 

for a Year 

The proposed regulations would 

provide that the employer may elect to 

use some or all of the prefunding 

balance or funding standard carryover 

balance to offset the otherwise 

applicable minimum required 

contribution for a plan year, provided 

that the plan met a funding percentage 

threshold for the preceding plan year. 

Specifically, an employer is permitted 

to make such an election only if the 

plan’s prior year funding ratio was at 

least 80 percent. For this purpose, the 

plan’s prior year funding ratio generally 

is a fraction (expressed as a percentage), 

the numerator of which is the value of 

plan assets on the valuation date for the 

preceding plan year, reduced by the 

amount of any prefunding balance (but 

not the amount of any funding standard 

carryover balance), and the denominator 

of which is the funding target of the 

plan for the preceding plan year 

(determined without regard to the atrisk rules of section 430(i)(1)). 

The proposed regulations would 

provide a transition rule to determine a 

plan’s prior year funding ratio for the 

first effective plan year. Under this 

transition rule, the current liability for 

the plan for the pre-effective plan year 

is substituted for the funding target of 

the plan for that plan year. In addition, 

the transition rule provides that the 

value of plan assets is determined under 

section 412(c)(2) as in effect for that preeffective plan year, except that the value 

of plan assets must be limited so that it 

is not less than 90 percent and not more 

than 110 percent of the fair market value 

of plan assets. 

The proposed regulations would 

reflect the rule in section 430(f)(3)(B) 

that requires the plan sponsor to have 

reduced the funding standard carryover 

balance in full (either by using the 

funding standard carryover balance to 

offset the minimum required 

contribution for a year or through a 

voluntary reduction under section 

430(f)(5)) before the prefunding balance 

is permitted to be used to offset a 

current year minimum funding 

requirement. 

E. Subtraction From Plan Assets and 

Employer Election To Reduce Balances 

The proposed regulations would 

reflect the rules under section 430(f)(4) 

which provide that the prefunding 

balance and funding standard carryover 

balance are subtracted from the plan 

assets for certain purposes. These 

include the determination of the FTAP, 

which is also relevant for purposes of 

applying the benefit limitations of 

section 436. 

In accordance with section 

430(f)(4)(A), the proposed regulations 

would provide that the amount of the 

prefunding balance is subtracted from 

the value of plan assets for purposes of 

determining whether a plan is exempt 

from the requirement to establish a new 

shortfall amortization base under 

section 430(c)(5) only if an election to 

use the prefunding balance to offset the 

minimum required contribution is made 

for the plan year. In addition, pursuant 

to section 430(f)(4)(B)(ii), the proposed 

regulations would provide that the 

prefunding balance and funding 

standard carryover balance are not 

subtracted from plan assets for purposes 

of determining the funding shortfall 

under section 430(c)(4) to the extent that 

there is a binding written agreement 

with the Pension Benefit Guaranty 

Corporation (PBGC) which provides that 

all or a portion of those balances cannot 

be used to offset the minimum required 

contribution for a plan year. For this 

purpose, an agreement with the PBGC is 

taken into account with respect to a 

plan year only if the agreement was 

executed prior to the valuation date for 

the plan year. 

In addition, section 436(j) sets forth 

an exception from the requirement to 

subtract the plan’s prefunding balance 

and funding standard carryover balance 

from the value of plan assets in 

determining a plan’s FTAP for purposes 

of the benefit limitation rules of section 

436 provided that the plan’s FTAP 

would meet certain standards if it were 

calculated without subtracting the 

balances from plan assets. 

Section 430(f)(5) provides that an 

employer may elect to reduce the 

amount of the prefunding balance and 

the funding standard carryover balance. 

This will have the effect of increasing 

the plan assets for various purposes. For 

example, the increase in plan assets will 

increase the FTAP, which may allow the 

plan to avoid the application of section 

436 limitations. The proposed 

regulations would reflect the rule in 

section 430(f)(5)(B) that requires the 

employer to reduce the funding 

standard carryover balance in full 

(either by using the funding standard 

carryover balance to offset the minimum 

required contribution for a year or 

through a voluntary reduction under 

section 430(f)(5)) before any reduction is 

permitted for the prefunding balance. 

F. Elections Under Section 430(f) 

The proposed regulations would 

provide that an election under section 

430(f) is made by the plan sponsor by 

providing written notification of the 

election to the plan’s enrolled actuary 

and the plan administrator, must be 

irrevocable when made, and must 

satisfy certain timing rules. The written 

notification must set forth the relevant 

details of the election, including the 

specific amounts involved in the 

election with respect to the prefunding 

balance and funding standard carryover 

balance. An election under section 

430(f) generally must be made on or 

before the due date (with extensions) for 

the filing of the plan’s Form 5500 

‘‘Annual Return/Report of Employee 

Benefit Plan’’ for the plan year to which 

the election relates (or, in the case of a 

plan not required to file a Form 5500 for 

the plan year, before the last day of the 

seventh month after the end of the plan 

year to which the election relates). For 

this purpose, an election to add to the 

prefunding balance relates to the plan 

year for which excess contributions 

were made. However, the proposed 

regulations would require any section 

430(f)(5) election to reduce a portion of 

the prefunding balance or funding 

standard carryover balance for a plan 

year to be made by the end of the plan 


pwalker on PROD1PC71 with PROPOSALS3
50548 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

3The PBGC has informed the IRS and the 

Treasury Department that it expects similarly to 

treat such an automatic restoration of missed 

benefit accruals as a plan amendment. 

year to which the election relates. For 

example, in the case of a calendar year 

plan required to file Form 5500, an 

election to add to the prefunding 

balance as of the first day of the 2010 

plan year (in an amount not in excess 

of the 2009 interest-adjusted excess 

contributions), must be made no later 

than the due date for filing the 2009 

Form 5500 (with extensions) while an 

election to reduce the prefunding 

balance as of the first day of the 2010 

plan year must be made by the end of 

the 2010 plan year. In both cases, the 

election would be reported on the 2010 

Form 5500 (Schedule SB) that would be 

filed in 2011. 

The proposed regulations would 

provide that, for purposes of elections 

under section 430(f), any reference in 

the proposed regulations to the plan 

sponsor generally means the employer 

or employers responsible for making 

contributions to the plan. However, in 

the case of elections under section 

430(f) for multiple employer plans to 

which section 413(c)(4)(A) does not 

apply, any reference in the proposed 

regulations to the plan sponsor means 

the plan administrator within the 

meaning of section 414(g). 

II. Section 436—Limits on Benefits and 

Benefit Accruals Under Single Employer 

Defined Benefit Plans 

A. Overview and General Rules 

1. In general. The proposed 

regulations would set forth the rules 

that a defined benefit pension plan that 

is subject to section 412 and that is not 

a multiemployer plan must satisfy in 

order to comply with the requirement in 

section 401(a)(29) that the plan meet the 

requirements of section 436. This 

requirement is a qualification 

requirement. A plan satisfies the 

requirements of section 436 only if the 

plan meets the requirements of these 

regulations. 

2. New plans. In accordance with 

section 436(g), the proposed regulations 

would provide that the limitations 

described in sections 436(b), 436(c), and 

436(e) do not apply to a plan for the first 

five plan years of the plan. For purposes 

of applying this new plan rule, plan 

years under a plan are aggregated with 

plan years under a predecessor plan. 

Thus, the only benefit limitation that 

could apply under a plan that is not a 

successor plan during the first five years 

of its existence is the section 436(d) 

limitation applicable to accelerated 

benefit payments (such as single sum 

distributions). 

3. Multiple employer plans. The 

proposed regulations under section 436 

apply to plans maintained by one 

employer (including a controlled group 

of employers) and to multiple employer 

plans (within the meaning of section 

413(c)). In the case of a multiple 

employer plan to which section 

413(c)(4)(A) applies, the rules under the 

proposed regulations would be applied 

separately for each employer under the 

plan, as if each employer maintained a 

separate plan. Thus, the benefit 

limitations under section 436 could 

apply differently to employees of 

different employers under such a 

multiple employer plan. In the case of 

a multiple employer plan to which 

section 413(c)(4)(A) does not apply (that 

is, a plan described in section 

413(c)(4)(B) that has not made the 

election for section 413(c)(4)(A) to 

apply), the proposed regulations under 

section 436 would apply as if all 

participants in the plan were employed 

by a single employer. 

4. Treatment of plan as of close of 

prohibited or cessation period. The 

proposed regulations would provide 

that, if a limitation on accelerated 

benefit payments under section 436(d) 

(such as single sum distributions) 

applies to a plan as of a section 436 

measurement date, but that limit 

subsequently ceases to apply to the plan 

as of a later section 436 measurement 

date, then the limitation does not apply 

to benefits with annuity starting dates 

that are on or after that later section 436 

measurement date. In addition, the 

proposed regulations would provide 

that, if a limitation on benefit accruals 

under section 436(e) applies to a plan, 

unless the plan provides otherwise, 

benefit accruals under the plan will 

resume effective as of the section 436 

measurement date as of which benefit 

accruals are no longer restricted. 

With respect to a participant who had 

an annuity starting date within a period 

during which the accelerated benefit 

payment limitation rules of section 

436(d) applied to the plan, once the 

limitation ceases to apply, the 

participant’s benefits will continue to be 

paid in the form previously elected 

unless the plan permits the participant 

to be offered a new election which 

would modify the prior election. The 

proposed regulations would permit a 

plan to provide that the participant will 

be offered the opportunity to have a new 

election under which the form of benefit 

previously elected may be modified, 

subject to applicable qualification 

requirements, and that new election will 

constitute a new annuity starting date 

for purposes of section 417. Similarly, a 

plan is permitted to be amended to 

provide that any benefit accruals that 

were limited under the rules of section 

436(e) will be credited under the plan 

once the limitation no longer applies, 

subject to applicable qualification 

requirements. If a plan provides for the 

restoration of benefit accruals for the 

period of the limitation under 

preexisting plan terms, the plan is 

treated as having adopted an 

amendment that has the effect of 

increasing liabilities under the plan if 

the period of the limitation exceeded 12 

months. Whether a plan is amended or 

is treated as having been amended as 

described above, the amendment or preexisting plan provision is subject to the 

limitations of section 436(c).3

In addition, the proposed regulations 

would provide that a plan is permitted 

to be amended to provide that any 

unpredictable contingent event benefits 

that were limited under the rules of 

section 436(b) will be paid or reinstated 

when the limitation no longer applies, 

subject to applicable qualification 

requirements. Any such amendment is 

subject to the limitations of section 

436(c). A plan is not permitted to 

provide for restoration of any such 

unpredictable contingent event benefits 

without an amendment that complies 

with section 436(c). 

5. Deemed election to reduce 

prefunding and funding standard 

carryover balances. The proposed 

regulations would provide that, if a 

limitation on accelerated benefit 

payments under section 436(d) would 

otherwise apply to a plan, the plan 

sponsor is treated as having made an 

election under section 430(f) to reduce 

the prefunding balance or funding 

standard carryover balance by such 

amount as is necessary for the AFTAP 

to be at or above the applicable 

threshold (60, 80, or 100 percent, as the 

case may be) in order for the benefit 

limitation not to apply to the plan. In 

such a case, the plan sponsor is treated 

as having made that election on the 

section 436 measurement date as of 

which the benefit limitation would 

otherwise apply. This deemed election 

applies if the plan provides for 

accelerated distributions that would be 

limited in a plan year, regardless of 

whether a plan participant is eligible or 

elects to receive such a distribution 

during the plan year (but does not apply 

if the plan does not provide for any 

accelerated distributions that are subject 

to the benefit limitation). However, the 

deemed reduction applies with respect 

to this limitation only if the prefunding 

and funding standard carryover 

balances to be reduced are large enough 


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4See also Notice 2007–14, IRB 501, (see 

§ 601.601(d)(2) of this chapter) requesting 

comments on the types of benefits that are 

permitted to be provided in a qualified defined 

benefit plan, including benefits payable in the event 

of a plant shutdown or similar event. 

to avoid the application of the 

limitation. Thus, no reduction of 

prefunding and funding standard 

carryover balances is required if the 

limitation would still apply for a year 

even if those balances were reduced to 

zero. 

In addition, the proposed regulations 

would provide that, in the case of a plan 

maintained pursuant to one or more 

collective bargaining agreements 

between an employee representative 

and one or more employers in which a 

benefit limitation under section 436(b), 

436(c), or 436(e) would otherwise apply 

to the plan, the employer is treated for 

purposes of section 436 as having made 

an election under section 430(f) to 

reduce the prefunding balance or 

funding standard carryover balance by 

such amount as is necessary for the 

AFTAP to be at or above the applicable 

threshold for the benefit limitation not 

to apply to the plan, taking into account 

the unpredictable contingent event 

benefits or plan amendment, as 

applicable. The proposed regulations 

would provide that, in the case of a plan 

with respect to which collective 

bargaining agreements apply to some, 

but not all, of the plan participants, the 

plan is considered a collectively 

bargained plan for purposes of this 

provision if at least 25 percent of the 

participants in the plan are members of 

the collective bargaining units for whom 

the benefit levels under the plan are 

specified under the collective 

bargaining agreements. As in the case of 

the deemed reduction in funding 

balances for the accelerated benefit 

distributions under section 436(d), the 

deemed reduction applies only if the 

prefunding and funding standard 

carryover balances to be reduced are 

large enough to avoid the application of 

the limitation under section 436(b), 

436(c), or 436(e), as applicable. 

If the mandatory reduction of funding 

balances applies to a plan, the employer 

is treated as having made that election 

on the date as of which the applicable 

benefit restriction would otherwise 

apply. In addition, the proposed 

regulations would provide that, if a plan 

(whether or not collectively bargained) 

is presumed to have an AFTAP of less 

than 60 percent under the section 436(h) 

presumption rules, then the plan is 

treated as if the plan’s funding standard 

carryover balance and prefunding 

balance are insufficient to increase the 

plan’s AFTAP to the threshold 

percentage. 

6. Section 436 measurement date. The 

‘‘section 436 measurement date’’ is a 

defined term under the proposed 

regulations that is used to describe the 

date that stops or starts the application 

of the limitations of sections 436(d) and 

436(e) and is also used for calculations 

with respect to applying the limitations 

of sections 436(b) and 436(c). The 

regulations would provide that the date 

of the enrolled actuary’s certification of 

the AFTAP for the plan year is a section 

436 measurement date if it occurs 

within the first nine months of the plan 

year. If the date of an enrolled actuary’s 

certification of the AFTAP is between 

the first day of the 10th month of a plan 

year and the last day of that plan year, 

that date is not a section 436 

measurement date for purposes of the 

limitations of section 436(d) or 436(e) 

because, in that case, the plan’s AFTAP 

is presumed to be under 60 percent 

(however, receipt of the enrolled 

actuary’s certification during that period 

impacts the plan’s presumed 

‘‘carryover’’ AFTAP for the following 

year). The proposed regulations would 

provide that a section 436 measurement 

date occurs where there is a change in 

the plan’s AFTAP under the 

presumption rules of section 436(h). In 

addition, the proposed regulations 

would provide a series of rules in cases 

where the enrolled actuary’s 

certification of the AFTAP for a plan 

year is made after the end of the plan 

year, as described below under the 

heading ‘‘Presumed underfunding for 

purposes of benefit limitations.’’

B. Limitation on Plant Shutdown and 

Other Unpredictable Contingent Event 

Benefits 

In accordance with section 436(b), the 

proposed regulations would provide 

that a plan that provides for any 

unpredictable contingent event benefit 4

must provide that the benefit will not be 

paid to a plan participant during a plan 

year if the AFTAP for the plan year is 

less than 60 percent (or is 60 percent or 

more but would be less than 60 percent 

if the benefits attributable to the 

unpredictable contingent event were 

taken into account in determining the 

AFTAP). However, this prohibition on 

payment of unpredictable contingent 

event benefits no longer applies for a 

plan year, effective as of the first day of 

the plan year, if the employer makes the 

contribution specified in section 

436(b)(2), as described in paragraph F in 

this preamble. 

For this purpose, the proposed 

regulations would provide that an 

‘‘unpredictable contingent event 

benefit’’ means any benefit or increase 

in benefits to the extent the benefit or 

increase would not be payable but for 

the occurrence of an unpredictable 

contingent event, and an ‘‘unpredictable 

contingent event’’ means a plant 

shutdown (whether full or partial) or 

similar event, or an event other than the 

attainment of any age, performance of 

any service, receipt or derivation of any 

compensation, or the occurrence of 

death or disability. Thus, for example, if 

a plan provides for an unreduced early 

retirement benefit upon the occurrence 

of an event other than the attainment of 

any age, performance of any service, 

receipt or derivation of any 

compensation, or the occurrence of 

death or disability, then that unreduced 

early retirement benefit is an 

unpredictable contingent event benefit 

to the extent of any portion of the 

benefit that would not be payable but 

for the occurrence of the event, even if 

the remainder of the benefit is payable 

without regard to the occurrence of the 

event. Similarly, an unpredictable 

contingent event benefit under the 

proposed regulations includes a benefit 

payable upon the presence of 

circumstances specified in the plan 

(other than the attainment of any age, 

performance of any service, receipt or 

derivation of any compensation, or the 

occurrence of death or disability), so 

that a plan that provides those benefits 

upon a participant’s severance from 

employment in those circumstances, but 

not upon a severance from employment 

that does not involve those 

circumstances, is providing an 

unpredictable contingent event benefit. 

Unpredictable contingent event 

benefits attributable to a plant shutdown 

or other unpredictable contingent event 

that occurred within a period during 

which no limitation under section 

436(b) applied to the plan are not 

affected by the limitation as it applies in 

a subsequent period. For example, if a 

plant shutdown occurs in 2010 and a 

plan’s funded status is such that its 

shutdown benefits are not subject to the 

limitation for that plan year, benefits 

paid pursuant to that shutdown are 

permitted to be paid in a later plan year 

even if the plan’s AFTAP for the 

subsequent year is less than 60 percent. 

Conversely, if a plant shutdown occurs 

in 2010 and a plan’s funded status is 

such that its shutdown benefits are 

subject to the limitation under section 

436(b) for that plan year and cannot be 

paid, those shutdown benefits related to 

the 2010 plant shutdown are not 

permitted to be paid in a later year even 

if the plan’s AFTAP for the later year is 

at or above the 60 percent threshold for 

the section 436(b) limitation (subject to 


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the rules permitting plan amendments 

to reinstate previously restricted 

benefits, including unpredictable 

contingent event benefits, as described 

in paragraph II.A.4 of this preamble). 

C. Limitations on Plan Amendments 

Increasing Liability for Benefits 

In accordance with section 436(c), the 

proposed regulations would provide 

that a plan satisfies the limitation on 

plan amendments increasing liability for 

benefits only if the plan provides that 

no amendment to the plan that has the 

effect of increasing 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 is permitted to take effect 

if the AFTAP for the plan year is less 

than 80 percent (or is 80 percent or 

more but would be less than 80 percent 

if the benefits attributable to the 

amendment were taken into account in 

determining the AFTAP). However, this 

prohibition on plan amendments no 

longer applies for a plan year if the 

employer makes the contribution 

specified in section 436(c)(2), as 

described in paragraph F of this 

preamble. 

In accordance with section 436(c)(3), 

the limitation on amendments 

increasing liabilities does not apply to 

any amendment that provides for an 

increase in benefits under a formula that 

is not based on a participant’s 

compensation, but only if the rate of 

increase in benefits does not exceed the 

contemporaneous rate of increase in 

average wages of participants covered 

by the amendment. The proposed 

regulations would provide that the 

determination of the rate of increase in 

average wages is made by taking into 

consideration the net increase in 

average wages during the period 

beginning with the effective date of the 

most recent benefit increase applicable 

to all of those participants who are 

covered by the current amendment and 

ending on the effective date of the 

current amendment. If the participants 

covered by an amendment include both 

currently employed participants and 

terminated participants (who will have 

no increase or decrease in wages for this 

purpose after severance from 

employment), all covered participants 

must be included in determining the 

increase in average wages of the 

participants covered by the amendment. 

Alternatively, the employer could adopt 

two amendments—one that increases 

benefits for currently employed 

participants and another one that 

increases benefits for the terminated 

participants. In that case, this exception 

from application of the section 436(c) 

limitation generally would apply to the 

amendment that increases benefits for 

currently employed participants (based 

solely on the wages of those current 

employees), but the amendment that 

applies only to terminated participants 

(who received no increase in wages 

from the employer during the period 

over which the increase in average 

wages is determined) would not be 

eligible for the exception. 

In addition, the proposed regulations 

would provide that, to the extent that 

any amendment results in (or is made 

pursuant to) a mandatory increase in the 

vesting of benefits under the Code or 

ERISA (such as vesting rate increases 

pursuant to statute and plan termination 

amendments under section 411(d)(3)), 

that amendment does not constitute an 

amendment that changes the rate at 

which benefits become nonforfeitable 

for purposes of section 436(c). 

D. Limitations on Accelerated Benefit 

Distributions 

1. Funding percentage less than 60 

percent. In accordance with section 

436(d)(1), under the proposed 

regulations, a plan must provide that, if 

the plan’s AFTAP for a plan year is less 

than 60 percent, the plan will not pay 

any prohibited payment with an annuity 

starting date that is on or after the 

applicable section 436 measurement 

date. However, if a participant requests 

such a prohibited distribution, the plan 

must permit the participant to elect 

another form of benefit available under 

the plan or to defer payment to a later 

date to the extent permitted under 

applicable qualification requirements. 

Similar rules apply in any case in which 

a beneficiary is entitled to a prohibited 

payment (for example, where a qualified 

pre-retirement survivor annuity is 

offered in an alternative single sum 

payment). 

2. Bankruptcy. In accordance with 

section 436(d)(2), under the proposed 

regulations, a plan must provide that the 

plan will not pay any prohibited 

payment with an annuity starting date 

that is during any period during a plan 

year in which the plan sponsor is a 

debtor in a case under title 11, United 

States Code, or similar Federal or State 

law, until the date on which the 

enrolled actuary of the plan certifies 

that the plan’s AFTAP is not less than 

100 percent. 

3. Limited payment if percentage at 

least 60 percent but less than 80 

percent. In accordance with section 

436(d)(3), under the proposed 

regulations, a plan must provide that, in 

any case in which the plan’s AFTAP for 

a plan year is 60 percent or more but is 

less than 80 percent, a participant is 

permitted to elect a prohibited payment 

only if the present value of the portion 

of the payment that is greater than the 

amount of the monthly straight life 

annuity under the plan (and any social 

security supplement, if applicable) does 

not exceed 50 percent of the present 

value of the participant’s benefits (or if 

less, 100 percent of the present value of 

the maximum guarantee with respect to 

the participant under section 4022 of 

ERISA). For this purpose, present value 

is determined using the rules of section 

417(e) except that, if the plan provides 

a single sum distribution that is larger 

than the present value of the benefit 

determined using the rules of section 

417(e), then that larger benefit is 

substituted for the present value of the 

participant’s benefits before applying 

the 50 percent factor. Similar rules 

apply in any case in which a beneficiary 

is entitled to a prohibited payment. 

If an optional form of benefit that is 

otherwise available under the terms of 

the plan is not available as of the 

annuity starting date because it is a 

prohibited payment that cannot be paid 

under the preceding paragraph, then the 

plan must provide a participant who 

elects such an optional form with the 

option either to defer payment to a later 

date (to the extent permitted under 

applicable qualification requirements) 

or to bifurcate the benefit into 

unrestricted and restricted portions. If 

the participant elects to bifurcate the 

benefit, the plan must permit the 

participant to elect, with respect to the 

unrestricted portion, any optional form 

of benefit otherwise available under the 

plan with respect to the participant’s 

entire benefit (whether or not the 

optional form of benefit with respect to 

the unrestricted portion is a prohibited 

payment). The unrestricted portion of 

the benefit is the lesser of (i) 50 percent 

of the benefit and (ii) the benefit that 

has a present value that does not exceed 

100 percent of the present value of the 

maximum PBGC guarantee with respect 

to the participant under section 4022 of 

ERISA. If the participant elects payment 

of the unrestricted portion of the benefit 

in the form of a prohibited payment, 

then the plan must permit the 

participant to elect payment of the 

restricted portion in any optional form 

of benefit under the plan that would 

have been permitted with respect to the 

participant’s entire benefit other than a 

prohibited payment. A plan is also 

permitted (but not required) to offer 

optional forms of benefit that are solely 

available during the period section 

436(d)(3) applies to the plan, such as an 

optional form of benefit that provides 


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for the current payment of the 

unrestricted portion of the benefit, with 

a delayed commencement for the 

restricted portion of the benefit, subject 

to other applicable qualification 

requirements. 

A participant who receives a 

prohibited payment (or a series of 

prohibited payments under a single 

optional form of benefit) under the rule 

permitting certain prohibited payments 

cannot receive any additional payment 

that would be a prohibited payment 

until there is a plan year for which none 

of the limitations on accelerated 

distributions under section 436(d) 

apply. Benefits provided to a participant 

and any beneficiary are aggregated for 

purposes of determining the limited 

distribution under section 436(d)(3). 

The proposed regulations would also 

reflect the rules of section 

436(d)(3)(B)(ii), which describes how 

this limited distribution is allocated 

among the beneficiaries of a participant. 

4. Exception for certain frozen plans. 

In accordance with section 436(d)(4), 

the limitations under section 436(d) will 

not apply to a plan for any plan year if 

the terms of the plan, as in effect for the 

period beginning on September 1, 2005, 

provided for no benefit accruals with 

respect to any participants. However, if 

such a plan provides for any benefit 

accruals during a plan year, this 

exception will cease to apply for the 

plan as of the date those accruals start. 

5. Prohibited payment. In accordance 

with section 436(d)(5), the proposed 

regulations would provide that the term 

‘‘prohibited payment’’ means: 

(i) Any payment for a month that is 

in excess of the monthly amount paid 

under a single life annuity (plus any 

social security supplements described 

in the last sentence of section 411(a)(9)), 

to a participant or beneficiary whose 

annuity starting date (as defined in 

section 417(f)(2)) occurs during any 

period that a limitation on accelerated 

benefit payments is in effect; 

(ii) Any payment for the purchase of 

an irrevocable commitment from an 

insurer to pay benefits; and 

(iii) Any other payment that is 

identified as a prohibited payment by 

the Commissioner in revenue rulings 

and procedures, notices and other 

guidance published in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter). 

In addition, for purposes of applying 

the limitations on accelerated benefit 

payments under the requirements of 

section 436(d), the term annuity starting 

date means, as applicable—

(a) The first day of the first period for 

which an amount is payable as an 

annuity as described in section 

417(f)(2)(A)(i); 

(b) In the case of a benefit not payable 

in the form of an annuity, the first day 

on which all events have occurred 

(including the participant’s election, the 

participant’s severance from 

employment if the participant is below 

normal retirement age, and, if 

applicable, the participant’s survival to 

the date as of which payment is made) 

which entitle the participant to such 

benefit as described in section 

417(f)(2)(A)(ii); 

(c) In the case of an amount payable 

on a retroactive annuity starting date, 

the benefit commencement date; and 

(d) The date of any payment for the 

purchase of an irrevocable commitment 

from an insurer to pay benefits under 

plan. 

E. Limitation on Benefit Accruals 

In accordance with section 436(e), 

under the proposed regulations, a plan 

must provide that, in any case in which 

the plan’s AFTAP for a plan year is less 

than 60 percent, benefit accruals under 

the plan will cease as of the applicable 

section 436 measurement date. If a plan 

must cease benefit accruals under this 

limitation, then the plan is also not 

permitted to be amended in a manner 

that would increase the liabilities of the 

plan by reason of an increase in benefits 

or establishment of new benefits. This 

rule applies regardless of whether an 

amendment would otherwise be 

permissible under section 436(c)(3) 

(involving certain amendments to 

increase benefits under a formula not 

based on a participant’s compensation). 

This prohibition on additional benefit 

accruals will no longer apply for a plan 

year if the plan sponsor makes the 

contribution specified in section 

436(e)(2), as described in paragraph F of 

this preamble. 

F. Rules Relating to Contributions 

Required To Avoid Benefit Limitations 

The proposed regulations provide 

rules regarding contributions by the 

plan sponsor to avoid benefit limitations 

under section 436. An employer 

sponsoring a plan that would otherwise 

be subject to the limitations of section 

436 can avoid the application of those 

limits through one of four different 

techniques: 1) reducing the funding 

standard carryover balance and 

prefunding balance; 2) making 

additional contributions for a prior plan 

year that are not added to the 

prefunding balance; 3) making the 

specific contributions described in 

sections 436(b)(2), 436(c)(2), and 

436(e)(2); and 4) providing security, as 

described in section 436(f)(1). 

As noted in this preamble, under the 

first of the techniques, if a plan sponsor 

elects to reduce the plan’s funding 

standard carryover balance or the 

prefunding balance, this will have the 

effect of increasing the plan assets that 

are taken into account in determining 

the plan’s FTAP and AFTAP and, 

thereby, will raise the AFTAP to a level 

so that the benefit limitations may no 

longer apply to the plan. Alternatively, 

if the deadline for making prior year 

contributions has not passed, the plan 

sponsor could utilize the second 

technique—making additional 

contributions for the prior plan year. If 

these additional contributions are not 

added to the prefunding balance, then 

the additional contributions will also 

have the effect of increasing the plan’s 

FTAP and AFTAP. 

The third and fourth techniques for 

avoiding the application of the benefit 

limitations of section 436 are described 

in § 1.436–1(f) of the proposed 

regulations. Under the third technique, 

the plan sponsor makes additional 

contributions that are specifically 

designated at the time the contribution 

is used to avoid the application of a 

limitation under section 436(b), 436(c), 

or 436(e). The proposed regulations 

would provide for this designation to be 

provided to the plan’s enrolled actuary 

and plan administrator in writing. 

Furthermore, the designation must be 

irrevocable, except as described below. 

If the contributions are made on a date 

other than the valuation date for the 

plan year, the contributions must be 

adjusted for interest (using the plan’s 

effective interest rate, except as 

provided in the proposed regulations). 

These contributions are separate from 

any minimum required contributions 

required by section 430, and no 

prefunding balance or funding standard 

carryover balance under section 430(f) 

may be used as a contribution to avoid 

a section 436 benefit limitation. A plan 

sponsor that makes such a current year 

contribution will nonetheless fail to 

satisfy the minimum funding 

requirements if it does not make the 

minimum required contribution under 

section 430 for the year. In addition, as 

noted above, these contributions are not 

taken into account in determining 

whether a plan sponsor is making 

excess contributions for purposes of 

adding to the plan’s prefunding balance. 

The fourth technique for a plan 

sponsor to avoid the application of the 

benefit limitations of section 436 is for 

the plan sponsor to provide security. In 

such a case, the AFTAP for the plan 

year is determined by treating as an 

asset of the plan any security provided 

by a plan sponsor by the valuation date 


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50552 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

for the plan year in a form meeting 

certain specified requirements. 

However, this security is not taken into 

account for any other purpose, 

including section 430. The only security 

permitted to be provided by a plan 

sponsor for this purpose is (i) a bond 

issued by a corporate surety company 

that is an acceptable surety for purposes 

of section 412 of ERISA, or (ii) cash or 

United States obligations that mature in 

three years or less that are held in 

escrow by a bank or insurance company. 

The regulations would reflect sections 

436(f)(1)(C) and (D) in specifying when 

the security is to be contributed to the 

plan and when it may be released. If the 

security is turned over to the plan, then 

that amount is treated as an employer 

contribution when it is turned over to 

the plan. The proposed regulations 

would provide that any such security 

turned over to the plan pursuant to the 

enforcement mechanism cannot be 

treated as a contribution to avoid or 

terminate the application of a section 

436 benefit limitation under section 

436(b)(2), 436(c)(2), or 436(e)(2). 

G. Presumed Underfunding for Purposes 

of Benefit Limitations 

The proposed regulations reflect the 

rules of section 436(h), which sets forth 

a series of presumptions that are used to 

apply the section 436 benefit limitations 

in situations where the plan’s enrolled 

actuary has not yet issued a certification 

of the plan’s AFTAP for the plan year. 

In addition, the proposed regulations 

also set forth rules for the application of 

the limitations prior to and during the 

period those presumptions apply to a 

plan, and describe the interaction of 

those presumptions with plan 

operations after the plan’s enrolled 

actuary has issued a certification of the 

plan’s AFTAP for the plan year. These 

rules are designed to encourage plans to 

obtain certifications in a timely manner, 

with a particular emphasis with respect 

to plans that have a greater likelihood of 

having a new section 436 benefit 

limitation apply because they had an 

AFTAP for the prior plan year that was 

near a threshold for a benefit limitation 

to apply. 

The proposed regulations would 

provide that, in any case in which a 

plan was subject to a benefit limitation 

on the last day of the prior plan year, 

the first day of the plan year is a section 

436 measurement date and the AFTAP 

of the plan for the current plan year is 

presumed to be equal to the preceding 

year’s certified AFTAP until the plan’s 

enrolled actuary certifies the AFTAP of 

the plan for the current plan year. 

Because no plan could be subject to a 

benefit limitation for a plan year that 

precedes the plan year that begins in 

2008, the section 436(h)(1) presumption 

generally will not apply to any plan 

before the first plan year beginning in 

2009. 

In accordance with section 436(h)(3), 

the proposed regulations would provide 

that, if the enrolled actuary of the plan 

has not certified the AFTAP of the plan 

for the current plan year by the first day 

of the 4th month of the plan year and 

the AFTAP for the preceding year was 

certified to be at least 60 percent but 

less than 70 percent or at least 80 

percent but less than 90 percent, then 

the first day of the 4th month of the 

current plan year is a section 436 

measurement date, and the AFTAP of 

the plan is presumed to be equal to 10 

percentage points less than the AFTAP 

of the plan for the preceding plan year. 

This presumption will apply until the 

earlier of the date the enrolled actuary 

certifies the AFTAP for the plan year or 

the first day of the 10th month of the 

plan year. 

In accordance with section 436(h)(2), 

the proposed regulations would provide 

that, in any case in which no 

certification of the specific AFTAP for 

the current plan year is made before the 

first day of the 10th month of such year, 

that date is a section 436 measurement 

date and, as of that date, the plan’s 

AFTAP is conclusively presumed to be 

less than 60 percent. In such a case, the 

presumed AFTAP of under 60 percent 

for the current plan year will continue 

to apply under the rules of section 

436(h)(1) for the next plan year, until 

such time as the enrolled actuary 

certifies the AFTAP for either the 

current plan year or the next plan year. 

The proposed regulations would 

provide rules that apply the section 

436(h) presumptions for the plan year in 

cases in which the enrolled actuary’s 

certification for the prior plan year is 

made on or after the first day of the 10th 

month of that prior plan year. If the date 

of the enrolled actuary’s certification of 

the specific AFTAP for a plan year 

occurs on or after the date the 

conclusive presumption applies but on 

or before the last day of the plan year, 

the proposed regulations would provide 

that the certified percentage is 

disregarded for that plan year but is 

used for purposes of the presumption 

rule of section 436(h)(1) starting with 

the beginning of the following plan year 

(rather than continuing to apply the 

less-than-60 percent presumption that 

applied before the first day of that 

following plan year). If the date of the 

enrolled actuary’s certification of the 

specific AFTAP for a plan year occurs 

after the end of the plan year but prior 

to the first day of the 4th month in the 

following plan year, the proposed 

regulations would provide that the 

certification date is treated as a section 

436 measurement date for that following 

plan year and that, starting on that date, 

the plan’s AFTAP is presumed to be the 

certified AFTAP for the prior year 

(rather than continuing to apply the 

less-than-60 percent presumption that 

applied before the certification). If the 

date of the enrolled actuary’s 

certification of the specific AFTAP for a 

plan year occurs after the first day of the 

4th month in the following plan year 

but before the first day of the 10th 

month, the proposed regulations would 

provide that the certification date also is 

a section 436 measurement date for that 

following plan year, and the plan’s 

AFTAP for that following year 

beginning on that date is presumed to be 

the certified AFTAP for the prior year 

(rather than continuing to apply the 

less-than-60 percent presumption that 

applied before the certification). 

However, in such a case, if a 10 

percentage point reduction in the 

AFTAP would have applied on the first 

day of the 4th month of that following 

plan year if the AFTAP for the prior 

plan year had been certified before that 

day, then the same 10 percentage point 

reduction applies on the date of the 

certification. These presumption rules 

based on the prior year AFTAP do not 

apply once a certification of the 

following year’s AFTAP is issued by the 

plan’s enrolled actuary. 

The enrolled actuary’s certification of 

the AFTAP for a plan year must be 

made in writing, must be provided to 

the plan administrator, and must certify 

the plan’s AFTAP for the plan year. As 

an alternative to certifying a specific 

number for the plan’s AFTAP, the 

regulations would provide that the 

enrolled actuary is permitted to certify 

during the first nine months of a plan 

year that the plan’s AFTAP for that year 

is within a percentage ‘‘range’’ that is 

either (i) 60 percent or higher, but less 

than 80 percent, (ii) 80 percent or 

higher, or (iii) 100 percent or higher. 

The proposed regulations would 

provide that such a ‘‘range’’ certification 

ends the application of the 

presumptions provided that the enrolled 

actuary follows up with a certification 

of the specific AFTAP before the first 

day of the 10th month of that year and 

that the certified specific AFTAP is 

within the range of the earlier 

certification. 

If this ‘‘range’’ certification alternative 

is followed, the plan is treated as having 

a certified AFTAP at the smallest value 

within the applicable range. Thus, for 

example, if the enrolled actuary 

certified that the AFTAP was more than 


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60 percent but less than 80 percent, then 

the plan is treated as having an AFTAP 

of 60 percent for purposes of applying 

the limitations of section 436(b) until 

the earlier of the date of the specific 

AFTAP certification or the first day of 

the 10th month of the plan year. In such 

a case, if the plan has an unpredictable 

contingent event or a plan amendment 

that increases liability for benefits, 

unpredictable contingent event benefits 

cannot be paid and the plan amendment 

cannot take effect unless the plan 

sponsor makes a contribution described 

in section 436(b)(2) or 436(c)(2), as 

applicable. If the plan sponsor makes a 

contribution under section 436(b)(2) or 

section 436(c)(2), the proposed 

regulations would provide that the 

contribution is recharacterized as a 

regular employer contribution that is 

taken into account under section 430 for 

the current plan year to the extent it is 

determined that the contribution was 

not needed to avoid the application of 

the benefit limit, based on the 

subsequent calculation of the specific 

AFTAP. 

The proposed regulations would 

specify that the enrolled actuary is 

generally not permitted to certify the 

AFTAP based on a value of assets that 

includes contributions receivable for the 

prior year that have not actually been 

made as of the date of the certification. 

However, this rule would not apply to 

certifications that are made for plan 

years beginning before January 1, 2009. 

Thus, for a certification with respect to 

2008, the enrolled actuary is permitted 

to take in account contributions for 2007 

that are reasonably expected but have 

not yet been made by the plan sponsor 

at the time of the certification. However, 

if the plan sponsor does not make those 

contributions, the enrolled actuary’s 

certification will be incorrect, which 

will result in a failure to satisfy section 

401(a)(29) and section 436 if the 

difference constitutes a material change. 

If the enrolled actuary for the plan 

provides a certification of the AFTAP 

for the plan year (including a range 

certification) and that certified 

percentage is superseded by a 

subsequent determination of the AFTAP 

for that plan year, that later percentage 

must be applied and a determination 

must be made whether the change in the 

applicable percentage is a material 

change or an immaterial change. For 

this purpose, the proposed regulations 

would specify that there is a material 

change if plan operations with respect 

to benefits that are addressed by section 

436, taking into account any actual 

contributions and elections under 

section 430(f) made by the plan sponsor 

based on the prior certified percentage, 

would have been different based on the 

subsequent determination of the plan’s 

AFTAP for the plan year. Thus, for 

example, if after the actuary certifies the 

plan’s AFTAP for a plan year, the plan 

sponsor elects to add excess 

contributions for the prior plan year to 

the plan’s prefunding balance, this 

would have the effect of reducing the 

plan’s AFTAP, and such a change could 

be a material change. 

The proposed regulations would 

specify that an immaterial change is a 

change in an AFTAP that is not a 

material change. In addition, the 

proposed regulations would provide 

that if the difference between the 

AFTAP for a plan year and the later 

revised determination of that percentage 

is the result of additional contributions 

for the preceding year that are made by 

the plan sponsor after the date of the 

enrolled actuary’s certification or results 

from the plan sponsor’s election to 

reduce the prefunding or funding 

standard carryover balance after the date 

of the certification, such change is 

always treated as an immaterial change 

(regardless of whether it would 

otherwise affect the application of the 

section 436 benefit limitations). 

In the case of a material change where 

the plan was operated in accordance 

with the prior certification of the 

AFTAP for the plan year, the plan will 

not have satisfied the requirements of 

section 401(a)(29) and section 436. In 

the case of a material change where the 

plan was operated in accordance with 

the subsequent certification of the 

AFTAP during the period of time the 

prior certification applied, then the plan 

will not have been operated in 

accordance with its terms. In addition, 

in the case of a material change, the 

rules requiring application of a 

presumed AFTAP under section 436(h) 

continue to apply from and after the 

date of the prior certification until the 

date of the subsequent certification. In 

the case of an immaterial change, the 

revised percentage applies prospectively 

but it does not change the 

inapplicability of the presumptions 

under section 436(h) for the plan year 

prior to the date of the subsequent 

certification. 

H. Coordination Between Presumptions 

and Determination of AFTAP 

1. Periods during which a 

presumption applies to the plan. A plan 

must provide that, for any period during 

which a presumption under section 

436(h) applies to the plan, the 

limitations applicable under sections 

436(b), 436(c), 436(d), and 436(e) apply 

to the plan as if the actual AFTAP for 

the year were the presumed AFTAP. 

During that period, the rules relating to 

the deemed election to reduce the 

funding standard carryover balance and 

the prefunding balance must be applied 

based on the presumed percentage with 

respect to the applicable limitations. 

Thus, a plan’s prefunding balance and 

funding standard carryover balance 

must be reduced if the reduction would 

be sufficient to avoid the applicable 

limitation. The proposed regulations 

provide rules for determining the 

amount of the reduction in balances. 

If the presumed AFTAP for the plan 

year changes during the year because of 

application of the presumption in 

section 436(h)(3), the rules regarding the 

deemed election to reduce funding 

balances must be reapplied based on the 

new presumed AFTAP. This 

reapplication of the deemed election 

may require an additional reduction in 

funding balances if the amount of the 

reduction in funding balances that is 

necessary to reach the applicable 

threshold to avoid the application of the 

limitation under section 436(d) or 436(e) 

is greater than the amount that was 

initially reduced. 

2. Periods prior to certification where 

no presumption applies. If no 

presumptions under section 436(h) 

apply to a plan for a period and the 

plan’s enrolled actuary has not yet 

issued the certification of the plan’s 

AFTAP for the plan year, the plan is not 

permitted to limit the payment of 

unpredictable contingent event benefits 

or the accrual of benefits based on an 

expectation that the limitations under 

section 436(d) or 436(e) will apply to 

the plan once the enrolled actuary’s 

certification of the AFTAP is issued. In 

addition, the proposed regulations 

would provide that, if no presumptions 

under section 436(h) apply to a plan 

during a period and the plan’s enrolled 

actuary has not yet issued a certification 

of the plan’s AFTAP for the plan year, 

the limitations under sections 436(b) 

and 436(c) that apply to unpredictable 

contingent event benefits and certain 

plan amendments, respectively, during 

that period must be applied following 

the special rules described below in 

paragraph H.3. of this preamble. Thus, 

if after application of those rules the 

plan would be treated as having an 

AFTAP below the applicable threshold 

under section 436(b) or 436(c), the 

limitation will apply unless the plan 

sponsor makes a contribution to avoid 

application of the applicable benefit 

limitations described in section 

436(b)(2) or 436(c)(2). In such case, 

following the certification of the AFTAP 

for the current plan year by the plan’s 

enrolled actuary, the proposed 

regulations would provide that those 


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50554 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

contributions are recharacterized as 

employer contributions under section 

430 for the current plan year to the 

extent they exceed the amount 

necessary to avoid application of the 

applicable limitation under section 

436(b) or 436(c) based on the certified 

percentage. 

3. Periods prior to certification—

special rules for unpredictable 

contingent event benefits and plan 

amendments that increase liability. The 

proposed regulations would provide 

that, during the pre-certification period, 

the rules relating to the deemed election 

to reduce the funding standard 

carryover balance and the prefunding 

balance must be applied based on the 

plan’s presumed AFTAP. The proposed 

regulations would provide rules for 

determining the amount of the 

reduction in those balances that would 

apply in such a situation and provide 

that, in making such determination, the 

presumed adjusted funding target is 

increased to take into account the 

benefits attributable to the 

unpredictable contingent event or the 

plan amendment described in section 

436(b) and 436(c), respectively. For this 

purpose, if no presumption applies 

under the rules of section 436(h) (for 

example, because the plan’s actual 

AFTAP for the prior year was certified 

to be at least 80 percent), then that prior 

year’s actual AFTAP is substituted for 

the presumed AFTAP for the plan year 

in determining the presumed adjusted 

funding target. In the case of a plan that 

is not a collectively bargained plan with 

a funding standard account carryover 

balance or a prefunding balance, the 

deemed election rules do not apply for 

purposes of sections 436(b) and 436(c), 

and the plan sponsor is permitted (but 

not required) to reduce those balances 

in order to increase the adjusted plan 

assets that are compared to the 

presumed AFTAP. 

If, after application of such funding 

balance reductions and the other 

calculations set forth in the proposed 

regulations, the plan’s AFTAP (taking 

into account the additional benefits) is 

less than the applicable threshold under 

section 436(b) or 436(c), as applicable, 

then the plan is not permitted to 

provide any benefits attributable to the 

unpredictable contingent event or plan 

amendment unless the plan sponsor 

makes a contribution that would allow 

payment of unpredictable contingent 

event benefits or would permit a plan 

amendment increasing benefit liabilities 

to go into effect under the rules of 

section 436(b)(2) or 436(c)(2). 

If, after application of such funding 

balance reductions, the plan’s AFTAP 

(taking into account the additional 

benefits) is greater than or equal to the 

applicable threshold under section 

436(b) or 436(c), as applicable, then the 

plan is not permitted to limit the 

payment of unpredictable contingent 

event benefits under section 436(b) or to 

restrict a plan amendment increasing 

liability for benefits from taking effect 

under section 436(c) based on an 

expectation that those limitations will 

apply to the plan once the enrolled 

actuary’s certification is issued. 

4. Limitations based on AFTAP. The 

proposed regulations would provide 

that, on and after the date the enrolled 

actuary for the plan issues a certification 

of the AFTAP for the current plan year, 

the plan must apply that certified 

percentage (however, if the certification 

is issued on or after the first day of the 

10th month of the current plan year but 

before the first day of the following plan 

year, the certified percentage applies 

under the presumption rules beginning 

on the first day of that following plan 

year). For example, the plan sponsor 

must apply the certified AFTAP for a 

plan year to an unpredictable contingent 

event that occurs or a plan amendment 

that is effective on or after the date of 

the enrolled actuary’s certification 

during the plan year. Thus, the plan 

administrator must determine if the 

AFTAP is at or above the applicable 

threshold, taking into account the 

increase in the funding target that 

would be attributable to the 

unpredictable contingent event or plan 

amendment if the unpredictable 

contingent event benefits or the increase 

in liability attributable to the plan 

amendment were taken into account. 

After the AFTAP for a plan year is 

certified by the plan’s enrolled actuary, 

with respect to the application of 

limitations under sections 436(d) and 

436(e) (accelerated benefit payments 

and benefit accruals, respectively) for 

the plan year, the deemed election to 

reduce funding balances must be 

reapplied based on the actual funding 

target for the year (provided the 

certification is issued by the first day of 

the 10th month). This reapplication of 

the deemed election may require an 

additional reduction in funding 

balances if the amount of the reduction 

in funding balances that is necessary to 

reach the applicable threshold to avoid 

the application of those limitations is 

greater than the amount of a prior 

reduction for the plan year. The 

proposed regulations would also reflect 

section 436(d)(2), which provides that 

no prohibited payments under section 

436(d)(5) are permitted to be paid by a 

plan during any period in which the 

plan sponsor is a debtor in a case under 

title 11, United States Code, or any 

similar Federal or State law, if the plan’s 

enrolled actuary has not yet certified the 

plan’s AFTAP for the plan year to be at 

least 100 percent. Thus, the 

presumptions do not apply for purposes 

of section 436(d)(2). 

The proposed regulations would 

provide that the enrolled actuary’s 

certification of the AFTAP does not 

affect the application of the limitation 

under section 436(d) for participants 

with annuity starting dates before the 

certification. Similarly, the enrolled 

actuary’s certification for the plan year 

does not affect the application of the 

limitation under section 436(e) of this 

section prior to the date of that 

certification. 

With respect to the impact of the 

enrolled actuary’s certification of the 

AFTAP for a plan year on periods prior 

to the certification, the proposed 

regulations would provide that the 

certification does not affect the 

application of limitations under sections 

436(b) and 436(c) for periods prior to 

the date the certification is issued, 

regardless of the extent to which the 

certified percentage varies from the 

presumed percentage. Notwithstanding 

the foregoing, in the case of a plan that, 

for a plan year, did not provide benefits 

attributable to an unpredictable 

contingent event or plan amendment 

based on the preceding year’s certified 

AFTAP (and where sufficient 

contributions under section 436(b)(2) or 

436(c)(2) were not made), the plan must 

provide any benefits that were not so 

provided if those benefits would be 

permitted under the rules of section 436 

based on the certified AFTAP, taking 

into account the increase in the funding 

target that would be attributable to the 

unpredictable contingent event benefits 

or increase in liability due to the plan 

amendment. 

A special rule applies if a plan is 

providing benefits with respect to one or 

more unpredictable contingent events 

occurring within the plan year or 

amendments taking effect within the 

plan year. In such a case, the restrictions 

on unpredictable contingent event 

benefits and plan amendments are 

applied with respect to a subsequent 

unpredictable contingent event or 

amendment by treating the increase in 

the funding target attributable to the 

subsequent event or amendment as if it 

included the increases in the funding 

target attributable to all such earlier 

events or amendments. 

I. Determination of Funding Target 

Attainment Percentage 

For purposes of section 436, the 

funding target means the funding target 


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5H.R. 3361 (August 3, 2007) and S. 1974 (August 

2, 2007), at sections 2(c)(1)(C), 2(c)(2)(C), 2(c)(1)(F), 

and 2(c)(2)(F). 

6Except to the extent permitted under section 

411(d)(6) and the § 1.411(d)–4 regulations, or under 

a statutory provision such as section 1107 of PPA 

’06, section 411(d)(6) prohibits a plan amendment 

that decreases a participant’s accrued benefits or 

that has the effect of eliminating or reducing an 

early retirement benefit or retirement-type subsidy, 

or eliminating an optional form of benefit, with 

respect to benefits attributable to service before the 

Continued 

under section 430(d) or section 430(i), 

as applicable to the plan for a plan year. 

For purposes of section 436, the 

funding target attainment percentage 

(FTAP) for any plan year is the fraction 

(expressed as a percentage), the 

numerator of which is the value of net 

plan assets, and the denominator of 

which is the plan’s funding target 

(determined without regard to the atrisk rules under section 430(i) even in 

the case of a plan that is in at-risk 

status). For this purpose, pursuant to 

section 430(f)(4), the value of net plan 

assets for the plan year is generally 

determined by subtracting the plan’s 

funding standard carryover balance and 

prefunding balance (if any) for the plan 

year from the value of plan assets. 

The adjusted funding target 

attainment percentage (AFTAP) for any 

plan year is the fraction (expressed as a 

percentage), the numerator of which is 

the adjusted plan assets and the 

denominator of which is the adjusted 

funding target. The adjusted plan assets 

equals the net plan assets, increased by 

the aggregate amount of purchases of 

annuities for employees other than 

highly compensated employees (as 

defined in section 414(q)) which were 

made by the plan during the preceding 

2 plan years. The proposed regulations 

would provide that the adjusted funding 

target equals the funding target for the 

plan year (determined without regard to 

the at-risk rules under section 430(i)), 

increased by the aggregate amount of 

purchases of annuities for employees 

other than highly compensated 

employees (as defined in section 414(q)) 

which were made by the plan during the 

preceding 2 plan years. 

If the FTAP for a plan year, 

determined without regard to the 

section 430(f)(4) subtraction of the 

funding standard carryover balance and 

the prefunding balance from the value 

of plan assets, would be 100 percent or 

more, then, for purposes of section 436 

(but not section 430(d)), the value of net 

plan assets used in the determination of 

the FTAP and the AFTAP is determined 

without regard to any subtraction of 

funding balances under section 

430(f)(4). The proposed regulations 

would reflect the transition rule of 

section 436(j)(3)(B) under which a plan 

is permitted to phase up to 100 percent 

for purposes of the preceding sentence. 

The proposed regulations would also 

provide that, in the case of the first plan 

year beginning in 2008, the FTAP for 

the preceding plan year is determined as 

a fraction (expressed as a percentage), 

the numerator of which is the value of 

net plan assets, and the denominator of 

which is the plan’s current liability 

determined pursuant to section 412(l)(7) 

on the valuation date for the last plan 

year that begins before 2008 (the 2007 

plan year). For this purpose, the value 

of plan assets is determined under 

section 412(c)(2) as in effect for the 2007 

plan year, except that the value of plan 

assets prior to subtraction of the plan’s 

funding standard account credit balance 

described below can neither be less than 

90 percent of the fair market value of 

plan assets nor greater than 110 percent 

of the fair market value of plan assets on 

the valuation date for that plan year. If 

a plan has a funding standard account 

credit balance as of the valuation date 

for the 2007 plan year, that balance 

must be subtracted from the asset value 

described above as of that date unless 

the value of plan assets is greater than 

or equal to 90 percent of the plan’s 

current liability determined under 

section 412(l)(7) on the valuation date 

for the 2007 plan year. 

In the case of the first plan year 

beginning in 2008, for purposes of 

determining the AFTAP for the 2007 

plan year, the proposed regulations 

provide that the adjusted funding target 

is equal to the current liability 

determined pursuant to section 412(l)(7) 

on the valuation date for the 2007 plan 

year, increased by the aggregate amount 

of purchases of annuities for employees 

other than highly compensated 

employees (as defined in section 414(q)) 

which were made by the plan during the 

preceding 2 plan years. In any case in 

which the plan’s enrolled actuary has 

not issued a certification of the AFTAP 

of the plan for the 2007 plan year using 

this rule, the AFTAP of the plan for the 

first plan year beginning in 2008 is 

presumed to be less than 60 percent 

until the AFTAP of the plan for the 2007 

plan year has been certified or the 

AFTAP of the plan for the first plan year 

beginning in 2008 has been certified. 

This rule applies for purposes of 

sections 436(b) and 436(c) at the 

beginning of the first plan year 

beginning in 2008 and applies for 

purposes of sections 436(d) and 436(e) 

as of the first day of the 4th month of 

the first plan year beginning in 2008. 

The special rules permitting range 

certifications for plan years beginning 

after 2007 do not apply to the 2007 plan 

year. 

However, if the employer makes an 

election to reduce some or all of the 

funding standard carryover balance as of 

the first day of the first plan year 

beginning in 2008 in accordance with 

proposed § 1.430(f)–1(e), then the 

present value (determined as of the 

valuation date for the prior year using 

the valuation interest rate for that prior 

year) of the amount so reduced is not 

treated as part of the funding standard 

account credit balance when that 

balance is subtracted from the value of 

net plan assets. Thus, an employer’s 

election to reduce the funding standard 

carryover balance in 2008 will have the 

effect of reducing the amount that must 

be subtracted from the assets in 

determining the 2007 AFTAP for 

purposes of applying the presumptions 

under section 436(h)(3) as of the first 

day of the 4th month of the plan year 

beginning in 2008. 

Proposed Legislation 

As of the date of issuance of these 

proposed regulations, bills have been 

introduced in the House of 

Representatives and the Senate that 

would exclude mandatory cash-out 

distributions under section 411(a)(11) 

from application of the accelerated 

payments limitation under section 

436(d) and that would provide the 

Treasury Department with authority to 

address application of the presumptions 

under section 436(h) to plans that have 

valuation dates that are later than the 

first day of the plan year.5 Proposed 

§ 1.436–1(d)(6) and § 1.436–1(h)(5), 

respectively, are reserved in order to 

accommodate such changes. 

Section 1107 of PPA ’06 and Code 

Section 411(d)(6) 

Under section 1107 of PPA ’06, a plan 

sponsor is permitted to delay adopting 

a plan amendment pursuant to statutory 

provisions under PPA ’06 (or pursuant 

to any regulation issued under PPA ’06) 

until the last day of the first plan year 

beginning on or after January 1, 2009 

(January 1, 2011 in the case of 

governmental plans). As described in 

Rev. Proc. 2007–44, 2007–28 IRB 54, 

this amendment deadline applies to 

both interim and discretionary 

amendments that are made pursuant to 

PPA ’06 statutory provisions or any 

regulation issued under PPA ’06. See 

§ 601.601(d)(2) of this chapter. If section 

1107 of PPA ’06 applies to an 

amendment of a plan, section 1107 

provides that the plan does not fail to 

meet the requirements of section 

411(d)(6) by reason of such amendment, 

except as provided by the Secretary of 

the Treasury.6 For example, section 


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amendment. However, an amendment that 

eliminates or decreases benefits that have not yet 

accrued does not violate section 411(d)(6), provided 

the amendment is adopted and effective before the 

benefits accrue. 

411(d)(6) relief would be available for 

plan amendments that would prohibit 

single sum or other accelerated 

distributions if the plan’s AFTAP was 

less than 60 percent, in accordance with 

section 436(d) and § 1.436–1(d) of the 

proposed regulations. Plan sponsors 

should note that the IRS and the 

Treasury Department are reviewing 

whether sample plan amendments 

should be issued with respect to section 

436 and the § 1.436–1 regulations. 

ERISA Notice to Participants and 

Beneficiaries 

Under section 101(j) of ERISA, as 

amended by PPA ’06, the plan 

administrator of a single employer plan 

is required to provide a written notice 

to participants and beneficiaries within 

30 days after: 

• The date the plan has become 

subject to a restriction described in the 

ERISA provisions that are parallel to 

paragraphs (b) and (d) of Code section 

436; 

• In the case of a plan that is subject 

to the ERISA provisions that are parallel 

to paragraph (e) of Code section 436, the 

valuation date for the plan year for 

which the plan’s AFTAP is less than 60 

percent (or, if earlier, the date the 

AFTAP is presumed to be less than 60 

percent under the ERISA provisions that 

parallel the presumption rules in 

paragraph (h) of Code section 436); and 

• At such other time as may be 

determined by the Secretary of the 

Treasury. The notice is required to be 

provided in writing, except that the 

notice may be in electronic or other 

form to the extent that such form is 

reasonably accessible to the recipient. 

Effective/Applicability Dates 

1. Section 1.430(f)–1 

In general, these regulations under 

section 430(f) are proposed to apply to 

plan years beginning on or after January 

1, 2008. However, in the case of a plan 

for which the effective date of section 

430 is delayed in accordance with 

sections 104 through 106 of the Pension 

Protection Act of 2006, Public Law 109–

280, 120 Stat. 780, the regulations under 

section 430(f) are proposed to apply to 

plan years beginning on or after the 

effective date of section 430 with 

respect to the plan. Unlike section 436, 

section 430 and the regulations under 

section 430(f) do not include a delayed 

effective date for collectively bargained 

plans. 

2. Section 1.436–1 

In general, the regulations under 

section 436 are proposed to apply to 

plan years beginning on or after January 

1, 2008. However, in the case of a plan 

for which the effective date of section 

436 is delayed in accordance with 

sections 104 through 106 of the Pension 

Protection Act of 2006, Public Law 109–

280, 120 Stat. 780, the regulations under 

section 436 are proposed to apply to 

plan years beginning on or after the 

effective date of section 436 with 

respect to the plan. In addition, in the 

case of a collectively bargained plan 

maintained pursuant to one or more 

collective bargaining agreements 

between employee representatives and 

one or more employers ratified before 

January 1, 2008, the regulations under 

section 436 would not apply to plan 

years beginning before the earlier of: (1) 

the later of the date on which the last 

collective bargaining agreement relating 

to the plan terminates (determined 

without regard to any extension thereof 

agreed to after August 17, 2006), or the 

first day of the first plan year to which 

the proposed regulations under section 

436 would otherwise apply, or (2) 

January 1, 2010. For this purpose, any 

plan amendment made pursuant to a 

collective bargaining agreement relating 

to the plan which amends the plan 

solely to conform to any requirement 

under the proposed regulations would 

not be treated as a termination of the 

collective bargaining agreement. The 

determination of whether a plan is a 

collectively bargained plan is the same 

as described above in paragraph II.A.5 

of this preamble with respect to a plan 

sponsor’s deemed election to reduce 

funding balances. 

3. Reliance on Proposed Regulations 

For periods following the issuance of 

these proposed regulations and before 

final regulations are issued, these 

proposed regulations may be relied 

upon for plan qualification purposes, 

provided that such reliance is on a 

consistent and reasonable basis. 

4. Effect on Plans Subject to Section 402 

of PPA ’06 

The IRS and the Treasury Department 

are reviewing the applicability of 

section 436 and the funding balance 

rules of section 430(f) to plans that have 

made elections under section 402 of 

PPA ’06 (taking into account the 

amendments to section 402 of PPA ’06 

by section 6615 of the U.S. Troop 

Readiness, Veterans’ Care, Katrina 

Recovery, and Iraq Accountability 

Appropriations Act, 2007 (Public Law 

110–28)) and any special rules for such 

plans will be addressed in future 

guidance. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. It is hereby 

certified that the collection of 

information imposed by these proposed 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. Accordingly, a 

regulatory flexibility analysis is not 

required. The estimated burden 

imposed by the collection of 

information contained in these 

proposed regulations is 0.75 hours per 

respondent. Moreover, most of this 

burden is attributable to the requirement 

for a qualified defined benefit plan’s 

enrolled actuary to provide a timely 

certification of the plan’s AFTAP for 

each plan year to avoid certain benefit 

restrictions, which is imposed by 

section 436(h) of the Code. In addition, 

these proposed regulations provide for 

several written elections to be made by 

the plan sponsor upon occasion; these 

written elections will require minimal 

time to prepare. Pursuant to section 

7805(f) of the Code, these regulations 

have been submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Requests for a Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (one signed and eight (8) copies) 

or electronic comments that are 

submitted timely to the IRS. The IRS 

and Treasury Department specifically 

request comments on the clarity of the 

proposed regulations and how they may 

be made easier to understand. All 

comments will be available for public 

inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person who timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place of the public hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal authors of these 

regulations are Lauson C. Green and 

Linda S.F. Marshall, Office of Division 

Counsel/Associate Chief Counsel (Tax 


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Exempt and Government Entities). 

However, other personnel from the IRS 

and the Treasury Department 

participated in the development of these 

regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 2. Section 1.430(f)–1 is added to 

read as follows: 

§ 1.430(f)–1 Effect of prefunding balance 

and funding standard carryover balance. 

(a) In general—(1) Overview. This 

section provides rules relating to the 

application of prefunding balances and 

funding standard carryover balances 

under section 430(f). Section 430 and 

this section apply to single employer 

defined benefit plans (including 

multiple employer plans) that are 

subject to section 412, but do not apply 

to multiemployer plans (as defined in 

section 414(f)). Paragraph (b) of this 

section sets forth rules regarding a plan 

sponsor’s election to maintain a funding 

standard carryover balance or a 

prefunding balance. Paragraph (c) of this 

section provides rules under which 

those balances must be subtracted from 

plan assets. Paragraph (d) of this section 

describes a plan sponsor’s election to 

use those balances to offset the 

minimum required contribution. 

Paragraph (e) of this section describes a 

plan sponsor’s election to reduce those 

balances (which will affect the 

determination of the value of plan assets 

for purposes of sections 430 and 436). 

Paragraph (f) of this section sets forth 

rules regarding elections under this 

section. Paragraph (g) of this section 

contains examples. Paragraph (h) of this 

section contains effective/applicability 

dates and transitional provisions. 

(2) Special rules for multiple 

employer plans. In the case of a multiple 

employer plan to which section 

413(c)(4)(A) applies, the rules of this 

section are applied separately for each 

employer under the plan, as if each 

employer maintained a separate plan. 

Thus, each employer under such a 

multiple employer plan may have a 

separate funding standard carryover 

balance and a prefunding balance for 

the plan. In the case of a multiple 

employer plan to which section 

413(c)(4)(A) does not apply (that is, a 

plan described in section 413(c)(4)(B) 

that has not made the election for 

section 413(c)(4)(A) to apply), the rules 

of this section are applied as if all 

participants in the plan were employed 

by a single employer. 

(b) Election to maintain balances—(1) 

Prefunding balance—(i) In general. A 

plan sponsor is permitted to maintain a 

prefunding balance for a plan. A 

prefunding balance maintained for a 

plan consists of a beginning balance of 

zero, increased by the amount of excess 

contributions to the extent the employer 

elects to do so as described in paragraph 

(b)(1)(ii) of this section, and decreased 

to the extent provided in paragraph 

(b)(1)(iii) of this section. The prefunding 

balance is adjusted further for 

investment return and interest as 

provided in paragraphs (b)(3) and (b)(4) 

of this section. 

(ii) Increases—(A) In general. If the 

plan sponsor of a plan elects to add to 

the plan’s prefunding balance, as of the 

first day of each plan year following the 

first effective plan year for the plan, the 

prefunding balance is increased by the 

amount so elected by the plan sponsor 

for the plan year. The amount added to 

the prefunding balance cannot exceed 

the interest-adjusted excess 

contributions for the preceding plan 

year determined under paragraph 

(b)(1)(ii)(B) of this section. 

(B) Interest-adjusted excess 

contribution. For purposes of this 

paragraph (b)(1)(ii), the interest-adjusted 

excess contribution for the preceding 

plan year is the amount, increased with 

interest in accordance with the rules of 

paragraph (b)(1)(iv)(A) of this section, of 

the excess, if any, of—

(1) The present value of the employer 

contributions (other than contributions 

to avoid or terminate benefit limitations 

described in § 1.436–1(f)(2)) to the plan 

for the preceding plan year determined 

under the rules of paragraph (b)(1)(iv)(B) 

of this section; over 

(2) The minimum required 

contribution for the preceding plan year 

(determined without regard to any 

election to offset the minimum required 

contribution under paragraph (d) of this 

section for the preceding plan year). 

(iii) Decreases. The prefunding 

balance of a plan is decreased (but not 

below zero) by the sum of—

(A) As of the first day of each plan 

year after the first effective plan year for 

the plan, any amount of the prefunding 

balance that was used under paragraph 

(d) of this section to offset the minimum 

required contribution of the plan for the 

preceding plan year; and 

(B) As of the first day of each plan 

year, any reduction in the prefunding 

balance under paragraph (e) of this 

section for the plan year. 

(iv) Adjustments for interest—(A) 

Adjustment of excess contribution. The 

amount of the excess contribution for 

the preceding year (as determined under 

paragraph (b)(1)(ii)(B) of this section) is 

increased for interest accruing for the 

period between the valuation date for 

the preceding plan year and the first day 

of the current year. For this purpose, 

interest is determined by using the 

plan’s effective interest rate under 

section 430(h)(2)(A) for the preceding 

plan year. 

(B) Determination of present value. 

The present value of the contributions 

described in paragraph (b)(1)(ii)(B)(1) of 

this section is determined as of the 

valuation date for the preceding plan 

year, using the plan’s effective interest 

rate under section 430(h)(2)(A) for the 

preceding plan year. 

(2) Funding standard carryover 

balance—(i) In general. A funding 

standard carryover balance is only 

permitted to be maintained by a plan 

that had a positive balance in the 

funding standard account under section 

412(b) as of the end of the pre-effective 

plan year for the plan. The funding 

standard carryover balance as of the 

beginning of the first effective plan year 

for the plan is the positive balance in 

the funding standard account under 

section 412(b) as of the end of the preeffective plan year for the plan, 

decreased to the extent provided in 

paragraph (b)(2)(ii) of this section and 

adjusted further for investment return 

and interest as provided in paragraphs 

(b)(3) and (b)(4) of this section. 

(ii) Decreases. The funding standard 

carryover balance of a plan is decreased 

(but not below zero) by the sum of—

(A) As of the first day of each plan 

year after the first effective plan year for 

the plan, any amount of the funding 

standard carryover balance that was 

used under paragraph (d) of this section 

to offset the minimum required 

contribution of the plan for the 

preceding plan year; and 

(B) As of the first day of each plan 

year, any reduction in the funding 

standard carryover balance under 

paragraph (e) of this section for the plan 

year. 

(3) Adjustments for investment 

experience. In determining a plan’s 

prefunding balance under paragraph 

(b)(1) of this section or a plan’s funding 

standard carryover balance under 

paragraph (b)(2) of this section as of the 

first day of a plan year, the balance must 

be adjusted to reflect the actual rate of 

return on plan assets for the preceding 


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plan year. This adjustment is applied to 

the balance after subtracting amounts 

used to offset the minimum required 

contribution for the preceding plan year 

pursuant to paragraph (d) of this section 

and after any reduction of balances for 

that preceding plan year under 

paragraph (e) of this section. For this 

purpose, the actual rate of return on 

plan assets for the preceding plan year 

is determined on the basis of fair market 

value and must take into account the 

amount and timing of all contributions, 

distributions, and other plan payments 

made during that period. 

(4) Valuation date other than the first 

day of the plan year—(i) In general. If 

a plan’s valuation date is not the first 

day of the plan year, solely for purposes 

of applying paragraphs (c), (d), and (e) 

of this section, the plan’s prefunding 

balance and funding standard carryover 

balance (if any) determined under this 

paragraph (b) are increased to the 

valuation date using the plan’s effective 

interest rate under section 430(h)(2)(A) 

for the plan year. 

(ii) Special rule for adjustments for 

investment experience. For purposes of 

applying the rules regarding the 

adjustments for investment experience 

in paragraph (b)(3) of this section, in the 

case of a plan with a valuation date that 

is not the first day of the plan year, the 

amount of the funding balances that 

must be subtracted from plan assets 

under paragraph (d) of this section 

(because they are used to offset the 

minimum required contribution for the 

plan year) must be adjusted to the first 

day of the plan year using the effective 

interest rate under section 430(h)(2)(A) 

for that year. 

(c) Effect of balances on plan assets—

(1) In general. In the case of any plan 

with a prefunding balance or a funding 

standard carryover balance, the amount 

of those balances must be subtracted 

from the value of plan assets for 

purposes of sections 430 and 436, 

except as provided in paragraphs (c)(2), 

(c)(3), and (c)(4) of this section. 

(2) Subtraction of balances in 

determining new shortfall amortization 

base—(i) Prefunding balance. For 

purposes of determining whether a plan 

is exempt from the requirement to 

establish a new shortfall amortization 

base under section 430(c)(5), the amount 

of the prefunding balance is subtracted 

from the value of plan assets only if an 

election under paragraph (d) of this 

section to use the prefunding balance to 

offset the minimum required 

contribution is made for the plan year. 

(ii) Funding standard carryover 

balance. For purposes of determining 

whether a plan is exempt from the 

requirement to establish a new shortfall 

amortization base under section 

430(c)(5), 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 under paragraph (d) of this 

section. 

(3) Special rule for certain binding 

agreements with PBGC. If there is in 

effect for a plan year a binding written 

agreement with the Pension Benefit 

Guaranty Corporation (PBGC) which 

provides that all or a portion of the 

prefunding balance or funding standard 

carryover balance (or both balances) is 

not available to offset the minimum 

required contribution for a plan year, 

that specified amount is not subtracted 

from the value of plan assets for 

purposes of determining the funding 

shortfall under section 430(c)(4). For 

example, if a PBGC agreement provides 

that $5 million of a plan’s balances is 

unavailable to offset the minimum 

required contribution for a plan year, 

the sum of the plan’s prefunding 

balance and funding standard carryover 

balance is $20 million, and the plan’s 

assets are $100 million, the value of 

plan assets for purposes of determining 

the funding shortfall under section 

430(c)(4) is reduced by $15 million ($20 

million less $5 million) to $85 million. 

For purposes of this paragraph (c)(3), an 

agreement with the PBGC is taken into 

account with respect to a plan year only 

if the agreement was executed prior to 

the valuation date for the plan year. 

(4) Exception for section 436(j) and (k) 

special adjustment rules. See section 

436(j) and (k) and § 1.436–1(j)(2)(ii) and 

(iii) for exceptions from the requirement 

to subtract the prefunding and funding 

standard carryover balances from plan 

assets in determining a plan’s funding 

target attainment percentage for 

purposes of section 436. 

(d) Election to apply balances against 

minimum required contribution—(1) In 

general. Subject to the limitations 

provided in paragraphs (d)(2) and (d)(3) 

of this section, in the case of any plan 

year in which 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 current 

plan year, the minimum required 

contribution for the plan year 

(determined after taking into account 

any waiver under section 412(c)) is 

offset as of the valuation date for the 

plan year by the amount so used. 

(2) Requirement to use funding 

standard carryover balance before 

prefunding balance. To the extent that 

a plan has a funding standard carryover 

balance greater than zero, no amount of 

the plan’s prefunding balance may be 

used to offset the minimum required 

contribution. Thus, a plan’s funding 

standard carryover balance must be 

exhausted before the plan’s prefunding 

balance may be applied under 

paragraph (d)(1) of this section to offset 

the minimum required contribution. 

(3) Limitation for underfunded plans. 

An election to apply a funding standard 

carryover balance or a prefunding 

balance under paragraph (d)(1) of this 

section is not available for a plan year 

if the plan’s prior year funding ratio is 

less than 80 percent. For purposes of 

this paragraph (d)(3), except as provided 

in paragraph (h)(5) of this section, the 

plan’s prior year funding ratio is the 

fraction (expressed as a percentage)—

(i) The numerator of which is the 

value of plan assets on the valuation 

date for the preceding plan year, 

reduced by the amount of any 

prefunding balance (but not the amount 

of any funding standard carryover 

balance); and 

(ii) The denominator of which is the 

funding target of the plan for the 

preceding plan year (determined 

without regard to section 430(i)(1)). 

(e) Election to reduce balances—(1) In 

general. A plan sponsor may make an 

election for a plan year to reduce any 

portion of a plan’s prefunding balance 

and funding standard carryover balance 

under this paragraph (e). If such an 

election is made, the amount of those 

balances that must be subtracted from 

plan assets pursuant to paragraph (c)(1) 

of this section will be smaller and, 

accordingly, the plan assets taken into 

account for purposes of sections 430 

and 436 will be larger. Thus, this 

election to reduce a plan’s prefunding 

balance and funding standard carryover 

balance is taken into account in the 

determination of plan assets for the plan 

year and applies for all purposes under 

sections 430 and 436, including for 

purposes of determining the plan’s prior 

year funding ratio under paragraph 

(d)(3) of this section for the following 

plan year. See also section 436(f)(3) and 

§ 1.436–1(a)(5) for a rule under which 

the plan sponsor is deemed to make the 

election described in this paragraph (e). 

(2) Coordination between prefunding 

balance and funding standard carryover 

balance. To the extent that a plan has 

a funding standard carryover balance 

greater than zero, no election under 

paragraph (e)(1) of this section is 

permitted to be made that reduces the 

plan’s prefunding balance. Thus, a plan 

must exhaust its funding standard 

carryover balance before it is permitted 

to make an election under paragraph 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 50559 

(e)(1) of this section with respect to its 

prefunding balance. 

(f) Elections—(1) Method of making 

elections. Any election under this 

section by the plan sponsor must be 

made by providing written notification 

of the election to the plan’s enrolled 

actuary and the plan administrator. The 

written notification must set forth the 

relevant details of the election, 

including the specific amounts involved 

in the election with respect to the 

prefunding balance and funding 

standard carryover balance. 

(2) Timing of elections—(i) General 

rule. Except as provided in paragraph 

(f)(2)(ii) of this section, any election 

under this section must be made on or 

before the due date (with extensions) for 

the filing of the plan’s Form 5500 

‘‘Annual Return/Report of Employee 

Benefit Plan’’ for the plan year to which 

the election relates (or, in the case of a 

plan not required to file a Form 5500 for 

the plan year, on or before the last day 

of the seventh month after the end of the 

plan year to which the election relates). 

For this purpose, an election to add to 

the prefunding balance relates to the 

plan year for which excess contributions 

were made. For example, in the case of 

a plan required to file a Form 5500, an 

election to add to the prefunding 

balance as of the first day of the 2010 

plan year (in an amount not in excess 

of the 2009 interest-adjusted excess 

contributions under the rules of 

paragraph (b)(1)(ii) of this section) must 

be made no later than the due date for 

filing the 2009 Form 5500 even though 

the election is reported on the 2010 

Form 5500 (Schedule SB). 

(ii) Election to reduce balances. Any 

election under paragraph (e) of this 

section to reduce the prefunding 

balance or funding standard carryover 

balance for a plan year (for example, in 

order to avoid a benefit restriction under 

section 436) must be made by the end 

of the plan year to which the election 

relates. 

(3) Irrevocability of elections. A plan 

sponsor’s election under this section 

with respect to the plan’s funding 

standard carryover balance or 

prefunding balance is irrevocable (and 

must be unconditional). 

(4) Plan sponsor—(i) In general. For 

purposes of the elections described in 

this section, except as provided in 

paragraph (f)(4)(ii) of this section, any 

reference to the plan sponsor means the 

employer or employers responsible for 

making contributions to or under the 

plan. 

(ii) Certain multiple employer plans. 

For purposes of the elections described 

in this section, in the case of plans that 

are multiple employer plans to which 

section 413(c)(4)(A) does not apply, any 

reference to the plan sponsor means the 

plan administrator within the meaning 

of section 414(g). 

(g) Examples. The following examples 

illustrate the application of this section: 

Example 1. (i) Plan P is a defined benefit 

plan with a plan year that is the calendar 

year and a valuation date of January 1. The 

funding standard carryover balance of Plan P 

is $25,000 as of the beginning of the 2008 

plan year. The sponsor of Plan P, Sponsor S, 

does not elect in 2008, pursuant to paragraph 

(e)(1) of this section, to reduce any portion 

of the funding standard account carryover 

balance prior to the determination of the 

value of plan assets. The actual rate of return 

on plan P’s assets in 2008 is 2%. The 

effective interest rate in 2008 for plan P is 

6%. The minimum required contribution for 

Plan P under section 430 for 2008 is 

$100,000. The prior year funding ratio for 

Plan P for 2008, as determined under 

paragraph (h)(5) of this section, is not less 

than 80%. 

(ii) Sponsor S makes a contribution to Plan 

P of $150,000 on December 1, 2008, for the 

2008 plan year and makes no other 

contributions for the 2008 plan year. Because 

this contribution was made on a date other 

than the valuation date for the 2008 plan 

year, the contribution must be adjusted to 

reflect interest that would otherwise have 

accrued between the valuation date and the 

date of the contribution, at the effective rate 

of interest for the 2008 plan year. The 

amount of the contribution after adjustment 

is $142,198, determined as $150,000 

discounted for 11 months of compound 

interest at an effective annual interest rate of 

6%. 

(iii) The excess of employer contributions 

for 2008 over the minimum required 

contribution for 2008, as of the valuation 

date, is $42,198 ($142,198 less $100,000). 

Accordingly, the increase in Plan P’s 

prefunding balance as of January 1, 2009, 

cannot exceed $44,730 (which is the excess 

contribution of $42,198 adjusted for 12 

months of interest at an effective interest rate 

of 6%). 

(iv) Furthermore, if Sponsor S does not 

elect to apply any portion of the funding 

standard carryover balance toward the 

minimum contribution in 2008, the funding 

standard carryover balance as of January 1, 

2009, is $25,500 (which is the funding 

standard account balance as of January 1, 

2008, adjusted for investment experience at 

an effective interest rate of 2%). 

Example 2. (i) The facts are the same as in 

Example 1 except that the contribution of 

$150,000 is made on February 1, 2009, for the 

2008 plan year. 

(ii) The amount of the contribution after 

adjustment is $140,824, which is determined 

as $150,000 discounted for 13 months of 

interest at an effective interest rate of 6%. 

Accordingly, the increase in Plan P’s 

prefunding balance as of January 1, 2009, 

cannot exceed $43,273 (which is the excess 

contribution of $40,824 adjusted for 12 

months of interest at an effective interest rate 

of 6%). 

Example 3. (i) The facts are the same as in 

Example 1 except that Sponsor S contributes 

$85,000 to Plan P on January 1, 2008, for the 

2008 plan year and makes no other 

contributions to Plan P for the 2008 plan 

year. In addition, Sponsor S elects to use 

$15,000 of the funding standard carryover 

balance to offset P’s minimum required 

contribution in 2008, pursuant to paragraph 

(d)(1) of this section. 

(ii) With respect to the 2009 plan year, the 

adjustment for investment experience under 

paragraph (b)(3) of this section for the 

funding standard carryover balance for the 

preceding plan year is $200, determined as 

the actual rate of return on plan assets for 

2008 as applied to the 2008 funding standard 

carryover balance after reduction for the 

amount of that balance used under paragraph 

(d)(1) of this section (that is, $25,000 less 

$15,000, multiplied by the actual rate of 

return of 2%). 

(iii) The funding standard carryover 

balance, as of January 1, 2009, is $10,200, 

determined as the 2008 funding standard 

carryover balance less the amount used to 

offset the 2008 minimum required 

contribution, adjusted for investment 

experience during the 2008 year ($25,000 less 

$15,000 plus $200). 

Example 4. (i) The facts are the same as in 

Example 3 except that Sponsor S contributes 

$90,000 (instead of $85,000) to Plan P on 

January 1, 2008, for the 2008 plan year. 

(ii) Notwithstanding the fact that the 

amount that Sponsor S contributed to Plan P 

exceeds the minimum required contribution 

($85,000) after it has been offset as a result 

of the use of the funding standard carryover 

balance, the maximum amount that Sponsor 

S may add to the prefunding balance as of 

January 1, 2009, is $0. This is because the 

maximum amount that may be added to the 

prefunding balance is the excess of $90,000 

over $100,000. See paragraphs (b)(1)(ii)(A) 

and (B) of this section. 

Example 5. (i) Plan Q is a defined benefit 

plan with a plan year that is the calendar 

year and a valuation date of July 1. The 

funding standard carryover balance of Plan Q 

is $50,000 as of January 1, 2009, the 

beginning of the 2009 plan year. The 

prefunding balance of Plan Q as of the 

beginning of the 2009 plan year is $0. The 

actual rate of return on plan Q’s assets in 

2009 is 10%. The effective interest rate for 

Plan Q for 2009 is 5%. The funding ratio for 

Plan Q in 2008 is 85%, as determined under 

paragraph (d)(3) of this section. Thus, the 

prior year funding ratio for 2009 is not less 

than 80%. 

(ii) Pursuant to paragraph (b)(4) of this 

section, the funding standard carryover 

balance is increased to $51,235 as of July 1, 

2009 (that is, an increase to reflect 6 months 

of interest at an effective interest rate of 5%). 

Sponsor T does not elect in 2009 to reduce 

any portion of the funding standard carryover 

balance pursuant to paragraph (e) of this 

section. The funding standard carryover 

balance ($51,235) is subtracted from the 

value of plan assets, as of July 1, 2009, prior 

to the determination of the minimum funding 

contribution and, accordingly, $51,235 is the 

maximum amount that may be applied 

against the minimum required contribution. 

(iii) The minimum required contribution 

for Plan Q for 2009 is $200,000. Sponsor T 


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makes a contribution to Plan T of $190,000 

on July 1, 2009, for the 2009 plan year, and 

makes no other contributions for the 2009 

plan year. Sponsor T elects to use $10,000 of 

the funding standard carryover balance to 

offset Plan Q’s minimum required 

contribution in 2009. Accordingly, the value 

of the funding standard carryover balance as 

of July 1, 2009, prior to adjustment for 

investment experience, is $41,235 (that is, 

$51,235 less $10,000). 

(iv) The value of the funding standard 

carryover balance as of January 1, 2010, is 

determined by first discounting the value as 

of July 1, 2009, after amounts have been used 

to offset the minimum required contribution, 

to January 1, 2009, at the effective interest 

rate and then crediting this so determined 

amount with a full year’s investment 

experience at a rate equal to the actual rate 

of return. Thus, the July 1, 2009, value of 

$41,235 is discounted for 6 months of 

interest, at an effective interest rate of 5%, to 

obtain a January 1, 2009, value of $40,241. 

Accordingly, the value of the funding 

standard carryover balance as of January 1, 

2010, is $44,265 (that is, $40,241 increased 

with one year’s investment return at a rate of 

10%). 

(h) Effective/applicability date and 

transition rules—(1) General effective/ 

applicability date. Except as provided in 

paragraph (h)(2) of this section, this 

section applies to plan years beginning 

on or after January 1, 2008. 

(2) Plans with delayed effective date. 

In the case of a plan for which the 

effective date of section 430 is delayed 

in accordance with sections 104 through 

106 of the Pension Protection Act of 

2006, Public Law 109–280, 120 Stat. 

780, this section applies to plan years 

beginning on or after the effective date 

of section 430 with respect to the plan. 

(3) First effective plan year. For 

purposes of this section, the first 

effective plan year for a plan is the first 

plan year to which this section applies 

under paragraph (h)(1) or (h)(2) of this 

section. 

(4) Pre-effective plan year. For 

purposes of this section, the preeffective plan year for a plan is the last 

plan year beginning before the first 

effective date applicable under 

paragraph (h)(1) or (h)(2) of this section. 

Thus, except for plans with a delayed 

effective date under paragraph (h)(2) of 

this section, the pre-effective plan year 

for a plan is the last plan year beginning 

before January 1, 2008. 

(5) Special lookback rule for preeffective plan year’s funding ratio—(i) 

Plan assets. For purposes of 

determining a plan’s prior year funding 

ratio pursuant to paragraph (d)(3) of this 

section for the first effective plan year, 

the value of plan assets on the valuation 

date of the preceding plan year is 

determined under section 412(c)(2) as in 

effect for that pre-effective plan year, 

except that—

(A) If the value of plan assets is less 

than 90 percent of the fair market value 

of plan assets for the pre-effective plan 

year on that date, for this purpose such 

value is considered to be 90 percent of 

the fair market value; and 

(B) If the value of plan assets is greater 

than 110 percent of the fair market value 

of plan assets on the valuation date for 

the pre-effective plan year on that date, 

for this purpose such value is 

considered to be 110 percent of the fair 

market value. 

(ii) Funding target. For purposes of 

determining a plan’s prior year funding 

ratio pursuant to paragraph (d)(3) of this 

section for the first effective plan year, 

the funding target of the plan for the 

preceding plan year is equal to the 

plan’s current liability under section 

412(l)(7) on the valuation date for the 

plan’s pre-effective plan year. 

Par. 3. Section 1.436–1 is added to 

read as follows: 

§ 1.436–1 Limits on benefits and benefit 

accruals under single employer defined 

benefit plans. 

(a) General rules—(1) Qualification 

requirement. Section 401(a)(29) 

provides that a defined benefit pension 

plan that is subject to section 412 and 

that is not a multiemployer plan (within 

the meaning of section 414(f)) is a 

qualified plan only if it satisfies the 

requirements of section 436. This 

section provides rules relating to 

funding-based limitations on certain 

benefits under section 436, and the 

requirements of section 436 are satisfied 

only if the plan meets the requirements 

of this section beginning with the plan’s 

first effective plan year. This section 

applies to single employer defined 

benefit plans (including multiple 

employer plans), but does not apply to 

multiemployer plans. 

(2) Organization of the regulation. 

Paragraph (b) of this section describes a 

limitation on shutdown benefits and 

other unpredictable contingent event 

benefits. Paragraph (c) of this section 

describes limitations on plan 

amendments increasing liabilities. 

Paragraph (d) of this section describes 

limitations on accelerated benefit 

payments. Paragraph (e) of this section 

describes limitations on benefit 

accruals. Paragraph (f) of this section 

provides rules relating to methods to 

avoid benefit limitations. Paragraph (g) 

of this section provides rules for the 

operation of the plan in relation to 

benefit limitations under section 436. 

Paragraph (h) of this section describes 

related presumptions regarding 

underfunding that apply for purposes of 

the benefit limitations under section 

436. Paragraph (j) of this section 

contains definitions. Paragraph (k) of 

this section contains effective/ 

applicability date provisions. 

(3) Special rules for certain plans—(i) 

New plans. The limitations described in 

paragraphs (b), (c), and (e) of this 

section do not apply to a plan for the 

first 5 plan years of the plan. For 

purposes of applying this rule, plan 

years of a plan are aggregated with plan 

years of a predecessor plan in 

accordance with section 414(a) or 

§ 1.415(f)–1(c). 

(ii) Multiple employer plans. In the 

case of a multiple employer plan to 

which section 413(c)(4)(A) applies, this 

section applies separately with respect 

to each employer under the plan, as if 

each employer maintained a separate 

plan. Thus, the benefit limitations under 

this section 436 could apply differently 

to participants who are employees of 

different employers under such a 

multiple employer plan. In the case of 

a multiple employer plan to which 

section 413(c)(4)(A) does not apply (that 

is, a plan described in section 

413(c)(4)(B) that has not made the 

election for section 413(c)(4)(A) to 

apply), this section applies as if all 

participants in the plan were employed 

by a single employer. 

(4) Treatment of plan as of close of 

prohibited or cessation period—(i) 

Resumption of benefit payments and 

accruals—(A) Resumption of 

accelerated payments. If a limitation on 

accelerated benefit payments under 

paragraph (d) of this section applied to 

a plan as of a section 436 measurement 

date, but that limit no longer applies to 

the plan as of a later section 436 

measurement date, then the prohibition 

on paying accelerated benefits under the 

plan does not apply to benefits with 

annuity starting dates that are on or after 

that later section 436 measurement date. 

Any amendment to eliminate the 

payment of accelerated benefit 

payments for periods in which they are 

not restricted under section 436 is 

subject to the rules of section 411(d)(6). 

(B) Resumption of benefit accruals. 

Unless the plan provides otherwise, 

benefit accruals under the plan resume 

effective as of the section 436 

measurement date on which benefit 

accruals are no longer restricted under 

paragraph (e) of this section. 

(ii) Missed benefit payments and 

accruals—(A) Option to amend plan to 

restore benefits. A plan is permitted to 

be amended to provide participants who 

had an annuity starting date within a 

period during which the rules of 

paragraph (d) of this section applied to 

the plan with the opportunity to have a 

new election under which the form of 

benefit previously elected may be 


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modified, subject to applicable 

qualification requirements. A 

participant who makes such a new 

election is treated as having a new 

annuity starting date under section 417. 

Similarly, a plan is permitted to be 

amended to provide that any benefit 

accruals which were limited under the 

rules of paragraph (e) of this section are 

credited under the plan when the 

limitation no longer applies, subject to 

applicable qualification requirements. 

Any such plan amendment with respect 

to a new annuity starting date or 

crediting of benefit accruals is subject to 

the requirements of section 436(c) and 

paragraph (c) of this section. 

(B) Automatic plan provisions to 

restore benefits. A plan is permitted to 

provide that participants who had an 

annuity starting date within a period 

during which the rules of paragraph (d) 

of this section applied to the plan are 

automatically provided with the 

opportunity to have a new annuity 

starting date (which would constitute a 

new annuity starting date under section 

417) under which the form of benefit 

previously elected may be modified, 

subject to applicable qualification 

requirements, once the rules of 

paragraph (d) of this section cease to 

apply. In addition, a plan is permitted 

to provide for the automatic restoration 

of benefit accruals that had been limited 

under section 436(e) as of the section 

436 measurement date that the 

limitation ceases to apply, as described 

in paragraph (a)(4)(ii)(A) of this section. 

However, if a plan provides for the 

automatic restoration of those benefit 

accruals and the period of the limitation 

exceeds 12 months, the plan will be 

treated as having adopted, effective as of 

the section 436 measurement date on 

which the limitation ceases to apply, a 

plan amendment that has the effect of 

increasing liabilities under the plan. 

Such an amendment is subject to the 

limitations of paragraph (c) of this 

section. 

(iii) Shutdown and other 

unpredictable contingent event 

benefits—(A) In general. If any 

unpredictable contingent event benefits 

under paragraph (b) of this section are 

limited with respect to an unpredictable 

contingent event, that limitation applies 

to all such benefits that otherwise 

would have been paid to any plan 

participant with respect to that 

unpredictable contingent event. 

(B) Benefits not paid. 

Notwithstanding paragraph (a)(4)(iii)(A) 

of this section, a plan is permitted to be 

amended to provide that any 

unpredictable contingent event benefits 

that were limited under the rules of 

paragraph (b) of this section will be paid 

or reinstated as of the section 436 

measurement date on which the 

limitation no longer applies, subject to 

applicable qualification requirements. 

Such a plan amendment is subject to the 

requirements of section 436(c) and 

paragraph (c) of this section. A plan is 

not permitted to provide for restoration 

of any such unpredictable contingent 

event benefits without an amendment 

that complies with section 436(c). 

(iv) Example. The following example 

illustrates the application of this 

paragraph (a)(4): 

Example. (i) Plan T is a non-collectively 

bargained defined benefit plan with a plan 

year that is the calendar year and a valuation 

date of January 1. As of January 1, 2011, Plan 

T does not have a funding standard carryover 

balance or a prefunding balance. Plan T’s 

sponsor is not in bankruptcy. Beginning 

January 1, 2011, Plan T is subject to the 

restriction on accelerated benefit 

distributions under paragraph (d)(3) of this 

section based on a presumed adjusted 

funding target attainment percentage 

(AFTAP) of 75%, and can therefore only pay 

a portion (generally 50%) of the accelerated 

benefit distributions otherwise payable to 

participants who commence benefit 

payments while the restriction is in effect. 

(ii) U is a participant in Plan T. Participant 

U retires on February 1, 2011, and elects to 

receive benefits in the form of a single sum. 

However, because U elected a form of 

payment that is a prohibited payment that is 

not permitted to be paid under paragraph 

(d)(3)(i) of this section, U elects in 

accordance with paragraph (d)(3)(ii) of this 

section to receive 50% of his benefit in a 

single sum and the remainder as an 

immediately commencing straight life 

annuity. 

(iii) On March 1, 2011, the enrolled actuary 

for the Plan certifies that the AFTAP for 2011 

is 80%. Accordingly, beginning March 1, 

2011, Plan T is no longer subject to the 

restriction under paragraph (d)(3) of this 

section. 

(iv) Effective March 1, 2011, Plan T is 

amended to provide that a participant whose 

benefits were restricted under paragraph 

(d)(3) of this section may elect within a 

specified period on or after March 1, 2011, 

a new annuity starting date and receive the 

remainder of his or her pension benefits in 

an accelerated form of payment. Plan T’s 

enrolled actuary determines that the AFTAP, 

taking into account the amendment, is still 

80%. The amendment is permitted to take 

effect because Plan T has an AFTAP of 80% 

taking into account the amendment, and is 

therefore neither subject to the restriction on 

plan amendments in paragraph (c) of this 

section nor the restrictions on accelerated 

benefit payments under paragraphs (d)(1) and 

(d)(3) of this section. Accordingly, 

Participant U may elect, subject to otherwise 

applicable qualification rules, including 

spousal consent, to receive the remainder of 

his benefits in the form of a single sum on 

or after March 1, 2011. 

(5) Deemed election to reduce funding 

balances—(i) Limitations on accelerated 

benefit payments. If a benefit limitation 

under paragraph (d) of this section 

would (but for this paragraph (a)(5)) 

apply to a plan, the employer is treated 

as having made an election under 

section 430(f) to reduce the prefunding 

balance or funding standard carryover 

balance by such amount as is necessary 

for the adjusted funding target 

attainment percentage to be at or above 

the applicable threshold (60, 80, or 100 

percent, as the case may be) in order for 

the benefit limitation not to apply to the 

plan. In such a case, the employer is 

treated as having made that election on 

the section 436 measurement date as of 

which the benefit limitation would 

otherwise apply (without regard to 

whether a participant is eligible for or 

requests a payment that is a prohibited 

payment described in paragraph (d)(5) 

of this section). 

(ii) Other limitations for collectively 

bargained plans—(A) General rule. In 

the case of a collectively bargained plan 

to which a benefit limitation under 

paragraph (b), (c), or (e) of this section 

would (but for this paragraph (a)(5)) 

apply, the employer is treated as having 

made an election under section 430(f) to 

reduce the prefunding balance or 

funding standard carryover balance by 

such amount as is necessary for the 

adjusted funding target attainment 

percentage to be at or above the 

applicable threshold in order for the 

benefit limitation not to apply to the 

plan, taking into account the 

unpredictable contingent event benefits 

or plan amendment, as applicable. In 

such a case, the employer is treated as 

having made that election on the date as 

of which the applicable benefit 

limitation would otherwise apply. 

(B) Treatment of plans with both 

collectively bargained and noncollectively bargained employees. In the 

case of a plan with respect to which 

collective bargaining agreements apply 

to some, but not all, of the plan 

participants, the plan is considered a 

collectively bargained plan for purposes 

of this paragraph (a)(5)(ii) if at least 25 

percent of the participants in the plan 

are members of collective bargaining 

units for which the benefit levels under 

the plan are specified under a collective 

bargaining agreement. 

(iii) Exception for insufficient funding 

balances—(A) In general. Paragraphs 

(a)(5)(i) and (a)(5)(ii) of this section 

apply with respect to a benefit 

limitation for any plan year only if the 

application of those paragraphs would 

result in the corresponding benefit 

limitation not applying for such plan 

year. Thus, if the plan’s prefunding and 

funding standard carryover balances 

were reduced to zero and the resulting 


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increase in plan assets taken into 

account would still not increase the 

plan’s adjusted funding target 

attainment percentage enough to reach 

the threshold percentage applicable to 

the benefit limitation, the deemed 

election to reduce those balances 

pursuant to paragraph (a)(5)(i) or 

(a)(5)(ii) of this section does not apply. 

(B) Presumed adjusted funding target 

attainment percentage less than 60 

percent. If a plan is presumed to have 

an adjusted funding target attainment 

percentage of less than 60 percent under 

paragraph (h)(3) of this section, then the 

plan is treated as if the funding standard 

carryover balance and the prefunding 

balance are insufficient to increase the 

adjusted funding target attainment 

percentage to the threshold percentage 

of 60 percent. Accordingly, paragraphs 

(a)(5)(i) and (a)(5)(ii) of this section do 

not apply to such a plan. 

(iv) Example. The following example 

illustrates the application of this 

paragraph (a)(5): 

Example. (i) Plan W is a collectively 

bargained, single-employer defined benefit 

plan sponsored by Sponsor X, with a plan 

year that is the calendar year and a valuation 

date of January 1. Sponsor X is not in 

bankruptcy. 

(ii) The enrolled actuary for Plan W issues 

a certification on March 1, 2010, that the 

2010 AFTAP is 81%. Sponsor X adopts an 

amendment on March 25, 2010, to increase 

benefits under a formula based on participant 

compensation, with an effective date of May 

1, 2010. (Because the formula is based on 

compensation, the exception in paragraph 

(c)(3) of this section for increases with 

respect to a formula not based on 

compensation does not apply.) The plan’s 

enrolled actuary determines that the plan’s 

AFTAP for 2010 would be 75% if the benefits 

attributable to the plan amendment were 

taken into account. This percentage is below 

the 80% threshold for the plan amendment 

limitation under paragraph (c) of this section. 

(iii) Because the AFTAP would be below 

the 80% threshold if the benefits attributable 

to the plan amendment were taken into 

account, Sponsor X is deemed to have made 

an election under paragraph (a)(5)(ii) of this 

section to reduce Plan W’s prefunding 

balance and funding standard carryover 

balance by the amount necessary for the 

AFTAP to reach the 80% threshold 

(reflecting the increase in funding target 

attributable to the plan amendment) in order 

for the limitation under paragraph (c) of this 

section not to apply. 

(iv) In this case, provided the reduction in 

funding balances is sufficient for the 

limitation not to apply, the plan amendment 

will go into effect on its effective date (May 

1). See paragraph (f) of this section for other 

methods to avoid benefit limitations (where, 

for example, the amount necessary for a 

benefit limitation not to apply for a plan year 

exceeds the aggregate funding balances). 

(b) Limitation on shutdown benefits 

and other unpredictable contingent 

event benefits—(1) In general. A plan 

that contains an unpredictable 

contingent event benefit satisfies section 

436(b) and this section only if it 

provides that the benefit will not be 

paid to a plan participant during a plan 

year if the adjusted funding target 

attainment percentage for the plan 

year—

(i) Is less than 60 percent; or 

(ii) Is 60 percent or more, but would 

be less than 60 percent if the benefits 

attributable to the unpredictable 

contingent event were taken into 

account in determining the adjusted 

funding target attainment percentage. 

(2) Exemption—(i) In general. The 

prohibition on payment of 

unpredictable contingent event benefits 

under paragraph (b)(1) of this section 

ceases to apply with respect to a plan 

year, effective as of the first day of the 

plan year, upon payment by the plan 

sponsor of the contribution described in 

paragraph (f)(2) of this section. 

(ii) Prior unpredictable contingent 

event. Unpredictable contingent event 

benefits attributable to an unpredictable 

contingent event that occurred within a 

period during which no limitation 

under this paragraph (b) applied to the 

plan are not affected by the limitation 

described in this paragraph (b) as it 

applies in a subsequent period. For 

example, if a plant shutdown occurs in 

2010 and the plan’s funded status is 

such that shutdown benefits related to 

that shutdown are not subject to the 

limitation described in this paragraph 

(b) for that calendar plan year, this 

paragraph (b) will not apply to restrict 

payment of those shutdown benefits 

even if another shutdown occurs in 

2012 that results in shutdown benefits 

related to that later shutdown being 

restricted under this paragraph (b) 

(where the plan’s adjusted funding 

target attainment percentage for 2012 is 

less than 60 percent taking into account 

the liability attributable to those 

shutdown benefits). 

(3) Unpredictable contingent event. 

For purposes of this section, an 

unpredictable contingent event benefit 

means any benefit or increase in 

benefits to the extent the benefit or 

increase would not be payable but for 

the occurrence of an unpredictable 

contingent event. For this purpose, an 

unpredictable contingent event means a 

plant shutdown (whether full or partial) 

or similar event, or an event other than 

the attainment of any age, performance 

of any service, receipt or derivation of 

any compensation, or the occurrence of 

death or disability. Thus, for example, if 

a plan provides for an unreduced early 

retirement benefit upon the occurrence 

of an event other than the attainment of 

any age, performance of any service, 

receipt or derivation of any 

compensation, or the occurrence of 

death or disability, then that unreduced 

early retirement benefit is an 

unpredictable contingent event benefit 

to the extent of any portion of the 

benefit that would not be payable but 

for the occurrence of the event, even if 

the remainder of the benefit is payable 

without regard to the occurrence of the 

event. Similarly, if a plan includes a 

benefit payable upon the presence of 

circumstances specified in the plan 

(other than the attainment of any age, 

performance of any service, receipt or 

derivation of any compensation, or the 

occurrence of death or disability), but 

not upon a severance from employment 

that does not include those 

circumstances, the plan is providing an 

unpredictable contingent event benefit. 

(c) Limitations on plan amendments 

increasing liability for benefits—(1) In 

general. Except as provided in this 

paragraph (c), a plan satisfies section 

436(c) and this section only if the plan 

provides that no amendment to the plan 

that has the effect of increasing 

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 

takes effect if the adjusted funding target 

attainment percentage for the plan year 

is—

(i) Less than 80 percent; or 

(ii) Is 80 percent or more, but would 

be less than 80 percent if the benefits 

attributable to the amendment were 

taken into account in determining the 

adjusted funding target attainment 

percentage. 

(2) Exemption. The limitations on 

plan amendments in paragraph (c)(1) of 

this section cease to apply and the 

amendment is permitted to take effect as 

of the later of the first day of the plan 

year or the effective date of the 

amendment upon payment by the plan 

sponsor of the contribution described in 

paragraph (f)(2) of this section. 

(3) Exception for certain benefit 

increases—(i) In general. The limitation 

on plan amendments under paragraph 

(c)(1) of this section does not apply to 

any amendment that provides for an 

increase in benefits under a formula that 

is not based on a participant’s 

compensation, but only if the rate of 

increase in benefits does not exceed the 

contemporaneous rate of increase in 

average wages of participants covered 

by the amendment. The determination 

of the rate of increase in average wages 

is made by taking into consideration the 

net increase in average wages from the 

period of time beginning with the 


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effective date of the most recent benefit 

increase applicable to all of those 

participants who are covered by the 

current amendment and ending on the 

effective date of the current amendment. 

(ii) Application to terminated 

participants. If an amendment applies to 

both currently employed and terminated 

participants, all such participants must 

be included in determining the increase 

in average wages of the participants 

covered by the amendment. For this 

purpose, terminated participants are 

treated as having no increase or 

decrease in wages for the period after 

severance from employment. 

(iii) Separate amendments for 

different plan populations. In lieu of a 

single amendment that applies to both 

currently employed participants and 

terminated participants as described in 

paragraph (c)(3)(ii) of this section, the 

employer could adopt two 

amendments—one that increases 

benefits for currently employed 

participants and another one that 

increases benefits for terminated 

participants. In that case, the two 

amendments are considered separately 

in determining the increase in average 

wages, and the exception in this 

paragraph (c)(3) from application of the 

section 436(c) limitation would apply 

separately to each amendment (so that 

an amendment providing for increases 

in benefits for currently employed 

participants could go into effect, but an 

amendment providing for increases in 

benefits for terminated participants who 

received no increase in wages from the 

employer during the period over which 

the increase in average wages is 

determined could not go into effect). 

(4) Exception for statutorily required 

vesting. To the extent that any 

amendment results in (or is made 

pursuant to) a mandatory increase in the 

vesting of benefits under the Code or 

ERISA (such as vesting rate increases 

pursuant to statute, plan termination 

amendments under section 411(d)(3), 

and amendments that lead to vesting 

increases required by top heavy rules 

under section 416), that amendment 

does not constitute an amendment that 

changes the rate at which benefits 

become nonforfeitable for purposes of 

section 436(c) and this paragraph (c). 

(d) Limitations on accelerated benefit 

payments—(1) Funding percentage less 

than 60 percent—(i) In general. A plan 

satisfies the requirements of section 

436(d)(1) and this paragraph (d)(1) only 

if the plan provides that, if the plan’s 

adjusted funding target attainment 

percentage for a plan year is less than 

60 percent, the plan will not pay any 

prohibited payment with an annuity 

starting date on or after the applicable 

section 436 measurement date. 

(ii) Request for prohibited 

distribution. If a participant or 

beneficiary requests a distribution that 

is prohibited under paragraph (d)(1)(i) 

of this section, the plan must permit the 

participant or beneficiary to elect 

another form of benefit available under 

the plan or to defer payment to a later 

date to the extent permitted under 

applicable qualification requirements. 

(2) Bankruptcy. A plan satisfies the 

requirements of section 436(d)(2) and 

this paragraph (d)(2) only if the plan 

provides that the plan will not pay any 

prohibited payment with an annuity 

starting date that is during any period in 

which the plan sponsor is a debtor in a 

case under title 11, United States Code, 

or similar Federal or State law, except 

for payments made with an annuity 

starting date within a plan year that is 

on or after the date on which the 

enrolled actuary of the plan certifies 

that the plan’s adjusted funding target 

attainment percentage for that plan year 

is not less than 100 percent. The rules 

of paragraph (d)(1)(ii) of this section 

apply if payments are prohibited under 

this paragraph (d)(2). 

(3) Limited payment if percentage at 

least 60 percent but less than 80 

percent—(i) In general. A plan satisfies 

the requirements of section 436(d)(3) 

and this paragraph (d)(3) only if the 

plan provides that, in any case in which 

the plan’s adjusted funding target 

attainment percentage for a plan year is 

60 percent or more but is less than 80 

percent, a participant or beneficiary is 

permitted to elect the payment of a 

benefit with an annuity starting date on 

or after the applicable section 436 

measurement date in the form of a 

prohibited payment only if the present 

value, determined in accordance with 

section 417(e)(3), of the portion of the 

payment that is greater than the amount 

of the straight life annuity under the 

plan (as described in paragraph 

(d)(5)(i)(A) of this section) does not 

exceed the lesser of—

(A) 50 percent of the present value of 

the benefits, determined in accordance 

with section 417(e)(3) (or, if greater, 50 

percent of the amount of any single sum 

that would be payable without regard to 

this paragraph (d)); or 

(B) 100 percent of the PBGC guarantee 

amount described in paragraph (d)(3)(iv) 

of this section. 

(ii) Bifurcation if optional form 

unavailable—(A) General rule. If an 

optional form of benefit that is 

otherwise available under the terms of 

the plan is not available as of the 

annuity starting date because of the 

application of paragraph (d)(3)(i) of this 

section, then the plan must provide a 

participant or beneficiary who elects 

such an optional form with the option 

either to defer payment to a later date 

(to the extent permitted under 

applicable qualification requirements) 

or to bifurcate the benefit into 

unrestricted and restricted portions. If 

the participant or beneficiary elects to 

bifurcate the benefit, the plan must 

permit the participant or beneficiary to 

elect, with respect to the unrestricted 

portion, any optional form of benefit 

otherwise available under the plan with 

respect to the participant’s or 

beneficiary’s entire benefit (whether or 

not the optional form of benefit with 

respect to the unrestricted portion is a 

prohibited payment). In such a case, if 

the participant or beneficiary elects 

payment of the unrestricted portion of 

the benefit described in paragraph 

(d)(3)(ii)(B) of this section in the form of 

a prohibited payment, the plan must 

permit the participant or beneficiary to 

elect payment of the restricted portion 

described in paragraph (d)(3)(ii)(C) of 

this section in any optional form of 

benefit under the plan that is not a 

prohibited payment and that would 

have been permitted with respect to the 

participant’s or beneficiary’s entire 

benefit. A plan is also permitted to offer 

optional forms of benefit that are solely 

available during the period this 

paragraph (d)(3) applies to the plan, 

such as an optional form of benefit that 

provides for the current payment of the 

unrestricted portion of the benefit, with 

a delayed commencement for the 

restricted portion of the benefit, subject 

to other applicable qualification 

requirements. 

(B) Unrestricted portion of the benefit. 

The unrestricted portion of the benefit 

is the lesser of—

(1) 50 percent of the benefit; and 

(2) The portion of the benefit that has 

a present value equal to the PBGC 

guarantee amount described in 

paragraph (d)(3)(iv) of this section. 

(C) Restricted portion of the benefit. 

The restricted portion of the benefit is 

the portion of the benefit that is not 

described in paragraph (d)(3)(ii)(B) of 

this section. 

(iii) One-time application—(A) In 

general. A plan satisfies the 

requirements of this paragraph (d) only 

if the plan provides that, in the case of 

a participant who receives a prohibited 

payment (or series of prohibited 

payments under a single optional form 

of benefit) pursuant to paragraph 

(d)(3)(i) or (ii) of this section, the 

participant cannot thereafter receive any 

additional prohibited payment during 

any period of consecutive plan years to 

which the limitations under either this 


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50564 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

paragraph (d)(3), paragraph (d)(1) of this 

section, or paragraph (d)(2) of this 

section apply. 

(B) Treatment of beneficiaries. For 

purposes of this paragraph (d)(3), 

benefits provided to a participant and 

any beneficiary (including an alternate 

payee, as defined in section 414(p)(8)) 

are aggregated. If the accrued benefit of 

a participant is allocated to such an 

alternate payee and one or more other 

persons, the unrestricted amount under 

paragraphs (d)(3)(i) and (d)(3)(ii) of this 

section is allocated among such persons 

in the same manner as the accrued 

benefit is allocated, unless a qualified 

domestic relations order (as defined in 

section 414(p)(1)(A)) with respect to the 

participant or the alternate payee 

provides otherwise. 

(iv) Present value of PBGC maximum 

benefit guarantee. The amount 

described in this paragraph (d)(3)(iv) is, 

with respect to a participant, the present 

value (determined under guidance 

prescribed by the Pension Benefit 

Guaranty Corporation, using the interest 

and mortality assumptions under 

section 417(e)) of the maximum benefit 

guarantee under section 4022 of the 

Employee Retirement Income Security 

Act of 1974, as amended. 

(v) Examples. The following examples 

illustrate the application of this 

paragraph (d)(3): 

Example 1. (i) Plan A is subject to the 

restriction on accelerated benefit 

distributions under paragraph (d)(3) of this 

section for the 2010 plan year, and can 

therefore only pay a portion of the 

accelerated benefit payments otherwise 

payable to participants whose annuity 

starting date occurs while the restriction 

applies. 

(ii) Participant P is not married, and retires 

at age 65 during 2010, while the restriction 

under paragraph (d)(3) of this section applies 

to Plan A. P’s accrued benefit is $10,000 per 

month, payable commencing at age 65 as a 

straight life annuity. Plan A provides for an 

optional single sum payment (subject to the 

restrictions under section 436) equal to the 

present value of the participant’s accrued 

benefit using actuarial assumptions under 

section 417(e). P’s single sum payment, 

determined without regard to this paragraph 

(d), is calculated to be $1,416,000, payable at 

age 65. 

(iii) The PBGC guaranteed monthly benefit 

for a straight life annuity payable at age 65 

in 2010 (for purposes of this example) is 

$4,500. The present value of the PBGC 

guaranteed benefit using actuarial 

assumptions under section 417(e) is 

$637,200. 

(iv) Because Participant P retires during a 

period when the restriction in paragraph 

(d)(3) of this section applies to Plan A, only 

a portion of the benefit can be paid in the 

form of a single sum. P elects a single sum 

payment. Because a single sum payment is a 

prohibited payment, a determination must be 

made whether the payment can be paid 

under paragraph (d)(3)(i) of this section. In 

this case, because the portion of Participant 

P’s benefit that is greater than a straight life 

annuity exceeds the lesser of 50% of the 

benefit otherwise payable, or the present 

value of the PBGC guaranteed benefit, it 

cannot be paid under paragraph (d)(3)(i) of 

this section. Accordingly, the maximum 

single sum that Participant P can receive is 

$637,200 (that is, the lesser of 50% of 

$1,416,000 or $637,200). 

(v) Pursuant to paragraph (d)(3)(ii) of this 

section, the plan must offer P the option to 

bifurcate the benefit into restricted and 

unrestricted portions. The unrestricted 

portion is a monthly straight life annuity of 

$4,500, which can be paid in a single sum 

of $637,200. If P elects to receive the 

unrestricted portion of the benefit in the form 

of a single sum, then, with respect to the 

$5,500 restricted portion, the plan must 

permit P to elect any form of benefit that 

would otherwise be permitted with respect to 

the full $10,000 that is not a prohibited 

payment. Alternatively, the plan could 

permit P to elect to defer commencement of 

the restricted portion, subject to applicable 

qualification rules. 

Example 2. (i) The facts are the same as in 

Example 1. In addition, Plan A provides an 

optional form of payment (subject to any 

benefit restrictions under section 436) that 

consists of a partial payment equal to the 

total return of employee contributions to the 

plan accumulated with interest, with an 

annuity payment for the remainder of the 

participant’s benefit. 

(ii) Participant Q is not married, and retires 

at age 65 during 2010, while Plan A is subject 

to the restriction under paragraph (d)(3) of 

this section. Participant Q has an accrued 

benefit equal to a straight life annuity of 

$3,000 per month. Under the optional form 

described in paragraph (i) of this Example 2, 

Q may elect a partial payment of $99,120 

(representing the return of employee 

contributions accumulated with interest) 

plus a straight life annuity of $2,300 per 

month. The present value of Participant Q’s 

accrued benefit, using actuarial assumptions 

under section 417(e), is $424,800. The 

present value of the PBGC guarantee payable 

at age 65 in the form of a straight life annuity 

is determined to be $637,200 for the purposes 

of this Example 2. 

(iii) Under the bifurcation approach of 

paragraph (d)(3)(ii) of this section, Q can 

receive the partial single sum payment 

available under the terms of Plan A as long 

as the amount of the single sum does not 

exceed the unrestricted portion of the benefit 

under paragraph (d)(3)(ii)(B) of this section. 

The unrestricted portion of Q’s benefit is the 

lesser of 50% of the benefit otherwise 

payable, or the present value of the PBGC 

guaranteed benefit. Accordingly, the 

maximum single sum that Q can receive is 

$212,400 (that is, the lesser of 50% of 

$424,800, or $637,200). 

(iv) Because the present value of the 

portion of Q’s benefit that is greater than the 

straight life annuity ($99,120) is less than the 

lesser of 50% of the present value of benefits 

(50% of $424,800) and $637,200 (100% of the 

PBGC guaranteed benefit), the optional form 

described in paragraph (i) of this Example 2 

is permitted to be paid under paragraph 

(d)(3)(i) of this section. 

(4) Exception for cessation of benefit 

accruals. This paragraph (d) does not 

apply to a plan for a plan year if the 

terms of the plan, as in effect for the 

period beginning on September 1, 2005, 

provided for no benefit accruals with 

respect to any participants. If a plan that 

is described in this paragraph (d)(4) 

provides for benefit accruals during any 

time after September 1, 2005, this 

paragraph (d)(4) ceases to apply for the 

plan as of the date any benefits accrue 

under the plan. 

(5) Prohibited payment—(i) In 

general. For purpose of this paragraph 

(d), the term prohibited payment 

means—

(A) Any payment for a month that is 

in excess of the monthly amount paid 

under a straight life annuity (plus any 

social security supplements described 

in the last sentence of section 411(a)(9)) 

to a participant or beneficiary whose 

annuity starting date occurs during any 

period that a limitation under this 

paragraph (d) is in effect; 

(B) Any payment for the purchase of 

an irrevocable commitment from an 

insurer to pay benefits; and 

(C) Any other payment that is 

identified as a prohibited payment by 

the Commissioner in revenue rulings 

and procedures, notices and other 

guidance published in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter). 

(ii) Annuity starting date. Solely for 

purposes of applying the limitations on 

accelerated benefit payments under this 

paragraph (d), the term annuity starting 

date means, as applicable—

(A) The first day of the first period for 

which an amount is payable as an 

annuity as described in section 

417(f)(2)(A)(i); 

(B) In the case of a benefit not payable 

in the form of an annuity, the first day 

on which all events have occurred 

(including the participant’s election, the 

participant’s severance from 

employment if the participant is below 

normal retirement age, and, if 

applicable, the participant’s survival to 

the date as of which payment is made) 

which entitle the participant to such 

benefit as described in section 

417(f)(2)(A)(ii); 

(C) In the case of an amount payable 

on a retroactive annuity starting date, 

the benefit commencement date; and 

(D) The date of any payment for the 

purchase of an irrevocable commitment 

from an insurer to pay benefits under 

plan. 

(6) Involuntary distributions under 

section 411(a)(11). [Reserved]. 


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(e) Limitation on benefit accruals for 

plans with severe funding shortfalls—(1) 

In general. A plan satisfies the 

requirements of section 436(e) and this 

paragraph (e) only if it provides that, in 

any case in which the plan’s adjusted 

funding target attainment percentage for 

a plan year is less than 60 percent, 

benefit accruals under the plan will 

cease as of the applicable section 436 

measurement date. If a plan is required 

to cease benefit accruals under this 

paragraph (e), then the plan is not 

permitted to be amended in a manner 

that would increase the liabilities of the 

plan by reason of an increase in benefits 

or establishment of new benefits. The 

preceding sentence applies regardless of 

whether an amendment would 

otherwise be permissible under 

paragraph (c)(3) of this section. 

(2) Exemption. The prohibition on 

additional benefit accruals under a plan 

described in paragraph (e)(1) of this 

section ceases to apply with respect to 

any plan year, effective as of the first 

day of the plan year, upon payment by 

the plan sponsor of the contribution 

described in paragraph (f)(2) of this 

section. 

(f) Methods to avoid benefit 

limitations—(1) In general. This 

paragraph (f) sets forth rules relating to 

employer contributions and other 

methods to avoid the application of 

section 436 limitations under a plan for 

a plan year. In general, there are four 

methods a plan sponsor may utilize to 

avoid or terminate one or more of the 

benefit limitations under this section for 

a plan year. Two of these methods 

(where the plan sponsor elects to reduce 

the prefunding balance or funding 

standard carryover balance and where 

the plan sponsor makes additional 

contributions under section 430 for the 

prior plan year within the time period 

provided by section 430(j)(1) which are 

not added to the prefunding balance) 

involve increasing the amount of plan 

assets which are taken into account in 

determining the adjusted funding target 

attainment percentage. The other two 

methods (making a contribution that is 

specifically designated as a current year 

contribution to avoid application of a 

benefit limitation under paragraph (b), 

(c), or (e) of this section, and providing 

security under section 436(f)(1)) are 

described in paragraphs (f)(2) and (f)(3) 

of this section, respectively. 

(2) Current year contributions to avoid 

or terminate benefit limitations—(i) 

General rules—(A) Amount of 

contribution—(1) In general. This 

paragraph (f)(2) sets forth rules 

regarding contributions to avoid the 

application of section 436 limitations 

under a plan for a plan year that apply 

to unpredictable contingent event 

benefits, plan amendments that increase 

liabilities for benefits, and benefit 

accruals. 

(2) Interest adjustment. Any 

contribution made by a plan sponsor 

pursuant to this paragraph (f)(2) on a 

date other than the valuation date for 

the plan year must be adjusted with 

interest at the plan’s effective interest 

rate under section 430(h)(2)(A) for the 

plan year. If the plan’s effective interest 

rate for the plan year has not been 

determined at the time of the 

contribution, then this interest 

adjustment must be made using the 

highest of the three segment rates as 

applicable for the plan year under 

section 430(h)(2)(C). In such a case, if 

the effective interest rate for the year 

under section 430(h)(2)(A) is 

subsequently determined to be less than 

that highest rate, the excess is 

recharacterized as a section 430 

contribution for the current plan year. 

(B) Prefunding balance or funding 

standard carryover balance may not be 

used. No prefunding balance or funding 

standard carryover balance under 

section 430(f) may be used as a 

contribution described in this paragraph 

(f)(2). However, a plan sponsor is 

permitted to elect to reduce the funding 

standard carryover balance or the 

prefunding balance in order to increase 

the adjusted funding target attainment 

percentage for a plan year. See 

paragraph (a)(5) of this section for a rule 

mandating such a reduction in certain 

situations. 

(ii) Section 436 contributions separate 

from minimum required contributions—

(A) In general. The contributions 

described in this paragraph (f)(2) are 

contributions described in section 

436(b)(2), (c)(2), and (e)(2), and are 

separate from any minimum required 

contributions under section 430. Thus, 

if a plan sponsor makes a contribution 

described in this paragraph (f)(2) for a 

plan year but does not make the 

minimum required contribution for the 

plan year, the plan will fail to satisfy the 

minimum funding requirements under 

section 430 for the plan year. In 

addition, a contribution described in 

this paragraph (f)(2) is disregarded in 

determining the prefunding balance 

under section 430(f)(6) and § 1.430(f)–

1(b)(1)(i). 

(B) Designation requirement. Any 

contribution made by a plan sponsor 

pursuant to this paragraph (f)(2) must be 

designated as such at the time the 

contribution is used to avoid or 

terminate the limitations under this 

paragraph (f)(2) and, except as 

specifically provided in paragraph (g) or 

(h) of this section, cannot subsequently 

be recharacterized with respect to any 

plan year as a contribution to satisfy a 

minimum required contribution 

obligation, or otherwise. The 

designation must be made in accordance 

with the rules and procedures that 

otherwise apply to elections under 

§ 1.430(f)–1(f) with respect to funding 

balances. 

(iii) Contribution for unpredictable 

contingent event benefits. In the case of 

a contribution to avoid the application 

of the limitation on benefits attributable 

to an unpredictable contingent event 

under section 436(b)—

(A) If the adjusted funding target 

attainment percentage for the plan year 

determined without taking into account 

the liability attributable to the 

unpredictable contingent event benefits 

is less than 60 percent, then the amount 

of the contribution under section 

436(b)(2) is equal to the amount of the 

increase in the funding target of the plan 

for the plan year if the benefits 

attributable to the unpredictable 

contingent event were included in the 

determination of the funding target. 

(B) If the adjusted funding target 

attainment percentage for the plan year 

determined without taking into account 

the liability attributable to the 

unpredictable contingent event benefits 

is 60 percent or more, then the amount 

of the contribution under section 

436(b)(2) is the amount that would be 

sufficient to result in an adjusted 

funding target attainment percentage for 

the plan year of 60 percent if—

(1) The benefits attributable to the 

unpredictable contingent event were 

included in the determination of the 

funding target; and 

(2) The contribution were included as 

part of the assets of the plan. 

(iv) Contribution for plan 

amendments increasing liability for 

benefits. In the case of a contribution to 

avoid the application of the limitation 

on benefits attributable to a plan 

amendment under 436(c)—

(A) If the adjusted funding target 

attainment percentage for the plan year 

determined without taking into account 

the liability attributable to the plan 

amendment is less than 80 percent, then 

the amount of the contribution under 

section 436(c)(2) is equal to the amount 

of the increase in the funding target of 

the plan for the plan year if the 

liabilities attributable to the amendment 

were included in the determination of 

the funding target. 

(B) If the adjusted funding target 

attainment percentage for the plan year 

determined without taking into account 

the liability attributable to the plan 

amendment is 80 percent or more, then 

the amount of the contribution under 


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50566 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

section 436(c)(2) is the amount that 

would be sufficient to result in an 

adjusted funding target attainment 

percentage for the plan year of 80 

percent if—

(1) The liabilities attributable to the 

plan amendment were included in the 

determination of the funding target; and 

(2) The contribution were included as 

part of the assets of the plan. 

(v) Contribution required for 

continued benefit accruals. In the case 

of a contribution to avoid the 

application of the limitation on accruals 

under section 436(e), the amount of the 

contribution under section 436(e)(2) is 

equal to the amount sufficient to result 

in an adjusted funding target attainment 

percentage for the plan year of 60 

percent if the contribution were 

included as part of the assets of the 

plan. 

(3) Security to increase adjusted 

funding target attainment percentage—

(i) In general. For purposes of avoiding 

benefit limitations under section 436, a 

plan sponsor may provide security in 

the form described in paragraph (f)(3)(ii) 

of this section. In such a case, the 

adjusted funding target attainment 

percentage for the plan year is 

determined by treating as an asset of the 

plan any security provided by a plan 

sponsor by the valuation date for the 

plan year in a form meeting the 

requirements of paragraph (f)(3)(ii) of 

this section. However, this security is 

not taken into account as a plan asset for 

any other purpose, including section 

430. 

(ii) Form of security. The forms of 

security permitted under paragraph 

(f)(3)(i) of this section are limited to—

(A) A bond issued by a corporate 

surety company that is an acceptable 

surety for purposes of section 412 of the 

Employee Retirement Income Security 

Act of 1974, as amended; or 

(B) Cash, or United States obligations 

which mature in 3 years or less, held in 

escrow by a bank or an insurance 

company. 

(iii) Enforcement. Any form of 

security provided under paragraph 

(f)(3)(i) of this section must provide—

(A) That it will be paid to the plan 

upon the earliest of—

(1) The plan termination date as 

defined in section 4048 of ERISA; 

(2) If there is a failure to make a 

payment of the minimum required 

contribution for any plan year beginning 

after the security is provided, the due 

date for the payment under section 

430(j)(1) or 430(j)(3); or 

(3) If the plan’s adjusted funding 

target attainment percentage is less than 

60 percent (without regard to any 

security provided under this paragraph 

(f)(3)) for a consecutive period of 7 

years, the valuation date for the last year 

in the 7-year period; and 

(B) That the plan administrator must 

notify the surety, bank, or insurance 

company that issued or holds the 

security of any event described in 

paragraph (f)(3)(iii)(A) of this section 

within 10 days of its occurrence. 

(iv) Release of security. The form of 

security is permitted to provide that it 

will be released (and any amounts 

thereunder will be refunded together 

with any interest accrued thereon) as 

provided in the agreement governing the 

escrow, but such release is not 

permitted until the plan’s enrolled 

actuary has certified that the plan’s 

adjusted funding target attainment 

percentage for a plan year is at least 90 

percent (without regard to any security 

provided under this paragraph (f)(3)). 

(v) Contribution of security to plan. 

Any amount of security provided under 

this paragraph (f)(3) that is subsequently 

turned over to the plan (whether 

pursuant to the enforcement mechanism 

of paragraph (f)(3)(iii) of this section or 

after its release under paragraph 

(f)(3)(iv) of this section) is treated as a 

contribution by the plan sponsor under 

section 430 when contributed and, if 

turned over pursuant to paragraph 

(f)(3)(iii) of this section, is not a 

contribution under paragraph (f)(2) of 

this section. 

(4) Examples. The following examples 

illustrate the application of this 

paragraph (f): 

Example 1. (i) Plan Z is a non-collectively 

bargained defined benefit plan with a plan 

year that is the calendar year and a valuation 

date of January 1. Plan Z’s sponsor is not in 

bankruptcy and did not purchase any 

annuities in 2009 or 2010. As of January 1, 

2011, Plan Z does not have a funding 

standard carryover balance or a prefunding 

balance. As of that date, Plan Z has plan 

assets (and adjusted plan assets) of 

$2,000,000 and a funding target (and an 

adjusted funding target) of $2,550,000. On 

March 1, 2011, the enrolled actuary for the 

plan certifies that the AFTAP as of January 

1, 2011, is 78.43%. The effective rate of 

interest for Plan Z for the 2011 plan year is 

5.5%. 

(ii) On May 1, 2011, the plan sponsor 

amends Plan Z to increase benefits. The 

enrolled actuary for the plan determines that 

the present value, as of January 1, 2011, of 

the increase in funding target due to this 

amendment is $400,000. Because the AFTAP 

prior to the plan amendment is less than 

80%, Plan Z is subject to the restriction on 

plan amendments in paragraph (c) of this 

section, and the amendment cannot take 

effect unless the employer utilizes one of the 

methods described in paragraph (f) of this 

section to avoid benefit limitations. 

(iii) In order for this amendment to be 

permitted to become effective, the plan 

sponsor makes a contribution described in 

paragraph (f)(2) of this section. Because the 

AFTAP prior to the amendment was less than 

80%, the provisions of paragraph (f)(2)(iv)(A) 

of this section apply. The amount of the 

contribution as of January 1, 2011, needed to 

avoid the restriction on plan amendments 

under paragraph (c) of this section is equal 

to the amount of the increase in funding 

target attributable to the amendment, or 

$400,000. Under the provisions of paragraph 

(f)(2)(iv)(A) of this section, this contribution 

is required even though, if the contribution 

were included as part of the plan assets and 

the liability attributable to the plan 

amendment were included in the funding 

target, the AFTAP would be 81.36% (because 

the adjusted plan assets would have been 

$2,400,000 and the adjusted funding target 

would have been $2,950,000 (that is, adjusted 

plan assets of $2,000,000 plus the 

contribution of $400,000 as of January 1, 

2011; divided by the adjusted funding target 

of $2,550,000 increased to reflect the 

additional $400,000 in the funding target 

attributable to the plan amendment)). 

(iv) However, because the contribution is 

not paid until May 1, 2011, the necessary 

contribution amount must be adjusted to 

reflect interest that would otherwise have 

accrued between the valuation date and the 

date of the contribution, at Plan Z’s effective 

rate of interest for the 2011 plan year. The 

amount of the required contribution after 

adjustment is $407,203, determined as 

$400,000 increased for 4 months of 

compound interest at an effective annual 

interest rate of 5.5%. 

(v) A contribution of $407,203 is made on 

May 1, 2011, and is designated as a 

contribution under paragraph (f)(2) of this 

section. Accordingly, the contribution is not 

applied toward minimum funding 

requirements under section 430, and is not 

eligible for inclusion in the prefunding 

balance under § 1.430(f)–1(b)(1). Since this 

contribution meets the requirements of 

paragraph (f)(2) of this section, the plan 

amendment can take effect. 

Example 2. (i) The facts are the same as in 

Example 1, except that the plan is in at-risk 

status under section 430(i). The funding 

target determined under section 430(i) is 

$2,600,000, and the funding target 

determined without regard to section 430(i) 

is $2,550,000. 

(ii) On May 1, 2011, the plan sponsor 

amends Plan Z to increase benefits. The 

plan’s enrolled actuary determines that the 

present value as of January 1, 2011 of the 

increase in the funding target due to the 

amendment (taking into account the at-risk 

status of the plan) is $440,000. Because the 

AFTAP prior to the plan amendment is less 

than 80%, Plan Z is subject to the restriction 

on plan amendments in paragraph (c) of this 

section, and the amendment cannot take 

effect unless the employer utilizes one of the 

methods described in paragraph (f) of this 

section to avoid benefit limitations. 

(iii) In order for this amendment to be 

permitted to become effective, the plan 

sponsor makes a contribution described in 

paragraph (f)(2) of this section. Because the 

AFTAP prior to the amendment was less than 

80%, the provisions of paragraph (f)(2)(iv)(A) 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 50567 

of this section apply. The amount of the 

contribution as of January 1, 2011, needed to 

avoid the restriction on plan amendments 

under paragraph (c) of this section is equal 

to the amount of the increase in funding 

target attributable to the amendment, or 

$440,000. Under the provisions of paragraph 

(f)(2)(iv)(A) of this section, this contribution 

is required even though, if the contribution 

were included as part of the plan assets and 

the liability attributable to the plan 

amendment were included in the funding 

target, the AFTAP would exceed 80%. 

(iv) However, because the contribution is 

not paid until May 1, 2011, the necessary 

contribution amount must be adjusted to 

reflect interest that would otherwise have 

accrued between the valuation date and the 

date of the contribution, at Plan Z’s effective 

rate of interest for the 2011 plan year. The 

amount of the required contribution after 

adjustment is $447,923, determined as 

$440,000 increased for 4 months of 

compound interest at an effective annual 

interest rate of 5.5%. 

(v) A contribution of $447,923 is made on 

May 1, 2011, and is designated as a 

contribution under paragraph (f)(2) of this 

section. Accordingly, the contribution is not 

applied toward minimum funding 

requirements under section 430, and is not 

eligible for inclusion in the prefunding 

balance under § 1.430(f)–1(b)(1). Since this 

contribution meets the requirements of 

paragraph (f)(2) of this section, the plan 

amendment can take effect. 

Example 3. (i) The facts are the same as in 

Example 1, except that the enrolled actuary 

for the plan does not issue the certification 

of the 2011 AFTAP until September 1, 2011. 

Prior to October 1, 2010, the enrolled actuary 

had certified the 2010 AFTAP to be 82%. The 

highest of the three segment rates applicable 

to the 2011 plan year under section 

430(h)(2)(C) is 6%. 

(ii) Because the enrolled actuary has not 

certified the actual AFTAP as of January 1, 

2011, and the amendment is scheduled to 

take effect after April 1, 2011, the rules of 

paragraph (h)(2)(ii) of this section apply. 

Accordingly, the AFTAP for 2011 (prior to 

reflecting the effect of the amendment) is 

presumed to be 10 percentage points lower 

than the 2010 AFTAP, or 72%. Because this 

presumed AFTAP is less than 80%, the 

restriction on plan amendments in paragraph 

(c) of this section applies, and the plan 

amendment cannot take effect. 

(iii) In order to allow the plan amendment 

to take effect, the plan sponsor decides to 

make a contribution under paragraph (f)(2) of 

this section on May 1, 2011. Because the 

presumed AFTAP was less than 80% prior to 

reflecting the plan amendment, the rules of 

section (f)(2)(iv)(A) apply, and the amount of 

the contribution under section 436(c)(2) is 

the amount of the increase in the funding 

target for the year if the plan amendment 

were included in the determination of the 

funding target. Accordingly, an additional 

contribution of $400,000 is required as of 

January 1, 2011, to avoid the restriction on 

plan amendments under paragraph (c) of this 

section. 

(iv) However, since the contribution is not 

made until May 1, 2011, the amount of the 

required contribution must be adjusted to 

reflect interest that would otherwise have 

accrued between the valuation date and the 

date of the contribution. Since the effective 

interest rate has not yet been determined, the 

interest adjustment is based on the highest of 

the three segment rates applicable for the 

2011 plan year under section 430(h)(2)(C), or 

6%. The amount of the required contribution 

after adjustment is $407,845, determined as 

$400,000 increased for 4 months of 

compound interest at the highest segment 

interest rate for 2011, or 6%. 

(v) Once the plan’s effective interest rate 

has been determined, if that rate for the year 

is less than 6%, the amount of excess interest 

previously contributed is recharacterized as a 

section 430 contribution for the current plan 

year. 

(g) Rules of operation for periods prior 

to and after certification—(1) In general. 

Section 436(h) and paragraph (h) of this 

section set forth a series of 

presumptions that apply before the 

enrolled actuary for a plan issues a 

certification of the plan’s adjusted 

funding target attainment percentage for 

a plan year. This paragraph (g) sets forth 

rules for the application of limitations 

under sections 436(b), 436(c), 436(d), 

and 436(e) prior to and during the 

period those presumptions apply to a 

plan, and describes the interaction of 

those presumptions with plan 

operations after the plan’s enrolled 

actuary has issued a certification of the 

plan’s adjusted funding target 

attainment percentage for the plan year. 

Paragraph (g)(2) of this section sets forth 

rules that apply to periods during which 

a presumption under section 436(h) 

applies. Paragraph (g)(3) of this section 

sets forth rules that apply to periods 

during which no presumptions under 

section 436(h) apply but which are prior 

to the enrolled actuary’s certification of 

the plan’s adjusted funding target 

attainment percentage for the plan year. 

Paragraph (g)(4) of this section sets forth 

rules that apply after the enrolled 

actuary’s certification of the plan’s 

adjusted funding target attainment 

percentage for a plan year. Paragraph 

(g)(5) of this section sets forth additional 

rules that apply prior to the enrolled 

actuary’s certification of the adjusted 

funding target attainment percentage for 

a plan year with respect to the 

limitations on unpredictable contingent 

event benefits and plan amendments 

that increase liabilities under 

paragraphs (b) and (c) of this section, 

respectively. Paragraph (g)(6) of this 

section sets forth rules for multiple 

unpredictable contingent events and 

amendments during a plan year. 

Paragraph (g)(7) of this section sets forth 

examples of the application of this 

paragraph (g). 

(2) Periods prior to certification 

during which a presumption applies—

(i) Plan must follow presumptions. A 

plan must provide that, for any period 

during which paragraph (h)(1), (2), or (3) 

of this section applies to the plan, the 

limitations applicable under paragraphs 

(b), (c), (d), and (e) of this section apply 

to the plan as if the actual adjusted 

funding target attainment percentage for 

the year were the presumed adjusted 

funding target attainment percentage 

determined under the rules of paragraph 

(h) of this section. 

(ii) Determination of amount of 

reduction in balances—(A) Valuation 

date adjustment. During the period 

described in this paragraph (g)(2), the 

rules of paragraph (a)(5) of this section 

(relating to the deemed election to 

reduce the funding standard carryover 

balance and the prefunding balance) 

must be applied based on the presumed 

percentage with respect to the 

limitations under paragraphs (b), (c), (d), 

and (e) of this section. In order to 

determine the amount of the reduction 

in those balances that would apply in 

such a situation, a presumed adjusted 

funding target must be established, 

which is then compared to the interim 

value of adjusted plan assets as of the 

valuation date for the current plan year. 

For this purpose, the interim value of 

adjusted plan assets is equal to the value 

of adjusted plan assets as of the 

valuation date, determined without 

regard to future contributions, future 

elections to add to the prefunding 

balance for the prior year, and future 

elections (including deemed elections 

under paragraph (a)(5) of this section) to 

reduce the prefunding and funding 

standard carryover balances for the 

current plan year, and the presumed 

adjusted funding target is equal to the 

interim value of adjusted plan assets for 

the plan year divided by the presumed 

adjusted funding target attainment 

percentage. 

(B) Change in presumed percentage in 

4th month. If the presumed adjusted 

funding target attainment percentage for 

the plan year changes during the year 

because of application of the 

presumption in paragraph (h)(2) of this 

section, the rules regarding the deemed 

election to reduce funding balances 

described in paragraph (a)(5) of this 

section must be reapplied based on the 

new presumed adjusted funding target 

attainment percentage. This will 

typically occur on the first day of the 

4th month of a plan year, but could 

happen later if the enrolled actuary’s 

certification of the adjusted funding 

target attainment percentage for a plan 

year occurs after the first day of the 4th 

month of the following plan year. In 


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order to perform this reapplication, a 

new adjusted funding target must be 

determined based on the new presumed 

adjusted funding target attainment 

percentage and must be compared to an 

updated interim value of adjusted plan 

assets. For this purpose, the new 

presumed adjusted funding target is 

redetermined based on the new 

presumed adjusted funding target 

attainment percentage, and is compared 

to the adjusted plan assets updated to 

take into account the plan sponsor’s 

contributions made for the prior plan 

year and section 430(f) elections with 

respect to the plan’s prefunding and 

funding standard carryover balances 

since the earlier determination of the 

interim plan assets. This reapplication 

of the deemed election may require an 

additional reduction in funding 

balances if the amount of the reduction 

in funding balances that is necessary to 

reach the applicable threshold to avoid 

the application of the limitation under 

paragraph (d) or (e) of this section is 

greater than the amount that was 

initially reduced. Prior reductions of 

funding balances continue to apply in 

accordance with the rules of paragraph 

(g)(4)(i)(C) of this section. 

(iii) Bankruptcy of plan sponsor. 

Pursuant to section 436(d)(2), during 

any period in which the plan sponsor of 

a plan is a debtor in a case under title 

11, United States Code, or any similar 

Federal or State law (as described in 

paragraph (d)(2) of this section), if the 

plan’s enrolled actuary has not yet 

certified the plan’s adjusted funding 

target attainment percentage for the plan 

year to be at least 100 percent, no 

prohibited payments within the 

meaning of paragraph (d)(5) of this 

section may be paid. Thus, the 

presumption rules of paragraph (h) of 

this section do not apply for purposes 

of section 436(d)(2) and this paragraph 

(g)(2)(iii). 

(iv) Application to unpredictable 

contingent events and plan 

amendments. For purposes of applying 

the limitations under paragraphs (b) and 

(c) of this section during the period 

described in this paragraph (g)(2), the 

presumed adjusted funding target under 

paragraph (g)(2)(ii) of this section is 

adjusted to reflect the increase in the 

funding target that would be attributable 

to the unpredictable contingent event or 

the plan amendment if the 

unpredictable contingent event benefits 

or the increase in liability attributable to 

the plan amendment were taken into 

account. See paragraph (g)(5)(i) of this 

section for related rules regarding 

funding balances that apply in the case 

of unpredictable contingent event 

benefits or plan amendments increasing 

benefit liabilities. 

(3) Periods prior to certification 

during which no presumption applies—

(i) Accelerated benefit payments and 

benefit accruals. If no presumptions 

under section 436(h) apply to a plan 

during a period and the plan’s enrolled 

actuary has not yet issued the 

certification of the plan’s actual 

adjusted funding target attainment 

percentage for the plan year, the plan is 

not permitted to limit the payment of 

accelerated benefits under paragraph (d) 

of this section or the accrual of benefits 

under paragraph (e) of this section based 

on an expectation that those paragraphs 

will apply to the plan once an actuarial 

certification is issued. However, see 

paragraph (g)(2)(iii) of this section for a 

restriction on prohibited payments 

during any period in which the plan 

sponsor of a plan is a debtor in a case 

under title 11, United States Code, or 

any similar Federal or State law. 

(ii) Unpredictable contingent event 

benefits and plan amendments 

increasing benefit liability—(A) In 

general. If no presumptions under 

section 436(h) apply to a plan during a 

period and the plan’s enrolled actuary 

has not yet issued a certification of the 

plan’s adjusted funding target 

attainment percentage for the plan year, 

the limitations on unpredictable 

contingent event benefits under 

paragraph (b) of this section or plan 

amendments increasing benefit liability 

under paragraph (c) of this section 

during that period must be applied 

following the rules of paragraph (g)(5) of 

this section, based on the preceding 

year’s certified adjusted funding target 

attainment percentage. Thus, if after 

application of those rules the plan 

would be treated as having an adjusted 

funding target attainment percentage 

below the applicable threshold under 

paragraph (b) or (c) of this section 

(taking into account the increase in the 

funding target attributable to the 

unpredictable contingent event benefits 

or the increase in liability attributable to 

the plan amendment), the unpredictable 

contingent event benefits are not 

permitted to be paid, and the plan 

amendment is not permitted to go into 

effect, unless the contribution described 

in paragraph (g)(5)(ii) of this section is 

made. 

(B) Recharacterization of 

contributions to avoid benefit 

limitations. If, pursuant to paragraph 

(g)(3)(ii)(A) of this section, the plan 

sponsor makes contributions described 

in paragraph (g)(5)(ii) of this section to 

avoid application of the applicable 

benefit limitations, then, after the 

certification of the adjusted funding 

target attainment percentage for the 

current plan year is issued by the plan’s 

enrolled actuary, those contributions are 

recharacterized as employer 

contributions under section 430 for the 

current plan year to the extent they 

exceed the amount necessary to avoid 

application of the applicable limitation 

under paragraph (b) or (c) of this section 

based on the certified percentage. 

(4) Periods after certification of 

adjusted funding target attainment 

percentage—(i) Plan must follow 

certified percentage—(A) In general. 

The rules of paragraphs (g)(2) and (g)(3) 

of this section no longer apply for a plan 

year on and after the date the enrolled 

actuary for the plan issues a certification 

of the adjusted funding target 

attainment percentage of the plan for the 

current plan year, provided that the 

certification is issued before the first 

day of the 10th month of the plan year. 

Thus, for example, the plan must 

provide that paragraph (d) of this 

section applies for distributions with 

annuity starting dates on and after the 

date of that certification using the 

certified adjusted funding target 

attainment percentage of the plan for the 

plan year. Similarly, the plan must 

provide that any prohibition on accruals 

under paragraph (e) of this section as a 

result of the enrolled actuary’s 

certification that the adjusted funding 

target attainment percentage of the plan 

for the plan year is less than 60 percent 

is effective as of the date of the 

certification and that any prohibition on 

accruals ceases to be effective on the 

date the enrolled actuary issues a 

certification that the adjusted funding 

target attainment percentage of the plan 

for the plan year is at least 60 percent. 

In addition, in the case of a plan that has 

been issued a certification of the plan’s 

adjusted funding target attainment 

percentage for a plan year by the plan’s 

enrolled actuary, the plan sponsor must 

comply with the requirements of 

paragraphs (b) and (c) of this section for 

an unpredictable contingent event that 

occurs or a plan amendment that is 

effective on or after the date of the 

enrolled actuary’s certification. Thus, 

the plan administrator must determine 

if the adjusted funding target attainment 

percentage is at or above the applicable 

threshold, taking into account the 

increase in the funding target that 

would be attributable to the 

unpredictable contingent event or plan 

amendment if the unpredictable 

contingent event benefits or the increase 

in liability attributable to the plan 

amendment were taken into account. 

(B) Application of rule for deemed 

election to reduce funding balances. 

After the adjusted funding target 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 50569 

attainment percentage for a plan year is 

certified by the plan’s enrolled actuary, 

the deemed election to reduce funding 

balances under paragraph (a)(5) of this 

section must be reapplied based on the 

actual funding target for the year 

(provided the certification is issued 

before the first day of the 10th month of 

the plan year). This reapplication of the 

deemed election may require an 

additional reduction in funding 

balances if the amount of the reduction 

in funding balances that is necessary to 

reach the applicable threshold to avoid 

the application of the limitations under 

paragraph (d) or (e) of this section is 

greater than the amount that was 

reduced under paragraph (g)(2) or (g)(3) 

of this section. 

(C) Prior reductions continue to apply. 

If the amount of the reduction in 

funding balances that is necessary to 

reach the applicable threshold to avoid 

the application of the benefit limitation 

is less than the amount that was 

reduced under paragraph (g)(2) or (g)(3) 

of this section, then the prior reduction 

continues to apply. Similarly, if the 

amount of the reduction in funding 

balances that is necessary to reach the 

applicable threshold to avoid the 

application of the corresponding benefit 

limitation exceeds the amount of the 

funding balances, then the prior 

reduction continues to apply and no 

further reduction under paragraph (a)(5) 

of this section is provided. 

(ii) Applicability to prior periods—(A) 

In general. Except as provided in 

paragraph (g)(4)(ii)(B) of this section, the 

enrolled actuary’s certification of the 

adjusted funding target attainment 

percentage for the plan for the plan year 

does not affect the application of the 

limitation under paragraph (b) of this 

section with respect to unpredictable 

contingent events that occur during the 

periods to which paragraphs (g)(2) and 

(g)(3) of this section apply. Except as 

provided in paragraph (g)(4)(ii)(B) of 

this section, the enrolled actuary’s 

certification of the adjusted funding 

target attainment percentage for the plan 

for the plan year does not affect the 

application of the limitation under 

paragraph (c) of this section to a plan 

amendment that increases liability for 

benefits where the amendment is first 

effective during the periods to which 

paragraphs (g)(2) and (g)(3) apply. The 

enrolled actuary’s certification of the 

adjusted funding target attainment 

percentage for the plan for the plan year 

does not affect the application of the 

limitation under paragraph (d) of this 

section for distributions with annuity 

starting dates before the certification. 

Similarly, the enrolled actuary’s 

certification of the adjusted funding 

target attainment percentage for the plan 

for the plan year does not affect the 

application of the limitation under 

paragraph (e) of this section prior to the 

date of that certification. See paragraph 

(a)(4) of this section for rules relating to 

the period of time after benefits cease to 

be limited. 

(B) Special rule for unpredictable 

contingent event benefits and plan 

amendments that increase liability. If a 

plan does not pay benefits attributable 

to an unpredictable contingent event or 

plan amendment because of the 

application of paragraph (g)(5)(ii) of this 

section, the plan must provide for 

benefits that were not previously paid 

(or accrued) if such benefits would be 

permitted under the rules of section 436 

based on the certified actual adjusted 

funding target attainment percentage, 

taking into account the increase in the 

funding target that would be attributable 

to the unpredictable contingent event 

benefits or increase in liability due to 

the plan amendment. 

(5) Additional rules regarding 

limitations on unpredictable contingent 

event benefits and certain plan 

amendments based on presumed 

adjusted funding target prior to 

certification—(i) Reduction in funding 

balances—(A) Mandatory reduction for 

collectively bargained plans. During the 

period described in paragraph (g)(2) or 

(g)(3) of this section, the rules of 

paragraph (a)(5) of this section (relating 

to the deemed election to reduce the 

funding standard carryover balance and 

the prefunding balance) must be applied 

based on the presumed percentage. In 

order to determine the amount of the 

reduction in those balances that would 

apply to a collectively bargained plan 

during that period with respect to an 

unpredictable contingent event or a plan 

amendment that increases liability for 

benefits, the rules of paragraph (g)(2)(ii) 

of this section are applied, except that 

the presumed adjusted funding target is 

increased to take into account the 

benefits attributable to the 

unpredictable contingent event or the 

plan amendment. For this purpose, if no 

presumption applies under the rules of 

paragraph (h) of this section (for 

example, because the plan’s actual 

adjusted funding target attainment 

percentage for the prior year was 

certified to be at least 80 percent), then 

that prior year’s actual adjusted funding 

target attainment percentage is 

substituted for the presumed adjusted 

funding target attainment percentage for 

the plan year in determining the 

presumed adjusted funding target. 

(B) Optional reduction for plans that 

are not collectively bargained plans. A 

plan sponsor of a plan that is not a 

collectively bargained plan (and, thus, is 

not required to reduce the funding 

standard account carryover balance and 

the prefunding balance under the rules 

of paragraph (a)(5) of this section) is 

permitted to reduce those balances in 

order to increase the interim value of 

adjusted plan assets (as defined in 

paragraph (g)(2)(ii)(A) of this section) 

that is compared to the presumed 

adjusted funding target determined 

under this paragraph (g)(5)(i). 

(ii) Plans funded below the threshold. 

If, after application of paragraph (g)(5)(i) 

of this section, the ratio of the interim 

value of adjusted plan assets (as defined 

in paragraph (g)(2)(ii)(A) of this section) 

to the presumed adjusted funding target 

determined under that paragraph is less 

than the applicable threshold under 

section 436(b) or 436(c), as applicable, 

then the plan is not permitted to 

provide any benefits attributable to the 

unpredictable contingent event or plan 

amendment unless the plan sponsor 

makes a contribution that would allow 

payment of unpredictable contingent 

event benefits or would permit a plan 

amendment increasing benefit liabilities 

to go into effect under the rules of 

paragraph (b)(2) or (c)(2) of this section. 

(iii) Plans funded at or above the 

threshold. If, after application of 

paragraph (g)(5)(i) of this section, the 

ratio of the interim value of adjusted 

plan assets (as defined in paragraph 

(g)(2)(ii)(A) of this section) to the 

presumed adjusted funding target is 

greater than or equal to the applicable 

threshold under section 436(b) or 

436(c), as applicable, then the plan is 

not permitted to limit the payment of 

unpredictable contingent event benefits 

described in paragraph (b) of this 

section nor is the plan permitted to 

restrict a plan amendment increasing 

benefit liability described in paragraph 

(c) of this section from becoming 

effective based on an expectation that 

the limitations under paragraph (b) or 

(c) of this section will apply to the plan 

once an actuarial certification is 

received. 

(6) Application to multiple events and 

amendments. For purposes of this 

paragraph (g), if a plan is providing 

benefits with respect to one or more 

unpredictable contingent events 

occurring within the plan year or 

amendments taking effect within the 

plan year, then paragraphs (b) and (c) of 

this section are applied with respect to 

a subsequent unpredictable contingent 

event or amendment by treating the 

increase in the funding target 

attributable to the subsequent event or 

amendment as if it included the 

increases in the funding target 


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50570 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

attributable to all such earlier events or 

amendments. 

(7) Examples. The following examples 

illustrate the application of this 

paragraph (g). Unless otherwise 

indicated, these examples are based on 

the following facts: each plan has a plan 

year that is the calendar year and a 

valuation date of January 1; the first 

effective plan year is 2008; the plan 

sponsor is not in bankruptcy; and no 

annuity purchases have been made from 

the plan. No plan is in at-risk status for 

the years discussed in the examples. 

Example 1. (i) As of January 1, 2011, Plan 

A has assets of $3,300,000 and a prefunding 

balance of $300,000. Plan A has no funding 

standard carryover balance. Beginning on 

January 1, 2011, Plan A’s AFTAP for 2011 is 

presumed to be 75%, under the rules of 

paragraph (h) of this section and based on the 

certified AFTAP for 2010. 

(ii) Based on Plan A’s presumed AFTAP of 

75%, Plan A would be subject to the 

restriction on prohibited payments in 

paragraph (d)(3) of this section as of January 

1, 2011. However, under the provisions of 

paragraph (a)(5) of this section, if the 

prefunding balance is large enough, Plan A’s 

sponsor is deemed to elect to reduce the 

prefunding balance to the extent needed to 

avoid this restriction. 

(iii) The amount needed to avoid the 

restriction in paragraph (d)(3) of this section 

is determined by comparing the presumed 

adjusted funding target for Plan A with the 

interim value of adjusted plan assets as of the 

valuation date. The interim value of plan 

assets for Plan A is $3,000,000 (that is, the 

asset value of $3,300,000 reduced by the 

prefunding balance of $300,000). The 

presumed adjusted funding target for Plan A 

is the interim value of the adjusted plan 

assets divided by the presumed AFTAP, or 

$4,000,000 (that is, $3,000,000 divided by 

75%). 

(iv) In order to avoid the restriction on 

prohibited payments in paragraph (d)(3) of 

this section, Plan A’s presumed AFTAP must 

be increased to 80%. This requires an 

increase in Plan A’s adjusted plan assets of 

$200,000 (that is, 80% of the presumed 

adjusted funding target of $4,000,000, minus 

the interim value of the adjusted plan assets 

of $3,000,000). Plan A’s prefunding balance 

as of January 1, 2011, is reduced by $200,000 

under the deemed election provisions of 

paragraph (a)(5) of this section. Accordingly, 

Plan A’s prefunding balance is $100,000 (that 

is, $300,000 minus $200,000) and the interim 

value of adjusted plan assets is increased to 

$3,200,000 (that is, $3,300,000 minus the 

reduced prefunding balance of $100,000). 

Plan A must pay the full amount of the 

accelerated benefit distributions elected by 

participants with an annuity starting date of 

January 1, 2011, or later. 

Example 2. (i) The facts are the same as in 

Example 1. As of April 1, 2011, the enrolled 

actuary for Plan A has not certified the 2011 

AFTAP. Therefore, beginning April 1, 2011, 

Plan A’s AFTAP is presumed to be 65%, 10 

percentage points lower than the 2010 

AFTAP, in accordance with paragraph (h)(2) 

of this section. Under the provisions of 

paragraph (g)(2)(ii)(B) of this section, the 

deemed election to reduce funding balances 

described in paragraph (a)(5) of this section 

must be reapplied based on the new 

presumed AFTAP. 

(ii) In accordance with paragraph 

(g)(2)(ii)(B) of this section, a new adjusted 

funding target must be determined based on 

the new presumed AFTAP and must be 

compared to an updated interim value of 

adjusted plan assets. The new presumed 

AFTAP is equal to the interim value of 

adjusted plan assets as of the valuation date 

of $3,000,000, without reflecting the deemed 

election to reduce the prefunding balance 

that was made under paragraph (a)(5) of this 

section. The new presumed adjusted funding 

target is $3,000,000 divided by the presumed 

AFTAP of 65%, or $4,615,385. 

(iii) In order to avoid the restriction on 

prohibited payments in paragraph (d)(3) of 

this section, Plan A’s presumed AFTAP must 

be increased to 80%. This requires an 

additional increase in Plan A’s adjusted plan 

assets of $492,308 (that is, 80% of the new 

presumed adjusted funding target of 

$4,615,385, minus the updated interim value 

of the adjusted plan assets of $3,200,000, 

reflecting the deemed reduction in Plan A’s 

prefunding balance). 

(iv) Plan A’s remaining prefunding balance 

as of January 1, 2011, is only $100,000, 

which is not enough to avoid the restriction 

on prohibited payments under paragraph 

(d)(3) of this section. Accordingly, unless 

Plan A’s sponsor utilizes one of the methods 

described in paragraph (f) of this section to 

avoid the restriction, Plan A is subject to the 

restriction on prohibited payments in 

paragraph (d)(3) of this section and cannot 

pay accelerated benefit distributions elected 

by participants with an annuity starting date 

of April 1, 2011, or later. 

(v) Plan A’s prefunding balance remains at 

$100,000 because, under paragraph (a)(5)(iii) 

of this section, the deemed reduction rules 

do not apply if the prefunding balance is not 

large enough to increase the adjusted value 

of plan assets enough to avoid the restriction. 

However, the earlier deemed reduction of 

$200,000 continues to apply because all 

elections (including deemed elections) to 

reduce a plan’s funding standard carryover 

balance or prefunding balance are irrevocable 

and must be unconditional. 

Example 3. (i) The facts are the same as in 

Example 2. On July 1, 2011, the enrolled 

actuary for Plan A calculates the actual 

adjusted funding target as $3,700,000 as of 

January 1, 2011. Therefore, the 2011 AFTAP 

would have been 81.08% without reducing 

the prefunding balance (that is, plan assets of 

$3,300,000 minus the prefunding balance of 

$300,000, divided by the adjusted funding 

target of $3,700,000), and Plan A would not 

have been subject to the restrictions under 

paragraph (d)(3) of this section. 

(ii) However, paragraph (g)(4)(i)(C) of this 

section requires that any prior reductions in 

the prefunding or funding standard carryover 

balances continue to apply, and so Plan A’s 

prefunding balance remains at the reduced 

amount of $100,000 as of January 1, 2011. 

The enrolled actuary certifies that the 2011 

AFTAP is 86.49% (that is, plan assets of 

$3,300,000 reduced by the prefunding 

balance of $100,000, divided by the adjusted 

funding target of $3,700,000). 

Example 4. (i) Plan B is a collectively 

bargained plan with assets of $2,500,000 and 

a prefunding balance of $150,000 as of 

January 1, 2011. Plan B has no funding 

standard carryover balance. Beginning on 

January 1, 2011, Plan B’s AFTAP for 2011 is 

presumed to be 83% under the rules of 

paragraph (g)(3) of this section and based on 

the certified AFTAP for 2010. 

(ii) On January 10, 2011, Plan B’s sponsor 

amends the plan to increase benefits effective 

on February 1, 2011. The amendment would 

increase Plan B’s funding target by $350,000. 

Under the rules of paragraph (g)(5) of this 

section, the presumed adjusted funding target 

is calculated, and then the presumed 

adjusted funding target is increased to take 

into account the benefits attributable to the 

plan amendment. 

(iii) Plan B’s interim value of adjusted plan 

assets as of the valuation date is $2,350,000 

(that is, $2,500,000 minus the prefunding 

balance of $150,000). Prior to reflecting the 

amendment, Plan B’s presumed adjusted 

funding target as of January 1, 2011, is 

$2,831,325, which is equal to the interim 

value of adjusted plan assets as of the 

valuation date of $2,350,000, divided by the 

presumed AFTAP of 83%. Increasing Plan 

B’s presumed adjusted funding target by 

$350,000 to reflect the amendment results in 

a presumed adjusted funding target of 

$3,181,325 and a presumed AFTAP of 

73.87% (that is, the interim value of adjusted 

plan assets as of the valuation date of 

$2,350,000 divided by the presumed adjusted 

funding target of $3,181,325). 

(iv) Because Plan B’s presumed AFTAP 

was over 80% prior to taking the amendment 

into account but less than 80% when the 

amendment is reflected, section 436(c) and 

paragraph (c) of this section prohibit the plan 

amendment from taking effect unless the 

adjusted plan assets are increased so that the 

presumed AFTAP (reflecting the increase due 

to the amendment) is increased to 80%. This 

would require an additional amount of 

$195,060 (that is, 80% of the presumed 

adjusted funding target of $3,181,325 less the 

interim value of adjusted plan assets of 

$2,350,000). 

(v) Plan B’s prefunding balance of $150,000 

is not large enough for Plan B to avoid the 

restriction on plan amendments, and 

therefore the deemed election to reduce the 

prefunding balance under paragraph (a)(5) of 

this section does not apply and the 

amendment cannot take effect. 

Example 5. (i) The facts are the same as in 

Example 4, except that Plan B’s sponsor 

decides to make a contribution on February 

1, 2011, to avoid the benefit limitation as 

provided in paragraph (f)(2) of this section. 

Pursuant to paragraph (f)(2)(i)(A)(2) of this 

section, Plan B’s effective rate of interest for 

2011 is treated as 5.25%. 

(ii) The amount of the contribution as of 

January 1, 2011, needed to avoid the 

restriction on plan amendments under 

paragraph (c) of this section is $195,060. 

However, because the contribution is not 

paid until February 1, 2011, the necessary 

contribution amount must be adjusted to 


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reflect interest that would otherwise have 

accrued between the valuation date and the 

date of the contribution, at Plan B’s effective 

rate of interest for the 2011 plan year. The 

amount of the required contribution after 

adjustment is $195,894, determined as 

$195,060 increased for one month of 

compound interest at an effective annual 

interest rate of 5.25%. 

(iii) As of April 1, 2011, the enrolled 

actuary for the plan has not certified the 2011 

AFTAP. Therefore, beginning April 1, 2011, 

Plan A’s presumed AFTAP is presumed to be 

73%, 10 percentage points lower than the 

2010 AFTAP, in accordance with paragraph 

(h)(2) of this section. However, paragraph 

(g)(2)(ii)(B) of this section does not require 

reapplication of the deemed election if 

necessary to avoid the application of benefit 

restrictions under paragraph (c) of this 

section. Therefore, since the effective date of 

the plan amendment occurred prior to April 

1, 2011, no additional reduction in the 

prefunding balance is required and no 

additional contribution is required for the 

plan amendment to remain in effect. 

(iv) On July 1, 2011, the enrolled actuary 

for the plan calculates the actual adjusted 

funding target, prior to taking the plan 

amendment into account, as $2,700,000 and 

certifies the actual AFTAP for 2011 (prior to 

taking the amendment into account) as 

87.04% (that is, adjusted assets of $2,350,000 

divided by the adjusted funding target of 

$2,700,000). Reflecting the $350,000 increase 

in funding target due to the plan amendment 

would increase the adjusted funding target to 

$3,050,000 and would decrease Plan B’s 

AFTAP to 77.05%. 

(v) Based on the certified AFTAP, the 

amount necessary to avoid the benefit 

restriction under paragraph (c) of this section 

is $90,000 (that is, 80% of the adjusted 

funding target reflecting the plan amendment 

(or $3,050,000), minus the adjusted value of 

plan assets of $2,350,000). This amount must 

be adjusted for interest between the valuation 

date and the date the contribution was made 

using the effective interest rate for Plan B. 

Therefore, the amount required on the 

payment date of February 1, 2011, is $90,385 

(that is, $90,000 adjusted for compound 

interest for one month at Plan B’s effective 

interest rate of 5.25% per year). 

(vi) Under paragraph (g)(3)(ii)(B) of this 

section, the contribution made under 

paragraph (g)(5)(ii) of this section is 

recharacterized as an employer contribution 

under section 430 to the extent that it 

exceeds the amount necessary to avoid 

application of the restriction on plan 

amendments under paragraph (c) of this 

section. Therefore, $105,509 (that is, the 

$195,894 actual contribution paid on 

February 1, 2011, minus the $90,385 required 

contribution based on the actual certified 

AFTAP) is recharacterized as an employer 

contribution under section 430 for the 2011 

plan year. As such, it may be applied toward 

the minimum required contribution for 2011, 

or the plan sponsor can elect to credit the 

contribution to Plan B’s prefunding balance 

to the extent that the contributions for the 

2011 plan year exceed the minimum required 

contribution. 

Example 6. (i) The facts are the same as in 

Example 5, except that on July 1, 2011, the 

enrolled actuary for Plan B calculates the 

actual adjusted funding target (before 

reflecting the plan amendment) as $3,000,000 

and certifies the actual AFTAP as 78.33% 

prior to reflecting the plan amendment (that 

is, adjusted plan assets of $2,350,000 divided 

by the actual adjusted funding target of 

$3,000,000). Based on the provisions of 

paragraph (c) of this section, because the 

AFTAP prior to reflecting the amendment is 

less than 80%, the contribution required to 

avoid the restriction on plan amendments 

would have been the amount equal to the 

increase in funding target due to the plan 

amendment, or $350,000. 

(ii) However, according to paragraph 

(g)(4)(ii)(A) of this section, the enrolled 

actuary’s certification of the 2011 AFTAP 

does not affect the application of the 

limitation under paragraph (c) of this section 

regardless of the extent to which the certified 

percentage varies from the presumed 

percentage, because the amendment to Plan 

B was effective prior to the date of the 

certification. Therefore, it is not necessary for 

Plan B’s sponsor to contribute an additional 

amount in order for the plan amendment to 

remain in effect. 

(h) Presumed underfunding for 

purposes of benefit limitations—(1) 

Presumption of continued 

underfunding—(i) In general. This 

paragraph (h)(1) applies to a plan for 

which a limitation under paragraph (b), 

(c), (d), or (e) of this section applied to 

the plan on the last day of the plan year 

preceding the current plan year. If this 

paragraph (h)(1) applies to a plan, the 

first day of the plan year is a section 436 

measurement date and the presumed 

adjusted funding target attainment 

percentage for the plan is the percentage 

under paragraph (h)(1)(ii) or (iii) of this 

section, whichever applies to the plan, 

beginning on that first day until it is 

changed under this paragraph (h). 

(ii) Rule where preceding year 

certification issued during preceding 

year. In any case in which the plan’s 

enrolled actuary has issued a 

certification under paragraph (h)(4) of 

this section of the adjusted funding 

target attainment percentage for the plan 

year preceding the current year before 

the first day of the current year, the 

adjusted funding target attainment 

percentage of the plan for the current 

plan year is presumed to be equal to the 

preceding year’s actual adjusted funding 

target attainment percentage until the 

plan’s enrolled actuary issues a 

certification of the adjusted funding 

target attainment percentage of the plan 

for the current plan year under 

paragraph (h)(4) of this section or until 

changed under paragraph (h)(2) or (h)(3) 

of this section. 

(iii) No certification for preceding 

year issued during preceding year—(A) 

Deemed percentage under 60 percent. In 

any case in which the plan’s enrolled 

actuary has not issued a certification 

under paragraph (h)(4) of this section of 

the adjusted funding target attainment 

percentage of the plan for the plan year 

preceding the current year during that 

prior plan year, the adjusted funding 

target attainment percentage of the plan 

for the current plan year is presumed to 

be less than 60 percent until changed 

under paragraph (h)(1)(iii)(B) of this 

section or where the plan’s enrolled 

actuary issues the certification of the 

adjusted funding target attainment 

percentage for the current year under 

paragraph (h)(4) of this section. 

(B) Enrolled actuary’s certification in 

first 3 months of following year. In any 

case in which the plan’s enrolled 

actuary has issued the certification 

under paragraph (h)(4) of this section of 

the adjusted funding target attainment 

percentage of the plan for the plan year 

preceding the current year on or after 

the first day of the current year but 

before the first day of the 4th month of 

that year, the date of that prior year 

certification is a new section 436 

measurement date for the plan year. In 

such a case, until it is changed by a 

certification of the current year’s 

adjusted funding target attainment 

percentage under paragraph (h)(4) of 

this section or otherwise changed under 

paragraph (h)(2) or (h)(3) of this section, 

the presumed percentage for the current 

year beginning on the date of 

certification is equal to the certified 

percentage for the preceding year. 

(2) Presumption of underfunding after 

first day of 4th month for nearly 

underfunded plans—(i) In general. This 

paragraph (h)(2) applies to a plan for 

which the actual adjusted funding target 

attainment percentage for the plan year 

preceding the current plan year was 

certified for that prior plan year to be at 

least 60 percent but less than 70 

percent, or was certified for that prior 

plan year to be at least 80 percent but 

less than 90 percent, and where the 

enrolled actuary for the plan has not 

issued a certification of the adjusted 

funding target attainment percentage for 

the plan year by the first day of the 4th 

month of the plan year. If this paragraph 

(h)(2) applies to a plan, the presumed 

adjusted funding target attainment 

percentage for the plan is the percentage 

under paragraph (h)(2)(ii) or (iii) of this 

section, as applicable. 

(ii) Presumed adjusted funding target 

attainment percentage. If this paragraph 

(h)(2) applies to a plan, and the date of 

the enrolled actuary’s certification 

under paragraph (h)(4) of this section for 

the plan year preceding the current year 

occurred before the first day of the 4th 

month of the current plan year, then, 

commencing on the first day of the 4th 


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month of the current plan year and 

continuing until the earlier of the date 

the enrolled actuary issues a 

certification under paragraph (h)(4) of 

this section of the adjusted funding 

target attainment percentage for the plan 

year or the first day of the 10th month 

of the plan year as described in 

paragraph (h)(3) of this section—

(A) The adjusted funding target 

attainment percentage of the plan as of 

the valuation date for the plan year is 

presumed to be equal to 10 percentage 

points less than the actual adjusted 

funding target attainment percentage of 

the plan for the preceding plan year; 

and 

(B) The first day of the 4th month of 

the plan year is treated as a section 436 

measurement date. 

(iii) Certification for prior year. If this 

paragraph (h)(2) applies to a plan, and 

the date of the enrolled actuary’s 

certification under paragraph (h)(4) of 

this section of the actual adjusted 

funding target attainment percentage for 

the plan year preceding the current year 

occurs on or after the first day of the 4th 

month of the current plan year, then, 

commencing on the date of that prior 

year certification and continuing until 

the earlier of the date the enrolled 

actuary issues a certification under 

paragraph (h)(4) of this section of the 

adjusted funding target attainment 

percentage for the plan year or the first 

day of the 10th month of the plan year 

as described in paragraph (h)(3) of this 

section—

(A) The adjusted funding target 

attainment percentage of the plan as of 

the valuation date for the plan year is 

presumed to be equal to 10 percentage 

points less than the actual adjusted 

funding target attainment percentage of 

the plan for the preceding plan year; 

and 

(B) The date of the prior year 

certification is treated as a section 436 

measurement date. 

(3) Presumption of underfunding on 

and after first day of 10th month—(i) 

Section 436 measurement date. In any 

case in which no certification of the 

specific adjusted funding target 

attainment percentage for the current 

plan year under paragraph (h)(4) of this 

section is made with respect to the plan 

before the first day of the 10th month of 

the plan year, then that first day is 

treated as a section 436 measurement 

date. 

(ii) Presumed percentage under 60 

percent. In any case in which no 

certification of the specific adjusted 

funding target attainment percentage for 

the current plan year under paragraph 

(h)(4) of this section is made with 

respect to the plan before the first day 

of the 10th month of the plan year, the 

plan’s adjusted funding target 

attainment percentage is presumed to be 

less than 60 percent beginning on that 

date and continuing through the 

remainder of the plan year. 

(4) Certification of adjusted funding 

target attainment percentage—(i) Rules 

generally applicable to certifications—

(A) In general. The enrolled actuary’s 

certification referred to in this section 

must be made in writing, must be 

provided to the plan administrator, and, 

except as provided in paragraph 

(h)(4)(ii) of this section, must certify the 

plan’s adjusted funding target 

attainment percentage for the plan year 

(including setting forth the aggregate 

amount of annuity purchases taken into 

account under paragraph (j)(3)(ii) of this 

section). 

(B) Determination of plan assets. For 

purposes of making any determination 

of the adjusted funding target 

attainment percentage under this 

section, the determination is not 

permitted to take into account assets 

that have not been contributed to the 

plan by the certification date. For 

example, the enrolled actuary’s 

certification of the adjusted funding 

target attainment percentage for a plan 

year cannot take into account 

contributions that are expected to be 

made after the certification date. 

Notwithstanding the foregoing, for plan 

years beginning before January 1, 2009, 

the enrolled actuary’s certification of the 

adjusted funding target attainment 

percentage is permitted to take into 

account employer contributions for the 

prior plan year that are reasonably 

expected to be made for that prior plan 

year but have not been contributed by 

the date of the enrolled actuary’s 

certification. See paragraph (h)(4)(iii) of 

this section for rules relating to changes 

in the certified percentage. 

(ii) Special rules for certification 

within range—(A) In general. Under this 

paragraph (h)(4)(ii), the plan’s enrolled 

actuary is permitted to certify during the 

first nine months of a plan year that the 

plan’s adjusted funding target 

attainment percentage for that plan year 

either is 60 percent or higher (but is less 

than 80 percent), is 80 percent or higher, 

or is 100 percent or higher. If the 

enrolled actuary has issued such a range 

certification for a plan year and the 

enrolled actuary subsequently issues a 

certification of the specific adjusted 

funding target attainment percentage for 

the plan before the first day of the 10th 

month of that plan year, the certification 

of the specific adjusted funding target 

attainment percentage is treated as a 

change in the applicable percentage to 

which paragraph (h)(4)(iii) of this 

section applies. If the enrolled actuary 

has issued a range certification for a 

plan year but no specific certification of 

the adjusted funding target attainment 

percentage of the plan for the plan year 

is issued by the plan’s enrolled actuary 

before the first day of the 10th month of 

that plan year, then the rules of 

paragraph (h)(3) of this section apply 

and the change in the applicable 

percentage to under 60 percent on that 

date is treated as a change in the 

applicable percentage which is subject 

to the rules of paragraph (h)(4)(iii) of 

this section. 

(B) Effect of range certification—(1) 

Before certification of specific 

percentage. If a plan’s enrolled actuary 

issues a range certification pursuant to 

this paragraph (h)(4)(ii), then, for all 

purposes under this section (for 

example, applying the limitations of 

sections 436(b) and (c), making 

contributions described in sections 

436(b)(2), 436(c)(2), and 436(e)(2), and 

the mandatory reduction of funding 

balances under paragraph (a)(5) of this 

section), the plan is treated as having a 

certified percentage at the smallest 

value within the applicable range. 

(2) On and after certification of 

specific percentage. Once the 

certification of the specific adjusted 

funding target attainment percentage is 

issued by the plan’s enrolled actuary 

(before the first day of the 10th month 

of the plan year), that certified 

percentage applies for all purposes of 

this section on and after the date of that 

certification. If the plan sponsor made 

section 436 contributions to avoid 

application of a benefit limitation 

during the period a range certification 

was in effect, those section 436 

contributions will be recharacterized as 

employer contributions under section 

430 to the extent the contributions 

exceed the amount necessary to avoid 

application of a limitation based on the 

specific adjusted funding target 

attainment percentage as certified by the 

plan’s enrolled actuary before the first 

day of the 10th month of the plan year. 

(iii) Change of certified percentage—

(A) Application of new percentage. If 

the enrolled actuary for the plan 

provides a certification of the adjusted 

funding target attainment percentage of 

the plan for the plan year under this 

paragraph (h)(4) (including a range 

certification) and that certified 

percentage is superseded by a 

subsequent determination of the 

adjusted funding target attainment 

percentage for that plan year, that later 

percentage must be applied. 

(B) Determination of materiality—(1) 

In general. With respect to the effect of 

that subsequent determination of the 


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adjusted funding target attainment 

percentage on the plan for the period 

during which the plan’s operation was 

based on the prior percentage, a 

determination must be made whether 

the change in the applicable percentage 

is a material change or an immaterial 

change. 

(2) Definition of material change. For 

this purpose, there is a material change 

in a plan’s certified adjusted funding 

target attainment percentage if plan 

operations with respect to benefits that 

are addressed by section 436, taking into 

account any actual contributions and 

elections under section 430(f) made by 

the plan sponsor based on the prior 

certified percentage, would have been 

different based on the subsequent 

determination of the plan’s adjusted 

funding target attainment percentage for 

the plan year. However, if the difference 

between the adjusted funding target 

attainment percentage for a plan year 

and the later revised determination of 

that percentage is the result of 

additional contributions for the 

preceding year that are made by the 

plan sponsor after the date of the 

enrolled actuary’s certification or results 

from the plan sponsor’s election to 

reduce the prefunding balance or 

funding standard carryover balance after 

the date of the certification, such change 

is not treated as a material change. 

(3) Definition of immaterial change. 

An immaterial change is any change in 

an adjusted funding target attainment 

percentage for a plan year that is not a 

material change. 

(C) Effect of change in percentage—(1) 

Material change. In the case of a 

material change where the plan was 

operated in accordance with the prior 

certification of the adjusted funding 

target attainment percentage for the plan 

year, the plan will not have satisfied the 

requirements of section 401(a)(29) and 

section 436. In the case of a material 

change where the plan was operated in 

accordance with the subsequent 

certification of the adjusted funding 

target attainment percentage during the 

period of time the prior certification 

applied, then the plan will not have 

been operated in accordance with its 

terms. In addition, in the case of a 

material change, the rules requiring 

application of a presumed adjusted 

funding target attainment percentage 

under paragraphs (h)(1) through (h)(3) of 

this section continue to apply from and 

after the date of the prior certification 

until the date of the subsequent 

certification. 

(2) Effect of immaterial change. If the 

enrolled actuary for a plan provides a 

certification of the adjusted funding 

target attainment percentage of the plan 

for the plan year under this paragraph 

(h)(4) and that certified percentage is 

superseded by a subsequent 

determination of the adjusted funding 

target attainment percentage for that 

plan year that does not result in a 

material change under paragraph 

(h)(4)(iii)(B) of this section, the revised 

percentage does not change the 

inapplicability of the presumptions 

under paragraphs (h)(1), (2), and (3) of 

this section prior to the date of the later 

certification. 

(5) Application to plan with valuation 

date after first day of plan year. 

[Reserved]. 

(6) Examples of application of 

paragraphs (h)(1), (h)(2), and (h)(3) of 

this section. The following examples 

illustrate the application of paragraphs 

(h)(1), (h)(2), and (h)(3) of this section. 

Unless otherwise indicated, the 

examples in this section are based on 

the information in this paragraph. Each 

plan is a non-collectively bargained 

defined benefit plan with a plan year 

that is the calendar year and a valuation 

date of January 1. The first effective plan 

year is 2008. The plan does not have a 

funding standard carryover balance or a 

carryforward balance as of any of the 

dates mentioned, and the plan sponsor 

does not elect to utilize any of the 

methods in paragraph (f) of this section 

to avoid applicable benefit restrictions. 

No range certification under paragraph 

(h)(4) of this section has been issued. 

The plan sponsor is not in bankruptcy. 

Example 1. (i) On July 15, 2010, the 

adjusted funding target attainment 

percentage (‘‘AFTAP’’) for Plan T is certified 

to be 65%. Based on this AFTAP, Plan T is 

subject to the restriction on prohibited 

payments in paragraph (d)(3) of this section 

for the remainder of 2010. 

(ii) Beginning January 1, 2011, Plan T’s 

AFTAP for 2011 is presumed to be equal to 

the AFTAP for 2010, or 65%, under the 

provisions of paragraph (h)(1)(ii) of this 

section. Accordingly, the restriction on 

accelerated benefit distributions in paragraph 

(d)(3) of this section continues to apply. 

(iii) On March 1, 2011, the enrolled actuary 

for the plan certifies that the actual AFTAP 

for 2011 is 80%. Therefore, beginning March 

1, 2011, Plan T is no longer subject to the 

restriction under paragraph (d)(3) of this 

section, and so Plan T resumes paying the 

full amount of any accelerated benefit 

distributions elected by participants with an 

annuity starting date of March 1, 2011, or 

later. 

Example 2. (i) The facts are the same as in 

Example 1, except that the enrolled actuary 

for the plan does not certify the AFTAP for 

2011 until June 1, 2011. Accordingly, Plan 

T’s AFTAP for 2011 is presumed to be equal 

to the AFTAP for 2010 of 65% from January 

1, 2011, through March 31, 2011, and Plan 

T is subject to the restriction on accelerated 

benefit distributions under paragraph (d)(3) 

of this section during this period. 

(ii) Beginning April 1, 2011, the provisions 

of paragraph (h)(2)(ii) of this section apply 

because the enrolled actuary for the plan still 

has not certified the actual AFTAP as of 

January 1, 2011. Under the provisions of 

paragraph (h)(2)(ii) of this section, the 

AFTAP for Plan T is presumed to be 10 

percentage points lower, or 55%, beginning 

April 1, 2011. Accordingly, Plan T is now 

subject to the restriction in paragraph (d)(1) 

of this section, and so cannot pay any 

accelerated benefit distributions otherwise 

payable to plan participants who have 

annuity starting dates on or after April 1, 

2011. 

(iii) On June 1, 2011, the enrolled actuary 

for the plan certifies that the AFTAP for 2011 

for Plan T is 66%. Accordingly, Plan T is no 

longer subject to the restriction under 

paragraph (d)(1) of this section, but it is 

subject to the restriction under paragraph 

(d)(3) of this section. 

(iv) Since Plan T is no longer subject to the 

restriction on payment of accelerated benefit 

distributions under paragraph (d)(1) of this 

section, Plan T must resume paying the 

accelerated benefit distributions, as restricted 

under paragraph (d)(3) of this section, for 

participants who elect benefits in accelerated 

forms of payment and who have an annuity 

starting date of June 1, 2011, or later. 

Example 3. (i) The facts are the same as in 

Example 1, except that the enrolled actuary 

for the plan does not certify the 2011 AFTAP 

until November 15, 2011. Beginning October 

1, 2011, Plan T is conclusively presumed to 

have an AFTAP of less than 60%, in 

accordance with the provisions of paragraph 

(h)(3) of this section. Accordingly, Plan T is 

subject to the restriction in paragraph (d)(1) 

of this section, and cannot pay any 

accelerated benefit distributions to 

participants whose annuity starting date 

occurs on or after October 1, 2011. 

(ii) On November 15, 2011, the enrolled 

actuary for the plan certifies that the AFTAP 

for 2011 is 72%. However, because the 

certification occurred after October 1, 2011, 

the certification does not constitute a new 

section 436 measurement date, and Plan T 

continues to be subject to the restrictions on 

accelerated benefit distributions and benefit 

accruals under paragraphs (d)(1) and (e) of 

this section. 

(iii) Beginning January 1, 2012, the 2012 

AFTAP for Plan T is presumed to be equal 

to the 2011 AFTAP of 72%. Because the 

presumed 2012 AFTAP is between 70% and 

80% and, therefore, paragraph (h)(2) of this 

section (which provides for a 10 percentage 

point reduction in a plan’s AFTAP in certain 

cases) will not apply, the presumed AFTAP 

will remain at 72% until the plan’s enrolled 

actuary certifies the AFTAP for 2012 or until 

paragraph (h)(3) of this section applies on the 

first day of the 10th month of the plan year. 

Because the presumed AFTAP is 72%, Plan 

T is no longer subject to the restrictions on 

accelerated benefit distributions under 

paragraph (d)(1) of this section, and Plan T 

must resume paying accelerated benefit 

distributions, as restricted under paragraph 

(d)(3) of this section, that are elected by 

participants with annuity starting dates on or 

after January 1, 2012. Similarly, Plan T is no 

longer subject to the restriction on benefit 


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accruals under paragraph (e) of this section, 

and benefit accruals resume under Plan T 

beginning January 1, 2012, unless Plan T 

provides otherwise. 

Example 4. (i) The facts are the same as in 

Example 3, except that the enrolled actuary 

for the plan does not issue a certification of 

the AFTAP for 2011 for Plan T until February 

1, 2012. 

(ii) Beginning on January 1, 2012, the 

presumptions in paragraph (h)(1)(iii) of this 

section apply for the 2012 plan year. Because 

the enrolled actuary for the plan has not 

certified the AFTAP for 2011, the presumed 

AFTAP as of October 1, 2011, continues to 

apply for the period beginning January 1, 

2012. Therefore, the AFTAP as of January 1, 

2012, is presumed to be less than 60%, and 

Plan T continues to be subject to the 

restriction on accelerated benefit 

distributions in paragraph (d)(1) and the 

restriction on benefit accruals under 

paragraph (e) of this section. 

(iii) On February 1, 2012, the enrolled 

actuary for the plan certifies that the AFTAP 

for 2011 for Plan T is 65%. Because the 

enrolled actuary for the plan has not issued 

a certification of the AFTAP for 2012, the 

provisions of paragraph (h)(1)(iii)(B) of this 

section apply. Accordingly, the certification 

date for the 2011 AFTAP (February 1, 2012) 

is a section 436 measurement date and 65% 

is the presumed AFTAP for 2012 beginning 

on that date. 

(iv) Because the presumed AFTAP is over 

60% but less than 80%, the full restriction 

on accelerated benefit distributions under 

paragraph (d)(1) of this section no longer 

applies; however the partial restriction on 

accelerated benefit distributions under 

paragraph (d)(3) of this section applies 

beginning on February 1, 2012. Therefore, 

Plan T must pay a portion of accelerated 

benefit distributions elected by participants 

with annuity starting dates on or after 

February 1, 2012. Furthermore, based on the 

presumed AFTAP of 65%, the restriction on 

benefit accruals under paragraph (e) of this 

section no longer applies, and unless Plan T 

provides otherwise, benefit accruals will 

resume as of February 1, 2012. 

Example 5. (i) The facts are the same as in 

Example 3, except that the enrolled actuary 

for the plan does not issue a certification of 

the actual AFTAP for Plan T as of January 1, 

2011, until May 1, 2012. 

(ii) Beginning on January 1, 2012, the 

presumptions in paragraph (h)(1)(iii) of this 

section apply for the 2012 plan year. Because 

the enrolled actuary for the plan has not 

certified the actual AFTAP as of January 1, 

2011, the presumed AFTAP as of October 1, 

2011, continues to apply for the period 

beginning January 1, 2012. Therefore, the 

AFTAP as of January 1, 2012, is presumed to 

be less than 60%, and Plan T continues to 

be subject to the restriction on accelerated 

benefit distributions in paragraph (d)(1) of 

this section and the restriction on benefit 

accruals under paragraph (e) of this section. 

(iii) Since the enrolled actuary for the plan 

has not issued a certification of the actual 

AFTAP as of January 1, 2011, the rules of 

paragraph (h)(2)(iii) of this section apply 

beginning April 1, 2012, and the AFTAP is 

presumed to remain less than 60%. Plan T 

continues to be subject to the restriction on 

accelerated benefit distributions and benefit 

accruals under paragraphs (d)(1) and (e) of 

this section. 

(iv) On May 1, 2012, the enrolled actuary 

for the plan certifies that the actual AFTAP 

for 2011 for Plan T is 65%. Because the 

enrolled actuary for the plan has not issued 

a certification of the actual AFTAP as of 

January 1, 2012, the provisions of paragraph 

(h)(2)(ii) of this section apply. Accordingly, 

on May 1, 2012, the 2012 AFTAP is 

presumed to be 10 percentage points less 

than the 2011 AFTAP, or 55%, so that the 

restrictions under paragraphs (d) and (e) of 

this section continue to apply. 

Example 6. (i) The enrolled actuary for 

Plan V certifies the plan’s AFTAP for 2010 

to be 69%. Based on this AFTAP, Plan V is 

subject to the restriction in paragraph (d)(3) 

of this section, and can only pay a portion 

(generally 50%) of accelerated benefit 

distributions otherwise due to plan 

participants who commence benefits while 

the restriction is in effect. The enrolled 

actuary for the plan does not issue a 

certification of the AFTAP for 2011 until 

June 1, 2011. 

(ii) Beginning January 1, 2011, Plan V’s 

2011 AFTAP is presumed to be equal to the 

2010 AFTAP, or 69%, under the provisions 

of paragraph (h)(1)(ii) of this section. 

Accordingly, the restriction on accelerated 

benefit distributions in paragraph (d)(3) of 

this section continues to apply from January 

1, 2011, through March 31, 2011, and Plan 

T may only pay a portion of accelerated 

benefit distributions otherwise due to 

participants who commence benefit 

payments during this period. 

(iii) Beginning April 1, 2011, the 

provisions of paragraph (h)(2)(ii) of this 

section apply. Under those provisions, the 

AFTAP beginning April 1, 2011, is presumed 

to be 10 percentage points lower than the 

presumed 2011 AFTAP, or 59%. Because 

Plan V’s presumed AFTAP for 2011 is less 

than 60%, the restriction on the payment of 

accelerated benefit distributions under 

paragraph (d)(1) of this section and the 

restriction on benefit accruals under 

paragraph (e) of this section apply. 

Accordingly, Plan V cannot pay any 

accelerated benefit distributions to 

participants with an annuity starting date on 

or after April 1, 2011, and benefit accruals 

cease as of March 31, 2011. 

(iv) On June 1, 2011, Plan V’s enrolled 

actuary certifies that the plan’s AFTAP for 

2011 is 71%. Therefore, the restrictions on 

accelerated benefit distributions and benefit 

accruals in paragraphs (d)(1) and (e) of this 

section no longer apply, but the partial 

restriction on benefit payments in paragraph 

(d)(3) of this section does apply. Accordingly, 

Plan V begins paying a portion of the 

accelerated benefit distributions elected by 

participants with an annuity starting date on 

or after June 1, 2011, and benefit accruals 

previously restricted under paragraph (e) of 

this section resume effective June 1, 2011, 

unless Plan V provides otherwise. 

(v) Participants who were not able to elect 

an accelerated form of payment during the 

period from April 1, 2011, through May 31, 

2011, would be able to elect a new starting 

date with a partial distribution of accelerated 

benefits effective June 1, 2011, if Plan V 

contained a preexisting provision permitting 

such an election after the restriction in 

paragraph (d)(1) of this section no longer 

applies. This is permitted because, under 

paragraph (a)(4)(ii)(A) of this section, a 

preexisting provision of this type is not 

considered a plan amendment and is 

therefore not subject to the plan amendment 

restriction in paragraph (c) of this section 

even though Plan V’s AFTAP for 2011 is less 

than 80%. 

(vi) Benefit accruals for the period 

beginning April 1, 2011, through May 31, 

2011, would be automatically restored if Plan 

V contained a preexisting provision to 

retroactively restore benefit accruals 

restricted under paragraph (e) of this section 

after the restriction no longer applies. This is 

permitted because under paragraph 

(a)(4)(ii)(A) of this section, a preexisting 

provision of this type is not considered to be 

a plan amendment and is therefore not 

subject to the plan amendment restriction in 

paragraph (c) of this section even though 

Plan V’s AFTAP for 2011 is less than 80%, 

because the period of the restriction did not 

exceed 12 months. 

(7) Examples of application of 

paragraph (h)(4) of this section. The 

following examples illustrate the 

application of paragraph (h)(4) of this 

section: 

Example 1. (i) Plan Y is a non-collectively 

bargained defined benefit plan with a plan 

year that is the calendar year and a valuation 

date of January 1. Plan Y does not have a 

funding standard carryover balance or a 

prefunding balance. Plan Y’s sponsor is not 

in bankruptcy. In June of 2010, the actual 

AFTAP for 2010 for Plan Y is certified as 

65%. On the last day of the 2010 plan year, 

Plan Y is subject to the restrictions in 

paragraph (d)(3) of this section. 

(ii) The enrolled actuary for the plan issues 

a range certification on March 21, 2011, 

certifying that the AFTAP for 2011 is at least 

60% and less than 80%. Because the 

certification was issued before the first day 

of the 4th month of the plan year, the 10 

percentage point reduction in the presumed 

AFTAP under paragraph (h)(2) of this section 

does not apply. In addition, because the 

enrolled actuary for the plan has certified 

that the AFTAP is within this range, Plan Y 

is not subject to the full restriction on 

accelerated benefit payments in paragraph 

(d)(1) of this section or the restriction on 

benefit accruals under paragraph (e) of this 

section. 

(iii) On August 1, 2011, the enrolled 

actuary for the plan certifies that the actual 

AFTAP as of January 1, 2011, is 75.86%. This 

AFTAP falls within the previously certified 

range. Thus, the change is immaterial under 

paragraph (h)(4)(iii) of this section and the 

new certification does not change the 

applicability or inapplicability of the 

restrictions in this section. 

Example 2. (i) The facts are the same as in 

Example 1, except that the plan sponsor 

makes an additional contribution for the 

2010 plan year on September 1, 2011, that is 

not added to the prefunding balance. 


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Reflecting this contribution, the enrolled 

actuary for the plan issues a revised 

certification stating that the AFTAP for 2011 

is 81%, and Plan Y is no longer subject to 

the restriction on accelerated benefit 

payments under paragraph (d)(3) of this 

section on that date. 

(ii) Although the revised certification 

changes the applicability of the restriction 

under paragraph (d)(3) of this section, the 

change is not a material change under 

paragraph (h)(4)(iii)(B)(2) of this section 

because it changed only because of 

additional contributions for the preceding 

year made by the plan sponsor after the date 

of the enrolled actuary’s initial certification. 

(i) [Reserved]. 

(j) Definitions. For purposes of this 

section—

(1) Funding target. For purposes of 

section 436, the funding target means 

the funding target under section 430(d) 

or 430(i), as applicable to the plan for 

the plan year. 

(2) Funding target attainment 

percentage—(i) In general. For purposes 

of section 436, the funding target 

attainment percentage for any plan year 

is the fraction (expressed as a 

percentage), the numerator of which is 

the value of net plan assets for the plan 

year, and the denominator of which is 

the plan’s funding target for the plan 

year (but determined without regard to 

the at-risk rules under section 430(i) 

even in the case of a plan that is in atrisk status). For this purpose, pursuant 

to section 430(f)(4), the value of net plan 

assets for the plan year is generally 

determined by subtracting the plan’s 

funding standard carryover balance and 

prefunding balance (if any) for the plan 

year from the value of plan assets. A 

plan with a value of net plan assets for 

a plan year of zero is treated as having 

a funding target attainment percentage 

of zero, regardless of the amount of the 

plan’s funding target. 

(ii) Application to plans that are fully 

funded without regard to subtraction of 

funding balances from plan assets—(A) 

In general. If the funding target 

attainment percentage for a plan year, 

determined without regard to the 

section 430(f)(4) subtraction of the 

funding standard carryover balance and 

the prefunding balance from the value 

of plan assets, would be 100 percent or 

more, then, solely for purposes of 

section 436 and this section (but not 

section 430(d)), the value of net plan 

assets used in the determination of the 

funding target attainment percentage 

described in this paragraph (j)(2) (and 

the adjusted funding target attainment 

percentage described in paragraph (j)(3) 

of this section) is determined without 

regard to any subtraction of funding 

balances under section 430(f)(4). 

(B) Transition rule. Paragraph 

(j)(2)(ii)(A) of this section is applied to 

plan years beginning after 2007 and 

before 2011 by substituting for ‘‘100 

percent’’ the applicable percentage 

determined in accordance with the 

following table: 

In the case of a plan year 

beginning in calendar 

year: 

The applicable 

percentage is: 

2008 ................................ 92 

2009 ................................ 94 

2010 ................................ 96 

(C) Limitation. Paragraph (j)(2)(ii)(B) 

of this section does not apply with 

respect to any plan year after 2008 

unless the funding target attainment 

percentage (determined without regard 

to the section 430(f)(4) subtraction of the 

funding standard carryover balance and 

the prefunding balance from the value 

of plan assets) of the plan for each 

preceding plan year (after 2007) was not 

less than the applicable percentage with 

respect to such preceding plan year 

determined under paragraph (j)(2)(ii)(B) 

of this section. 

(iii) Special rules for first effective 

plan year—(A) In general. In the case of 

the plan’s first effective plan year, the 

funding target attainment percentage 

under section 436 for the plan’s preeffective plan year is determined as the 

fraction (expressed as a percentage), the 

numerator of which is the net plan 

assets determined under paragraph 

(j)(2)(iii)(B) of this section, and the 

denominator of which is the plan’s 

current liability determined pursuant to 

section 412(l)(7) on the valuation date 

for the plan’s pre-effective plan year. 

(B) General determination of value of 

net plan assets—(1) In general. The 

value of net plan assets for purposes of 

this paragraph (j)(2)(iii) is determined 

under section 412(c)(2) as in effect for 

the plan’s pre-effective plan year, except 

that the value of plan assets prior to 

subtracting the plan’s funding standard 

account credit balance described in 

paragraph (j)(2)(iii)(B)(2) of this section 

can neither be less than 90 percent of 

the fair market value of plan assets nor 

greater than 110 percent of the fair 

market value of plan assets on the 

valuation date for that plan year. 

(2) Subtraction of credit balance. If a 

plan has a funding standard account 

credit balance as of the valuation date 

for the plan’s pre-effective plan year, 

that balance is subtracted from the net 

asset value described in paragraph 

(j)(2)(iii)(B)(1) of this section as of that 

valuation date. However, the subtraction 

does not apply if the value of plan assets 

determined in paragraph (j)(2)(iii)(B)(1) 

of this section is greater than or equal 

to 90 percent of the plan’s current 

liability as of the valuation date for the 

plan determined under paragraph 

(j)(2)(iii)(A) of this section. 

(3) Effect of funding standard 

carryover balance reduction for first 

effective plan year. Notwithstanding 

paragraph (j)(2)(iii)(B)(2) of this section, 

if, for the first effective plan year, the 

employer has made an election to 

reduce some or all of the funding 

standard carryover balance as of the first 

day of that year in accordance with 

§ 1.430(f)–1(e), then the present value 

(determined as of the valuation date for 

the pre-effective plan year using the 

valuation interest rate for that preeffective plan year) of the amount so 

reduced is not treated as part of the 

funding standard account credit balance 

when that balance is subtracted from the 

asset value under paragraph 

(j)(2)(iii)(B)(2) of this section. 

(3) Adjusted funding target 

attainment percentage—(i) In general. 

The adjusted funding target attainment 

percentage for any plan year is the 

fraction (expressed as a percentage), the 

numerator of which is the adjusted plan 

assets described in paragraph (j)(3)(ii) of 

this section and the denominator of 

which is the adjusted funding target 

described in paragraph (j)(3)(iii) of this 

section. 

(ii) Adjusted plan assets. The adjusted 

plan assets equals the net plan assets 

(determined under paragraph (j)(2) of 

this section), increased by the aggregate 

amount of purchases of annuities for 

employees other than highly 

compensated employees (as defined in 

section 414(q)) which were made by the 

plan during the preceding 2 plan years. 

(iii) Adjusted funding target—(A) In 

general. The adjusted funding target 

equals the funding target for the plan 

year (determined in accordance with 

paragraph (j)(1) of this section but 

without regard to the at-risk rules under 

section 430(i)), increased by the 

aggregate amount of purchases of 

annuities for employees other than 

highly compensated employees (as 

defined in section 414(q)) which were 

made by the plan during the preceding 

2 plan years. 

(B) Special rule for first effective plan 

year. In the case of the plan’s first 

effective plan year, for purposes of 

determining the adjusted funding target 

attainment percentage for the preeffective plan year, the adjusted funding 

target is equal to the current liability 

determined pursuant to section 412(l)(7) 

as of the plan’s valuation date for the 

pre-effective plan year, increased by the 

aggregate amount of purchases of 

annuities for employees other than 

highly compensated employees (as 


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50576 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Proposed Rules 

defined in section 414(q)) which were 

made by the plan during the preceding 

2 plan years. 

(iv) Special rule where current 

liability not certified for pre-effective 

plan year. In any case in which the 

plan’s enrolled actuary has not issued a 

certification under paragraph (h)(4)(i) of 

this section of the adjusted funding 

target attainment percentage of the plan 

for the pre-effective plan year, the 

adjusted funding target attainment 

percentage of the plan for the first 

effective plan year is presumed to be 

less than 60 percent until the adjusted 

funding target attainment percentage of 

the plan for the pre-effective plan year 

has been certified. The preceding 

sentence applies for purposes of 

paragraphs (b) and (c) of this section at 

the beginning of the first effective plan 

year and applies for purposes of 

paragraphs (d) and (e) of this section as 

of the first day of the 4th month of the 

first effective plan year. See paragraph 

(h) of this section for rules that apply 

after the adjusted funding target 

percentage for the plan has been 

certified for either the pre-effective plan 

year or the first effective plan year. 

(4) Section 436 measurement date. 

The section 436 measurement date is 

the date that is used to stop or start the 

application of the limitations of sections 

436(d) and 436(e), and is also used for 

calculations with respect to applying 

the limitations of paragraphs (b) and (c) 

of this section. See paragraph (h) of this 

section regarding section 436 

measurement dates that result from 

application of the presumptions under 

that paragraph (h) of this section. 

(5) Examples. The following examples 

illustrate the application of this 

paragraph (j): 

Example 1. (i) Plan S is a non-collectively 

bargained defined benefit plan with a plan 

year that is the calendar year and a valuation 

date of January 1. The first effective plan year 

is 2008. 

(ii) As of January 1, 2008, Plan S has a 

value of plan assets (equal to the market 

value of assets) of $2,100,000 and a funding 

standard carryover balance of $200,000. 

During 2006, assets from Plan S were used 

to purchase a total of $100,000 in annuities 

for employees other than highly compensated 

employees. No annuities were purchased 

during 2007. On May 1, 2008, the enrolled 

actuary for the plan determines that the 

funding target as of January 1, 2008, is 

$2,500,000. 

(iii) The adjusted value of assets for Plan 

S as of January 1, 2008, is $2,000,000 (that 

is, plan assets of $2,100,000 plus annuity 

purchases of $100,000 minus the funding 

standard carryover balance of $200,000). The 

adjusted funding target is $2,600,000 (that is, 

the funding target of $2,500,000, increased by 

the annuity purchases of $100,000). 

(iv) Based on the above adjusted plan 

assets and adjusted funding target, the 

AFTAP as of January 1, 2008, would be 

76.92%. Since the AFTAP is less than 80% 

but is at least 60%, Plan S is subject to the 

restrictions in paragraph (d)(3) of this 

section. 

Example 2. (i) The facts are the same as in 

Example 1, except that it is reasonable to 

expect that the plan sponsor will make a 

contribution of $80,000 to Plan S for the 2007 

plan year by September 15, 2008. This 

amount is in excess of the minimum required 

contribution for 2007. The plan sponsor 

elects to reduce the funding standard 

carryover balance by $80,000. 

(ii) Because it is reasonable to expect that 

the $80,000 will be contributed by the plan 

sponsor, that amount is taken into account 

when the enrolled actuary certifies the 2008 

AFTAP under the special rule in paragraph 

(h)(4)(i)(B) of this section for plan years 

beginning before 2009. Accordingly, the 

enrolled actuary for the plan certifies the 

2008 AFTAP as 80% (that is, adjusted plan 

assets of $2,080,000, reflecting the $80,000 in 

contributions receivable, divided by the 

adjusted funding target of $2,600,000). 

(iii) The ability to take contributions into 

account before they are actually paid to the 

plan is available only for plan years 

beginning before 2009. Furthermore, if the 

employer does not actually make the 

contribution and the difference between the 

incorrect certification and the corrected 

AFTAP constitutes a material change, the 

plan will have violated section 401(a)(29) or 

will not have been operated in accordance 

with its terms. 

Example 3. (i) Plan R is a defined benefit 

plan with a plan year that is the calendar 

year and a valuation date of January 1. The 

first effective plan year for Plan R is 2008. 

The valuation interest rate for the 2007 plan 

year for Plan R is 7%. The fair market value 

of assets of Plan R as of January 1, 2007, is 

$1,000,000. The actuarial value of assets of 

Plan R as of January 1, 2007, is $1,200,000. 

The current liability of Plan R as of January 

1, 2007, is $1,500,000. The funding standard 

account credit balance as of January 1, 2007, 

is $80,000. The funding standard carryover 

balance of Plan R is $50,000 as of the 

beginning of the 2008 plan year. The sponsor 

of Plan R, Sponsor T, elects in 2008 to reduce 

the funding standard carryover balance in 

accordance with § 1.430(f)–1 by $45,000. 

(ii) Pursuant to paragraph (j)(2)(iii)(B)(1) of 

this section, the asset value used to 

determine the funding target attainment 

percentage (FTAP) for the 2007 plan year is 

limited to 110% of the fair market value of 

assets on January 1, 2007, or $1,100,000 

(110% of $1,000,000). 

(iii) Pursuant to paragraph (j)(2)(iii)(B)(2) of 

this section, the funding standard account 

credit balance as of January 1, 2007, is 

subtracted from the asset value used to 

determine the FTAP for the 2007 plan year. 

However, pursuant to paragraph 

(j)(2)(iii)(B)(3) of this section, the present 

value of the amount by which Sponsor T 

elected to reduce the funding standard 

carryover balance in 2008 is not subtracted. 

(iv) The present value, determined at an 

interest rate of 7%, of the $45,000 reduction 

in the funding standard account carryover 

balance elected by Sponsor T in 2008 is 

$42,056. Thus, $42,056 is not subtracted from 

the 2007 plan year asset value. Accordingly, 

the funding standard account credit balance 

that is subtracted from the 2007 plan year 

asset value is $37,944 (that is, $80,000 less 

$42,056). 

(v) Thus, the asset value that is used to 

determine the FTAP for the 2007 plan year 

is $1,100,000 less $37,944, or $1,062,056. 

Accordingly, for purposes of this section, the 

FTAP for the 2007 plan year for Plan R is 

70.8% (that is, $1,062,056 divided by 

$1,500,000). 

(k) Effective/applicability dates—(1) 

In general. In general, this section 

applies to plan years beginning on or 

after January 1, 2008. 

(2) Plans with delayed effective/ 

applicability date. In the case of a plan 

for which the effective date of section 

436 is delayed in accordance with 

sections 104 through 106 of the Pension 

Protection Act of 2006, Public Law 109–

280, 120 Stat. 780, this section applies 

to plan years beginning on or after the 

effective date of section 436 with 

respect to the plan. 

(3) Collective bargaining exception—

(i) In general. In the case of a 

collectively bargained plan that is 

maintained pursuant to one or more 

collective bargaining agreements 

between employee representatives and 

one or more employers ratified before 

January 1, 2008, this section does not 

apply to plan years beginning before the 

earlier of—

(A) The date described in paragraph 

(k)(3)(ii) of this section; or 

(B) January 1, 2010. 

(ii) Termination of collective 

bargaining agreement. The date 

described in this paragraph (k)(3)(ii) is 

the later of—

(A) The date on which the last 

collective bargaining agreement relating 

to the plan terminates (determined in 

accordance with paragraph (k)(3)(iii) of 

this section and without regard to any 

extension thereof agreed to after August 

17, 2006); or 

(B) The first day of the first plan year 

to which this section would (but for this 

paragraph (k)(3)) apply. 

(iii) Treatment of certain plan 

amendments. Any plan amendment 

made pursuant to a collective bargaining 

agreement relating to the plan which 

amends the plan solely to conform to 

any requirement added by section 436 is 

not treated as a termination of the 

collective bargaining agreement. 

(iv) Treatment of plans with both 

collectively bargained and noncollectively bargained employees. In the 

case of a plan with respect to which a 

collective bargaining agreement applies 

to some, but not all, of the plan 


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participants, the plan is considered a 

collectively bargained plan for purposes 

of this paragraph (k)(3) if it is 

considered a collectively bargained plan 

under the rules of paragraph (a)(5)(ii)(B) 

of this section. 

(4) First effective plan year. For 

purposes of this section, the first 

effective plan year for a plan is the first 

plan year to which this section applies 

under paragraph (k)(1), (k)(2), or (k)(3) 

of this section. 

(5) Pre-effective plan year. For 

purposes of this section, the preeffective plan year for a plan is the last 

plan year beginning before the first 

effective date applicable under 

paragraph (k)(1), (k)(2), or (k)(3) of this 

section. Thus, except for plans with a 

delayed effective date under paragraph 

(k)(2) or (k)(3) of this section, the preeffective plan year for a plan is the last 

plan year beginning before January 1, 

2008. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 07–4262 Filed 8–28–07; 8:45 am] 

BILLING CODE 4830–01–P 


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