[Federal Register Volume 73, Number 73 (Tuesday, April 15, 2008)]
[Proposed Rules]
[Pages 20203-20220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1133]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[REG-108508-08]
RIN 1545-BH71


Determination of Minimum Required Pension Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
on the determination of minimum required contributions for purposes of 
the funding rules that apply to single employer defined benefit plans. 
These regulations would affect sponsors, administrators, participants, 
and beneficiaries of single employer defined benefit plans. This 
document also provides a notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by July 14, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for August 4, 2008, at 10 a.m. must be received by July 15, 
2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108508-08), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
108508-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS-REG-108508-08). The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lauson C. 
Green or Linda S. F. Marshall at (202) 622-6090; concerning submissions 
of comments, the hearing, and/or being placed on the building access 
list to attend the hearing, Richard A. Hurst, at 
<a href="/cdn-cgi/l/email-protection#fba99298939a899fd5bad5b38e89888fbb92898898948e95889e97d58f899e9a88d59c948d"><span class="__cf_email__" data-cfemail="26744f454e4754420867086e53545552664f54554549534855434a08525443475508414950">[email protected]</span></a> or (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed Income Tax Regulations (26 CFR part 
1) under sections 430(a), 430(c), 430(e), and 430(j), as added to the 
Internal Revenue Code (Code) by the Pension Protection Act of 2006 (PPA 
'06), Public Law 109-280 (120 Stat. 780). In addition, this document 
contains proposed Excise Tax Regulations (26 CFR part 54) under section 
4971.
    Section 412 provides minimum funding requirements that generally 
apply for pension plans (including both defined benefit pension plans 
and money purchase pension plans). PPA '06 makes extensive changes to 
those minimum funding requirements that generally apply for plan years 
beginning on or after January 1, 2008. Section 430, which was added by 
PPA '06, specifies the minimum funding requirements that apply to 
single employer defined benefit pension plans (including multiple 
employer plans) pursuant to section 412.\1\
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    \1\ Section 302 of the Employee Retirement Income Security Act 
of 1974, as amended (ERISA), sets forth funding rules that are 
parallel to those in Code section 412, and section 303 of ERISA sets 
forth additional funding rules for single employer plans that are 
parallel to those in section 430 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 section 430 of the Code would 
apply as well for purposes of section 303 of ERISA.

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[[Page 20204]]

    Section 430(a) provides that a plan's minimum required contribution 
for a plan year is determined under one of two rules, depending on 
whether the value of plan assets is less than, or is equal to or 
greater than, the plan's funding target. If the value of plan assets is 
less than the funding target, the minimum required contribution is the 
sum of: (1) Target normal cost; (2) any shortfall amortization charge; 
and (3) any waiver amortization charge. If the value of plan assets 
equals or exceeds the funding target, the minimum required contribution 
is the plan's target normal cost, reduced (but not below zero) by the 
excess of the value of plan assets over the plan's funding target. For 
purposes of section 430(a), the value of plan assets is determined 
after reduction for certain funding balances as provided under section 
430(f)(4)(B).
    Section 430(c) provides that a shortfall amortization charge is the 
total (not less than zero) of the shortfall amortization installments 
for the plan year with respect to any shortfall amortization base 
established for that plan year and the 6 preceding plan years. Section 
430(c)(2)(A) provides that the shortfall amortization installments with 
respect to a shortfall amortization base established for a plan year 
are the amounts necessary to amortize the shortfall amortization base 
in level annual installments over the 7-plan-year period beginning with 
that plan year.
    Section 430(c)(3) provides that a shortfall amortization base is 
determined for a plan year based on the plan's funding shortfall for 
the plan year. Under section 430(c)(4), the funding shortfall is the 
amount (if any) by which the plan's funding target for the year exceeds 
the value of the plan's assets (as reduced by the funding standard 
carryover balance and prefunding balance under section 430(f)(4)(B)). 
The shortfall amortization base for a plan year is the plan's funding 
shortfall, minus the present value (determined using the interest rates 
under section 430(h)(2)) of the total of the shortfall amortization 
installments and waiver amortization installments that have been 
determined for the plan year and any succeeding plan year with respect 
to any shortfall amortization bases and waiver amortization bases for 
preceding plan years.
    Under section 430(c)(5), a shortfall amortization base is not 
established for a plan year if the value of a plan's assets is at least 
equal to the plan's funding target for the plan year. For this purpose, 
the prefunding balance is subtracted from the value of plan assets, but 
only if an election to use that prefunding balance to offset the 
minimum required contribution is in effect for the plan year. A 
transition rule applies for plan years beginning after 2007 and before 
2011 under which only a specified percentage of the plan's funding 
target is taken into account for purposes of section 430(c)(5). The 
transition rule does not apply to a plan that is not in effect for 2007 
or to a plan that is subject to the pre-PPA '06 deficit reduction 
contribution rules for 2007 (that is, a plan covering more than 100 
participants and with a funded current liability below the applicable 
threshold).
    Under section 430(e), the waiver amortization charge for a plan 
year is the total of the waiver amortization installments for the plan 
year with respect to any waiver amortization bases for the 5 preceding 
plan years. Under section 430(e)(2), the waiver amortization 
installments with respect to a waiver amortization base established for 
a plan year are the amounts necessary to amortize the waiver 
amortization base in level annual installments over the 5-plan-year 
period beginning with the succeeding plan year. Under section 
430(e)(4), the waiver amortization base for a plan year is the amount 
of the waived funding deficiency (if any) for that plan year.
    If a plan's funding shortfall for a plan year is zero (that is, the 
value of the plan's assets, reduced by the funding standard carryover 
balance and prefunding balance to the extent provided under section 
430(f)(4)(B), is at least equal to the plan's funding target for the 
year), any shortfall amortization bases and waiver amortization bases 
for preceding plan years (and any associated shortfall amortization 
installments and waiver amortization installments) are eliminated.
    Under section 430(j), as under pre-PPA '06 law, the due date for 
the payment of a minimum required contribution for a plan year is 
generally 8\1/2\ months after the end of the plan year. Any payment 
made on a date other than the valuation date for the plan year must be 
adjusted for interest accruing at the plan's effective interest rate 
under section 430(h)(2)(A) for the plan year for the period between the 
valuation date and the payment date. Pursuant to section 430(g)(2), the 
valuation date for a plan year must be the first day of the plan year 
except in the case of a small plan described in section 430(g)(2)(B).
    Under section 430(j)(3)(A), quarterly contributions must be made 
during a plan year if the plan had a funding shortfall for the 
preceding plan year. Each quarterly installment is 25% of the required 
annual payment. The required annual payment is equal to the lesser of 
90% of the minimum required contribution under section 430 for the plan 
year or 100% of the minimum required contribution under section 430 
(determined without regard to any waiver under section 412) for the 
preceding plan year. If a quarterly installment is not made, the 
interest charge that applies for the period of underpayment is 
determined using the plan's effective interest rate plus 5 percentage 
points. The requirements regarding quarterly contributions are similar 
to the requirements that formerly applied under section 412(m) as in 
effect before amendments made by PPA '06.
    Under section 430(j)(4), a plan sponsor of a plan that is subject 
to the quarterly contribution requirements for a plan year (other than 
a small plan described in section 430(g)(2)(B)) must make additional 
quarterly contributions in order to ensure that a minimum level of 
liquid assets is available to pay benefits as of the end of each 
quarter. Generally, this required minimum level of liquid assets is the 
amount of liquid assets needed to pay for three years of benefits, and 
an additional quarterly contribution (made in liquid assets) is due if 
the plan has insufficient liquid assets to meet this minimum level. A 
plan sponsor that fails to satisfy this liquidity requirement is 
treated as failing to make the required quarterly contribution and, 
pursuant to section 206(e) of ERISA, is required to cease making 
certain types of accelerated payments that are described in section 
401(a)(32)(B) of the Code. Pursuant to section 430(j)(4)(C), the 
portion of an installment that is treated as not made because of the 
liquidity requirement continues to be treated as unpaid until the close 
of the quarter that contains the due date for the contribution. These 
liquidity requirements are substantially similar to the requirements 
that formerly applied under section 412(m)(5), as in effect before 
amendments made by PPA '06.
    Section 402 of PPA '06 provides a series of special funding rules 
for a plan maintained by a commercial passenger airline (or by an 
employer whose principal business is providing catering services to a 
commercial passenger airline) if such an employer has made an election 
provided under that section. If an eligible employer has made the 
election described in section 402(a)(1) of PPA '06 (which is only 
available for a frozen plan), the calculation of the minimum required 
contribution for the plan is determined using a special 17-plan-year 
amortization period and an interest rate of 8.85%. If an eligible 
employer has made the election

[[Page 20205]]

described in section 402(a)(2) of PPA '06 (which can be made without 
regard to whether the plan is frozen), calculation of the minimum 
required contribution for the plan is determined using a special 10-
plan-year amortization period for the initial shortfall amortization 
base (that is, the shortfall amortization base for the first plan year 
for which section 430 applies to the plan) and, pursuant to the 
amendment to section 402 of PPA '06 made by section 6615 of the U.S. 
Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq 
Accountability Appropriations Act, 2007, Public Law 110-28 (121 Stat. 
112), an interest rate of 8.25% is used to determine the funding target 
for each of those 10 plan years.
    Section 4971(a) provides an excise tax on a failure to meet 
applicable minimum funding requirements. In the case of a single 
employer plan, the tax is 10% of the aggregate unpaid minimum required 
contributions for all plan years remaining unpaid as of the end of any 
plan year ending with or within a taxable year. In the case of a 
multiemployer plan, the tax is 5% of the accumulated funding deficiency 
as of the end of any plan year ending with or within the taxable year. 
Section 4971(b) provides an additional excise tax that applies where 
the applicable minimum funding requirements remain unsatisfied for a 
specified period. Section 4971(c) provides definitions that apply for 
purposes of section 4971, including a definition of unpaid minimum 
required contribution (which is based on the new section 430 rules for 
determining the minimum required contribution for a year). Section 
4971(f) imposes a tax of 10% of the amount of the liquidity shortfall 
for a quarter that is not paid by the due date for the installment for 
that quarter.
    Regulations under section 4971 were issued on May 1, 1986 (TD 
8084). In addition, proposed regulations regarding section 4971 were 
issued on the same date. Guidance regarding quarterly contribution 
requirements under former section 412(m) was issued in Notice 89-52 
(1989-1 C.B. 692), and guidance regarding the liquidity requirements 
under former section 412(m)(5) was issued in Rev. Rul. 95-31 (1995-1 
C.B. 76). See Sec.  601.601(d)(2).

Explanation of Provisions

I. Overview

    These proposed regulations are the fourth in a series of proposed 
regulations under new section 430.\2\ These proposed regulations would 
provide guidance regarding the minimum contribution rules that apply to 
sponsors of single employer defined benefit plans under section 430. In 
addition, this document includes proposed regulations under section 
4971, reflecting changes to the excise tax rules under PPA '06.
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    \2\ Proposed Sec. Sec.  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), proposed Sec.  1.430(f)-1, relating to prefunding and 
funding standard carryover balances under section 430(f), was issued 
August 31, 2007 (REG-113891-07, 72 FR 50544), and proposed 
Sec. Sec.  1.430(d)-1, 1.430(g)-1, 1.430(h)(2)-1, and 1.430(i)-1, 
relating to measurement of plan assets and liabilities for pension 
funding purposes, were issued December 31, 2007 (REG-139236-07, 72 
FR 74215).
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II. Section 1.430(a)-1 Determination of Minimum Required Contribution

    Section 1.430(a)-1 would provide rules for determining the minimum 
required contribution for a single employer defined benefit plan 
(including a multiple employer plan under section 413(c)) for a plan 
year under section 430(a). The determination of the amount of the 
minimum required contribution for a plan year depends on whether the 
value of plan assets, as reduced to reflect certain funding balances 
pursuant to section 430(f)(4)(B) (but not below zero), equals or 
exceeds the plan's funding target for the plan year. If this value of 
plan assets is less than the funding target for the plan year, the 
minimum required contribution for that plan year is equal to the sum of 
the plan's target normal cost for the plan year plus any applicable 
shortfall amortization installments and waiver amortization 
installments. If this value of plan assets equals or exceeds the 
funding target for the plan year, the minimum required contribution for 
that plan year is equal to the target normal cost of the plan for the 
plan year reduced (but not below zero) by any such excess.
    The proposed regulations provide that the shortfall amortization 
installments with respect to a shortfall amortization base established 
for a plan year are the annual amounts necessary to amortize that 
shortfall amortization base in level annual installments over the 7-
year period beginning with that plan year. As provided in proposed 
Sec.  1.430(h)(2)-1(f)(2), these installments are determined assuming 
that the installments are paid on the valuation date for each plan year 
and using the interest rates applicable under section 430(h)(2)(C) or 
(D). The shortfall amortization installments are determined using the 
interest rates that apply for the plan year for which the shortfall 
amortization base is established and are not redetermined in subsequent 
plan years to reflect changes in interest rates under section 430(h)(2) 
for those subsequent plan years.\3\
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    \3\ The proposed regulations reflect the alternative 
amortization periods and interest rates that apply to a commercial 
passenger airline (or other eligible employer) that has made an 
election under section 402 of PPA '06.
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    Under the proposed regulations, if the value of plan assets 
(reduced by the prefunding balance if the prefunding balance is used to 
offset the minimum required contribution for the plan year as provided 
under Sec.  1.430(f)-1(c), but not below zero) is equal to or greater 
than the funding target for the plan year, then no shortfall 
amortization base is established for that plan year. If this value of 
plan assets is less than the funding target for the plan year, a 
shortfall amortization base is established for the plan year. In such a 
case, the shortfall amortization base (which can be either positive or 
negative) is equal to the funding shortfall of the plan for the plan 
year, minus the sum of the present values of any remaining shortfall 
amortization installments and waiver amortization installments 
(determined in accordance with Sec.  1.430(h)(2)-1(f)(2) using the 
interest rates that apply for the current plan year). For this purpose, 
the funding shortfall of a plan for any plan year is the excess (if 
any) of the funding target of the plan for the plan year, over the 
value of plan assets for the plan year (as reduced to reflect the 
subtraction of the funding standard carryover balance and prefunding 
balance to the extent provided under Sec.  1.430(f)-1(c)).
    The proposed regulations reflect the transition rule under section 
430(c)(5)(B) under which only a specified portion of the funding target 
is taken into account in determining whether a shortfall amortization 
base is established for plan years beginning before January 1, 2011. 
This transition rule does not apply with respect to any plan year 
beginning after 2008 if a shortfall amortization base was required to 
be established for any preceding year, nor does it apply to a plan that 
was not in effect for a plan year beginning in 2007 or to a plan that 
was subject to section 412(l) for the last plan year before section 430 
applies to the plan (the pre-effective plan year), determined after the 
application of section 412(l)(6) and (9). The proposed regulations 
would not provide for any adjustment to the applicable percentages 
under this transition rule for a plan for which the effective date of 
section 430 is delayed under sections 104 through 106 of PPA `06.

[[Page 20206]]

    Under the proposed regulations, the waiver amortization 
installments with respect to a waiver amortization base established for 
a plan year are the annual amounts necessary to amortize that waiver 
amortization base in level annual installments over the 5-year period 
beginning with the following plan year. As provided in proposed Sec.  
1.430(h)(2)-1(f)(2), these installments are determined assuming that 
the installments are paid on the valuation date for each plan year and 
using the interest rates applicable under section 430(h)(2). Thus, if 
the plan is using segment rates, the installments are determined by 
applying the first segment rate to the first four installments and the 
second segment rate to the fifth (and final) installment. The waiver 
amortization installments established with respect to a waiver 
amortization base are determined using the interest rates that apply 
for the plan year for which the waiver is granted (even though the 
first installment with respect to the waiver amortization base is not 
due until the subsequent plan year) and are not redetermined in 
subsequent plan years to reflect changes in interest rates under 
section 430(h)(2) for those subsequent plan years. A waiver 
amortization base is established for each plan year for which a waiver 
of the minimum funding standard has been granted, and the amount of 
that waiver amortization base is equal to the amount of the minimum 
required contribution waived (or the waived funding deficiency) for the 
plan year.
    In the case of a plan that received a funding waiver under section 
412 for a plan year for which section 430 was not yet effective with 
respect to the plan, the proposed regulations provide that the waiver 
is treated as giving rise to a waiver amortization base, and the 
amortization charges with respect to that funding waiver are treated as 
waiver amortization installments. With respect to such a preexisting 
funding waiver, the amount of the annual waiver amortization 
installment is equal to the amortization charge with respect to that 
waiver determined using the interest rate or rates that applied for the 
pre-effective plan year. Thus, for a plan that received a waiver in the 
past, the plan sponsor would have to contribute the amounts needed to 
amortize that waiver over the original schedule as previously 
established.
    In accordance with section 430(c)(6), the proposed regulations 
provide that, in any case in which the funding shortfall of a plan for 
a plan year is zero, the shortfall amortization bases for all preceding 
plan years (and all shortfall amortization installments determined with 
respect to those shortfall amortization bases) are reduced to zero, and 
the waiver amortization bases for all preceding plan years (and all 
waiver amortization installments determined with respect to such bases) 
are reduced to zero.
    The proposed regulations would provide rules for determining the 
amount of a minimum required contribution for a short plan year. Under 
the proposed regulations, the amortization installments are prorated 
for a short plan year. The proposed regulations would not provide for 
any proration of the target normal cost. Instead, the determination of 
target normal cost would reflect actual accruals that accrue or are 
expected to accrue during the plan year.\4\ The proposed regulations 
also provide rules for the treatment of installments in subsequent plan 
years to take into account the proration of these installments for 
short plan years and any change in valuation date.
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    \4\ See 29 CFR 2530.204-2(e) for rules relating to changes in 
accrual computation periods.
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III. Section 1.430(j)-1 Payment of Minimum Required Contributions

    The proposed regulations under section 430(j) would provide rules 
related to the payment of minimum required contributions, including the 
payment of quarterly contributions and liquidity requirements. The 
proposed regulations provide that any payment of the minimum required 
contribution under section 430 for a plan year that is made on a date 
other than the valuation date for that plan year is adjusted for 
interest accruing for the period between the valuation date and the 
payment date, at the effective interest rate for the plan for that plan 
year determined pursuant to Sec.  1.430(h)(2)-1(f)(1). The direction of 
the adjustment depends on whether the contribution is paid before or 
after the valuation date for the plan year. If the contribution is paid 
after the valuation date for the plan year, the contribution is 
discounted to the valuation date using the plan's effective interest 
rate. By contrast, if the contribution is paid before the valuation 
date for the plan year (which could only occur in the case of a small 
plan described in section 430(g)(2)(B)), the contribution is increased 
for interest at that same interest rate.
    Under the proposed regulations, a payment of the minimum required 
contribution under section 430 for a plan year can be made no earlier 
than the first day of the plan year. The deadline for any payment of 
any minimum required contribution for a plan year is 8\1/2\ months 
after the close of the plan year. If a minimum required contribution is 
not paid by this deadline, an excise tax applies under section 4971.
    The proposed regulations would provide rules for accelerated 
quarterly contributions for underfunded plans. These rules are similar 
to the rules provided under Notice 89-52; however, these rules have 
been updated to reflect statutory changes. These statutory changes 
include changes regarding which plans are subject to the quarterly 
contribution requirements as well as the interest rates applicable to 
missed quarterly contributions.
    Under the proposed regulations, in any case in which the plan has a 
funding shortfall for the preceding plan year, the employer maintaining 
the plan must make the required quarterly installments.\5\ The amount 
of each required quarterly installment is equal to 25% of the required 
annual payment. For this purpose, the required annual payment is equal 
to the lesser of 90% of the minimum required contribution under section 
430(a) for the plan year, or 100% of the minimum required contribution 
under section 430(a) (determined without regard to any funding waiver 
under section 412) for the preceding plan year. These minimum required 
contributions are determined under section 430 as of the valuation date 
for each year and have no adjustment for interest.\6\ The proposed 
regulations provide that, for purposes of determining the required 
annual payment, the minimum required contribution for a plan year is 
determined without regard to use of the prefunding balance or funding 
standard carryover balance in the current year or any prior year.
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    \5\ These proposed regulations do not provide rules for 
determining whether a plan has a funding shortfall for the 2007 plan 
year for purposes of determining whether the plan must make required 
quarterly installments for the 2008 plan year. Nonetheless, plans 
must make this determination on a reasonable basis. See the 
discussion in this preamble under the heading ``Proposed 
Legislation'' for a rule that the IRS and the Treasury Department 
are considering for this purpose.
    \6\ In determining required installations for the plan year that 
begins in 2008, the minimum required contribution for the 2007 plan 
year under section 412 is used as the minimum required contribution 
for the preceding plan year. This amount, which does not reflect 
either use of the credit balance or the granting of any funding 
waiver, is adjusted with interest to the end of the 2007 plan year 
at the plan's valuation interest rate for the 2007 plan year.
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    Pursuant to section 430(j)(3)(C), the proposed regulations would 
provide that the due dates for the four required quarterly installments 
with respect to a

[[Page 20207]]

full plan year are as follows: The first installment is due on the 15th 
day of the 4th plan month, the second installment is due on the 15th 
day of the 7th plan month, the third installment is due on the 15th day 
of the 10th plan month, and the fourth installment is due on the 15th 
day following the close of the plan year. In the case of a short plan 
year, the proposed regulations would provide rules for determining the 
amount of the required annual payment, the number and due dates of 
installments, and the amount of those installments. The proposed 
regulations also provide rules for determining the plan month in the 
case of a plan year that does not begin on the first day of a calendar 
month.
    The proposed regulations would provide that, if the employer fails 
to pay the full amount of a required installment, then the rate of 
interest used to adjust the amount of the contribution with respect to 
the underpayment of the required installment for the period of time 
that begins on the due date for the required installment and that ends 
on the date of payment is equal to the effective interest rate for the 
plan for that plan year determined pursuant to Sec.  1.430(h)(2)-
1(f)(1) plus 5 percentage points. This increased interest rate applies 
only to installments that are due after the valuation date for the plan 
year because section 430(j)(3) refers to interest being charged on late 
quarterly contributions. The amount of the underpayment is equal to the 
excess of the required installment over the amount (if any) of the 
installment contributed to or under the plan on or before the due date 
for the installment. For this purpose, the proposed regulations contain 
an ordering rule under which contributions are to be credited against 
unpaid required installments in the order in which those installments 
were required to be paid.
    As was the case in Notice 89-52, the proposed regulations would 
provide that a plan sponsor generally can use a plan's funding balances 
to satisfy quarterly contribution requirements. However, this rule is 
subject to the new limitation on the use of funding balances by 
underfunded plans pursuant to section 430(f)(3)(C). An eligible plan 
sponsor's election to use the plan's prefunding balance and funding 
standard carryover balance under section 430(f) satisfies the 
obligation to make an installment on the date of the election, to the 
extent of the amount elected, as adjusted with interest at the plan's 
effective interest rate under section 430(h)(2)(A) for the plan year 
from the valuation date through the due date of the installment. 
Comments are requested regarding whether rules should be provided under 
which a plan sponsor is deemed to make an election to use a funding 
balance to the extent it is available to avoid a failure to make any 
required quarterly installment or under which a plan sponsor can make a 
single election that will apply to all future quarterly installments 
until revoked.
    A plan sponsor that uses the plan's prefunding balance or funding 
standard carryover balance toward satisfaction of the plan's quarterly 
contribution requirement before the plan's effective interest rate for 
the plan year has been determined should assume, in order to ensure 
that the quarterly contribution requirements are satisfied, that the 
effective interest rate is equal to the lowest of the three segment 
rates (generally the first segment rate) to adjust the elected amount. 
Plan sponsors should also note that, pursuant to proposed Sec.  
1.430(f)-1(b)(1)(ii)(B), the amount of the funding balance that is used 
to satisfy the quarterly contribution requirements cannot later be 
added back to the prefunding balance (because only contributions in 
excess of the minimum funding requirement, determined without regard to 
the offset under section 430(f)(3), are eligible to be added to the 
prefunding balance).
    The proposed regulations would provide rules for the liquidity 
requirements that generally apply to plans for which quarterly 
contributions are required. Under the proposed regulations, a plan 
subject to the requirement to make quarterly contributions (other than 
a small plan described in section 430(g)(2)(B)) is treated as failing 
to pay the full amount of the required installment for a quarter to the 
extent that the value of the liquid assets paid after the close of that 
quarter and on or before the due date for the installment is less than 
the liquidity shortfall for that quarter. Thus, in order to satisfy the 
quarterly contribution requirement for a quarter, liquid assets in the 
amount of the liquidity shortfall must be contributed after the close 
of that quarter and on or before the due date for the installment.\7\ 
The use of funding balances or the contribution of illiquid assets 
cannot remedy a liquidity shortfall.
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    \7\ In this context, see Department of Labor Interpretive 
Bulletin 94-3 (29 CFR 2509.94-3), which sets forth the Department's 
view that, in the absence of an applicable exemption, a contribution 
by an employer to a defined benefit plan in a form other than cash 
constitutes a prohibited transaction under section 406 of ERISA and 
section 4975 of the Code.
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    The rules under the proposed regulations relating to the liquidity 
requirements are similar to the rules provided under Rev. Rul. 95-31; 
however, these rules have been updated to reflect statutory changes. 
For example, the definition of liquid assets under the proposed 
regulations is the same as the definition of liquid assets under Rev. 
Rul. 95-31. Unlike Rev. Rul. 95-31, the proposed regulations measure 
satisfaction of a liquidity shortfall by reference to contributions 
made after the close of the quarter and by the due date for the 
installment while including contributions made during the plan quarter 
in plan assets. Although this appears to be a change from the rules of 
Rev. Rul. 95-31, the two formulations are mathematically identical.
    The proposed regulations provide that, for purposes of applying the 
additional 5 percentage point interest adjustment in the case of a 
quarterly contribution that is not fully paid, the liquidity increment 
for the quarter (the portion of the quarterly installment that is due 
solely by reason of the liquidity requirements) continues to be treated 
as unpaid until the close of the quarter in which the due date for that 
installment occurs, regardless of when it is contributed. However, for 
purposes of adjusting the contribution to the valuation date at the 
effective interest rate, the adjustment is made from the actual 
contribution date (rather than from the close of the quarter). In 
addition, the proposed regulations provide an ordering rule under 
which, if a contribution for a quarter is less than the total amount 
needed to satisfy the quarterly contribution requirement taking into 
account the liquidity requirement, then the contribution is first 
attributed toward satisfying the quarterly contribution requirement 
determined without regard to the liquidity requirement.
    Under the proposed regulations, if the amount of any required 
installment is increased because of the liquidity shortfall rules, that 
increase cannot exceed the amount that, when added to prior required 
installments determined under section 430(j) for the plan year, would 
increase the funding target attainment percentage of the plan for the 
plan year (taking into account the expected increase in funding target 
due to benefits accruing or earned during the plan year) to 100%.
    The proposed regulations would provide that the rules under section 
430(j) generally apply to a plan maintained by a commercial passenger 
airline (or other eligible employer) that has made an election under 
section 402(a)(1) or 402(a)(2) of PPA '06 in the same manner as they 
apply to any other

[[Page 20208]]

plan subject to section 430. However, in the case of a plan with 
respect to which the election under section 402(a)(1) of PPA '06 has 
been made, the determination of the funding shortfall for a plan year 
is made by reference to the unfunded liability under section 
402(e)(3)(A) of PPA '06. In addition, the effective interest rate for a 
plan with respect to which the election under section 402(a)(1) of PPA 
'06 has been made is deemed to be 8.85%. Pursuant to proposed Sec.  
1.430(h)(2)-1(f)(1), the effective interest rate for a plan with 
respect to which the election under section 402(a)(2) of PPA `06 has 
been made will be 8.25% for the 10-year period during which the 
election applies to the plan.

IV. Section 54.4971(c)-1 Taxes on Failure To Meet Minimum Funding 
Standards

    These proposed regulations set forth the definitions that apply for 
purposes of applying the rules of section 4971 that were modified by 
PPA '06.
    The proposed regulations define the term accumulated funding 
deficiency (which is only relevant for a multiemployer plan) as having 
the meaning given to that term by section 431. A multiemployer plan's 
accumulated funding deficiency for a plan year takes into account all 
charges and credits to the funding standard account under section 412 
for plan years before the first plan year for which section 431 applies 
to the plan.
    The proposed regulations define the term unpaid minimum required 
contribution, with respect to any plan year, as any minimum required 
contribution under section 430 for the plan year that is not paid on or 
before the due date for the plan year under section 430(j)(1). The 
proposed regulations provide that a plan's accumulated funding 
deficiency under section 412 for the pre-effective plan year is treated 
as an unpaid minimum required contribution for that plan year until 
correction is made. Unlike the determination of accumulated funding 
deficiency which applied under section 412 prior to PPA '06, the total 
unpaid minimum required contributions is not adjusted with interest. 
However, as described in the following paragraph, correction of an 
unpaid minimum required contribution does require a contribution that 
includes an adjustment for interest.
    The proposed regulations define the term correct as it applies to 
the accumulated funding deficiency and the unpaid minimum required 
contribution of a plan. With respect to an accumulated funding 
deficiency under a multiemployer plan, the proposed regulations set 
forth rules that are the same as the rules set forth in proposed Sec.  
54.4971-2(a). Under the proposed regulations, the correction of an 
unpaid minimum required contribution under a single employer plan for a 
plan year requires the contribution, to or under the plan, of the 
amount that, when discounted to the valuation date for the plan year 
for which the unpaid minimum required contribution is due at the 
appropriate rate of interest, equals or exceeds the unpaid minimum 
required contribution. For this purpose, the appropriate rate of 
interest is the plan's effective interest rate for the plan year for 
which the unpaid minimum required contribution is due except to the 
extent that the payments are subject to additional interest as provided 
under section 430(j)(3) or (4). With respect to an unpaid minimum 
required contribution, the proposed regulations provide an ordering 
rule under which a contribution is attributable first to the earliest 
plan year of any unpaid minimum required contribution for which 
correction has not yet been made. With respect to an accumulated 
funding deficiency under section 412 for the pre-effective plan year 
that is treated as an unpaid minimum required contribution, the 
proposed regulations provide that correction requires the contribution, 
to or under the plan, of the amount of that accumulated funding 
deficiency adjusted with interest from the end of the pre-effective 
plan year to the date of the contribution at the plan's valuation 
interest rate for the pre-effective plan year.
    The IRS and the Treasury Department intend to issue further 
guidance in the future on the application of section 4971, including 
special rules applicable to multiemployer plans that are in critical or 
endangered status under section 432.

Proposed Legislation

    As of the date of the issuance of these proposed regulations, bills 
have been passed in the House of Representatives and the Senate that 
would provide for technical corrections to PPA '06.\8\ These bills 
would amend section 430(j)(3)(A) to authorize the Treasury Department 
to provide rules for determining the funding shortfall for purposes of 
the pre-effective plan year and would add section 430(j)(3)(E)(iii) to 
authorize the Treasury Department to provide special rules for the 
treatment of quarterly contributions in the case of a plan with a 
valuation date other than the first day of the plan year. These bills 
would also specify an effective date for the PPA '06 amendments to 
section 4971.
---------------------------------------------------------------------------

    \8\ See H.R. 3361 as passed by the House of Representatives on 
March 13, 2008 and S. 1974 as passed by the Senate on December 19, 
2007.
---------------------------------------------------------------------------

    These proposed regulations have reserved Sec.  1.430(j)-1(c)(6) and 
Sec.  1.430(j)-1(g)(5)(ii) in order to accommodate any enacted changes 
to section 430(j). If legislation similar to that in the proposed 
technical corrections is enacted, the IRS and the Treasury Department 
are considering including the following provisions in final 
regulations. First, the funding shortfall for the pre-effective plan 
year would be determined as the excess (if any) of the plan's current 
liability determined pursuant to section 412(l)(7) on the valuation 
date for the plan's pre-effective plan year, over the net plan assets 
for the pre-effective plan year as determined under Sec.  1.430(i)-
1(f)(5)(ii). Second, if a quarterly installment is due before the 
valuation date for the plan year, the minimum required contribution for 
the plan year would be increased by an additional amount if that 
quarterly installment is not paid by the due date. This additional 
amount would be determined by applying interest at an annual rate of 5% 
to the underpayment of the required installment for the period of time 
between the due date for the required installment and the earlier of 
the date of payment or the valuation date.

Effective/Applicability Dates of Regulations

    Section 430 generally applies to plan years beginning on or after 
January 1, 2008. The proposed regulations under section 430 are 
proposed to apply generally to plan years beginning on or after January 
1, 2009. When the regulations are finalized, plans will be permitted to 
apply them for plan years beginning in 2008. In addition, for plan 
years beginning in 2008, plans are permitted to rely on the proposed 
regulations for purposes of satisfying the requirements of section 430. 
In the case of a plan for which the effective date of section 430 is 
delayed in accordance with sections 104 through 106 of PPA '06, the 
regulations are proposed to apply to plan years beginning on or after 
the date section 430 first applies with respect to the plan.
    The amendments made to section 4971 by section 114 of PPA '06 do 
not have a specific effective date. The regulations provide that the 
amendments to section 4971 generally apply at the same time as the 
amendments to section 430 (or section 431, as applicable) apply to the 
plan. Thus, the regulations provide that the amendments to section 4971 
generally

[[Page 20209]]

apply to taxable years beginning on or after January 1, 2008, but only 
with respect to plan years for which section 430 (or section 431) 
applies to the plan that end with or within any such taxable year. In 
the case of a plan to which a delayed effective date applies pursuant 
to sections 104 through 106 of PPA '06, the regulations provide that 
the amendments made to section 4971 apply to the same taxable years, 
but only with respect to plan years for which section 430 applies to 
the plan. The regulations under section 4971 generally are proposed to 
apply at the same time the statutory changes to section 4971 under PPA 
'06 become effective but would not apply to taxable years ending before 
April 15, 2008. Thus, for example, the regulations under section 4971 
would not apply to a short taxable year beginning January 1, 2008, and 
ending February 29, 2008.

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 and, because 
the proposed regulations do not impose a collection of information on 
small entities, a regulatory flexibility analysis is not required. 
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 Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the 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 has been scheduled for August 4, 2008, beginning 
at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by July 15, 2008, and an outline of topics to be 
discussed and the amount of time to be devoted to each topic (a signed 
original and eight (8) copies) by July 15, 2008. A period of 10 minutes 
will be allotted to each person for making comments. An agenda showing 
the scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

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 Exempt and Government Entities). However, other personnel 
from the IRS and the Treasury Department participated in the 
development of these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Insurance, 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(a)-1 is added to read as follows:


Sec.  1.430(a)-1  Determination of minimum required contribution.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's minimum required contribution for a plan year 
under section 430(a). Section 430 and this section apply to single 
employer defined benefit plans (including multiple employer plans as 
defined in section 413(c)) that are subject to section 412 but do not 
apply to multiemployer plans (as defined in section 414(f)). Paragraph 
(b) of this section defines a plan's minimum required contribution for 
a plan year. Paragraph (c) of this section provides rules for 
determining shortfall amortization installments. Paragraph (d) of this 
section provides rules for determining waiver amortization 
installments. Paragraph (e) of this section provides for early deemed 
amortization of shortfall and waiver amortization bases for fully 
funded plans. Paragraph (f) of this section provides definitions that 
apply for purposes of this section. Paragraph (g) of this section 
provides examples that illustrate the application of this section. 
Paragraph (h) of this section provides effective/applicability dates 
and transition rules.
    (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 section 430 and this section are applied separately for each 
employer under the plan, as if each employer maintained a separate 
plan. Thus, the minimum required contribution is computed separately 
for each employer 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 rules of section 
430 and this section are applied as if all participants in the plan 
were employed by a single employer.
    (b) Definition of minimum required contribution--(1) In general. In 
the case of a defined benefit plan that is not a multiemployer plan 
(within the meaning of section 414(f)), except as offset under section 
430(f) and Sec.  1.430(f)-1, the minimum required contribution for a 
plan year is determined as the applicable amount determined under 
paragraph (b)(2) of this section or paragraph (b)(3) of this section, 
reduced by the amount of any funding waiver under section 412(c) that 
is granted for the plan year. See paragraph (b)(4) of this section for 
special rules for a plan maintained by a commercial passenger airline 
(or other eligible employer) for which an election under section 402 of 
the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780) 
(PPA '06), has been made, and see section 430(j) and Sec.  1.430(j)-1 
for rules regarding the required interest adjustment for a contribution 
that is paid on a date other than the valuation date for the plan year.

[[Page 20210]]

    (2) Plan assets less than funding target--(i) General rule. For any 
plan year in which the value of plan assets of the plan (as reduced to 
reflect the subtraction of certain funding balances as provided under 
Sec.  1.430(f)-1(c), but not below zero) is less than the funding 
target of the plan for the plan year, the minimum required contribution 
for that plan year is equal to the sum of--
    (A) The target normal cost of the plan for the plan year;
    (B) The total (not less than zero) of the shortfall amortization 
installments determined with respect to the shortfall amortization 
bases for the plan year and each of the 6 preceding plan years as 
described in paragraph (c) of this section; and
    (C) The total of the waiver amortization installments determined 
with respect to the waiver amortization bases for each of the 5 
preceding plan years as described in paragraph (d) of this section.
    (ii) Special rule for short plan years--(A) Proration of 
amortization installments. In determining the minimum required 
contribution in the case of a plan year that is shorter than 12 months 
(and is not a 52-week plan year of a plan that uses a 52-53 week plan 
year), the shortfall amortization installments and waiver amortization 
installments that are taken into account under paragraphs (b)(2)(i)(B) 
and (C) of this section are determined by multiplying the amount of 
those installments that would be taken into account for a 12-month plan 
year by a fraction, the numerator of which is the duration of the short 
plan year and the denominator of which is 1 year.
    (B) Effect on subsequent years. In plan years after the short plan 
year, installments with respect to a shortfall amortization base (or 
waiver amortization base) continue to be taken into account under 
paragraphs (b)(2)(i)(B) and (C) of this section until the total amount 
of those installments, as originally determined to be paid over 7 years 
(or 5 years in the case of waiver amortization installments), has been 
taken into account. Thus, for example, in the case of a plan that has a 
short plan year, an additional partial installment will be taken into 
account under paragraphs (b)(2)(i)(B) and (C) of this section during 
the plan year after the end of the original amortization period in an 
amount determined so that the total of the amortization installments 
(including the prorated installment payable for the short plan year and 
the additional partial installment) is equal to the total amount of the 
amortization installments as originally determined. Similarly, in the 
case of a plan that has a short plan year, the total number of plan 
years required to take into account the full amount of installments 
will exceed 7 plan years (or 5 plan years in the case of waiver 
amortization installments), and, accordingly, the number of preceding 
plan years taken into account in paragraphs (b)(2)(i)(B) and (C) of 
this section is correspondingly increased so that the total amount of 
the amortization installments as originally determined is taken into 
account. In addition, for plan years beginning after the close of the 
short plan year, the shortfall amortization installments and waiver 
amortization installments that are taken into account under paragraphs 
(b)(2)(i)(B) and (C) of this section are assumed to be paid on the 
valuation date for the new plan year (rather than on the valuation date 
for the short plan year and preceding plan years).
    (3) Plan assets equal or exceed funding target. For any plan year 
in which the value of plan assets (as reduced to reflect the 
subtraction of certain funding balances as provided under Sec.  
1.430(f)-1(c), but not below zero) equals or exceeds the funding target 
of the plan for the plan year, the minimum required contribution for 
that plan year is equal to the target normal cost of the plan for the 
plan year reduced (but not below zero) by that excess.
    (4) Special rules for commercial passenger airlines--(i) In 
general. This paragraph (b)(4) provides special rules for a plan 
maintained by a commercial passenger airline (or an employer whose 
principal business is providing catering services to a commercial 
passenger airline) for which an election under section 402 of PPA '06 
has been made.
    (ii) Frozen plans--(A) Determinations during 17-year amortization 
period. If an election described in section 402(a)(1) of PPA '06 
applies for the plan year with respect to an eligible plan described in 
section 402(c)(1) of PPA '06, then the plan's minimum required 
contribution for purposes of section 430 of the Code for the plan year 
is equal to the amount necessary to amortize (at an interest rate of 
8.85 percent) the unfunded liability of the plan in equal installments 
over the remaining amortization period. For this purpose, the unfunded 
liability means the excess of the accrued liability under the plan 
determined using the unit credit funding method and an interest rate of 
8.85 percent over the fair market value of assets, and the remaining 
amortization period is the 17-plan-year period beginning with the first 
plan year for which the election was made, reduced by 1 year for each 
plan year after the first plan year for which the election was made. In 
addition, the section 430(f)(3) election to apply funding balances 
against the minimum required contribution does not apply to a plan to 
which the election described in section 402(a)(1) of PPA '06 applies 
for the plan year.
    (B) Determinations following 17-year amortization period. If an 
election described in section 402(a)(1) of PPA '06 applied to the plan 
for any preceding plan year but does not apply for the current plan 
year, then the plan's minimum required contribution for purposes of 
section 430 of the Code for the plan year is determined without regard 
to that election. For the first plan year for which that election no 
longer applies to the plan, any prefunding balance or funding standard 
carryover balance is reduced to zero.
    (iii) Other plans of commercial passenger airlines. If an election 
described in section 402(a)(2) of PPA '06 has been made for an eligible 
plan described in section 402(c)(1) of PPA '06, then the minimum 
required contribution for purposes of section 430 is determined under 
generally applicable rules, except that the shortfall amortization base 
for the first plan year for which section 430 applies to the plan is 
amortized over 10 years (rather than over 7 years as provided in 
paragraph (c)(1) of this section) in accordance with Sec.  1.430(h)(2)-
1(e) and (f) using the interest rates that apply for the first plan 
year for which section 430 applies to the plan. In such a case, the 
shortfall amortization installments with respect to the shortfall 
amortization base for that plan year will continue to be included in 
determining the minimum required contribution for 10 years rather than 
7 years. See also Sec.  1.430(h)(2)-1(b)(6) for a special rule for 
determining the funding target in the case of a plan for which an 
election under section 402(a)(2) of PPA '06 has been made.
    (c) Shortfall amortization installments--(1) In general. For 
purposes of this section, the shortfall amortization installments with 
respect to a shortfall amortization base established for a plan year 
are the annual amounts necessary to amortize that shortfall 
amortization base in level annual installments over the 7-year period 
beginning with that plan year. See Sec.  1.430(h)(2)-1(e) and (f) for 
rules regarding interest rates used for determining shortfall 
amortization installments and the date within each plan year on which 
the installments are assumed to be paid. The shortfall amortization 
installments are determined using the interest rates that apply for the 
plan year for which the

[[Page 20211]]

shortfall amortization base is established and are not redetermined in 
subsequent plan years to reflect changes in interest rates under 
section 430(h)(2) for those subsequent plan years.
    (2) Shortfall amortization base--(i) In general. For purposes of 
this section, unless the value of plan assets (as reduced to reflect 
the subtraction of certain funding balances as provided under Sec.  
1.430(f)-1(c)(2), but not below zero) is equal to or greater than the 
funding target of the plan for the plan year, a shortfall amortization 
base is established for the plan year equal to--
    (A) The funding shortfall of the plan for the plan year; minus
    (B) The amount attributable to future installments determined under 
paragraph (c)(2)(ii) of this section.
    (ii) Amount attributable to future installments. The amount 
attributable to future installments is equal to the sum of the present 
values (determined in accordance with Sec.  1.430(h)(2)-1(e) and (f) 
using the interest rates that apply for the current plan year) of--
    (A) The shortfall amortization installments that have been 
determined for the plan year and any succeeding plan year with respect 
to the shortfall amortization bases of the plan for any plan year 
preceding the plan year; and
    (B) The waiver amortization installments that have been determined 
for the plan year and any succeeding plan year with respect to the 
waiver amortization bases of the plan for any plan year preceding the 
plan year.
    (iii) Transition rule. See paragraph (h)(4) of this section for a 
transition rule under which only a portion of the funding target is 
taken into account in determining whether a shortfall amortization base 
is established under this paragraph (c)(2).
    (d) Waiver amortization installments--(1) In general. For purposes 
of this section, the waiver amortization installments with respect to a 
waiver amortization base established for a plan year are the annual 
amounts necessary to amortize that waiver amortization base in level 
annual installments over the 5-year period beginning with the following 
plan year. See Sec.  1.430(h)(2)-1(e) and (f) for rules regarding 
interest rates used for determining waiver amortization installments 
and the date within each plan year on which the installments are 
assumed to be paid. The waiver amortization installments established 
with respect to a waiver amortization base are determined using the 
interest rates that apply for the plan year for which the waiver is 
granted (even though the first installment with respect to the waiver 
amortization base is not due until the subsequent plan year) and are 
not redetermined in subsequent plan years to reflect changes in 
interest rates under section 430(h)(2) for those subsequent plan years.
    (2) Waiver amortization base--(i) In general. For purposes of this 
section, a waiver amortization base is established for each plan year 
for which a waiver of the minimum funding standard has been granted in 
accordance with section 412(c). The amount of the waiver amortization 
base is equal to the amount of the minimum required contribution waived 
(or the waived funding deficiency) for the plan year.
    (ii) Transition rule. See paragraph (h)(3) of this section for the 
treatment of funding waivers granted for plan years beginning before 
2008.
    (e) Early deemed amortization upon attainment of funding target. In 
any case in which the funding shortfall of a plan for a plan year is 
zero--
    (1) The shortfall amortization bases for all preceding plan years 
(and all shortfall amortization installments determined with respect to 
those shortfall amortization bases) are reduced to zero; and
    (2) The waiver amortization bases for all preceding plan years (and 
all waiver amortization installments determined with respect to such 
bases) are reduced to zero.
    (f) Definitions--(1) In general. The definitions set forth in this 
paragraph (f) apply for purposes of this section.
    (2) Funding shortfall. The term funding shortfall means the excess 
(if any) of--
    (i) The funding target of the plan for a plan year; over
    (ii) The value of plan assets for the plan year (as reduced to 
reflect the subtraction of the funding standard carryover balance and 
prefunding balance to the extent provided under Sec.  1.430(f)-1(c), 
but not below zero).
    (3) Funding target. The term funding target means the plan's 
funding target for a plan year determined under Sec.  1.430(d)-1(b)(2), 
Sec.  1.430(i)-1(c), or Sec.  1.430(i)-1(e)(1), whichever applies to 
the plan for the plan year.
    (4) Target normal cost. The term target normal cost means the 
plan's target normal cost for a plan year determined under Sec.  
1.430(d)-1(b)(1), Sec.  1.430(i)-1(d), or Sec.  1.430(i)-1(e)(2), 
whichever applies to the plan for the plan year.
    (g) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: the plan is subject to section 430 starting in 
2008; the plan year is the calendar year; the valuation date is January 
1; and the plan's funding standard carryover balance is $0.

    Example 1. (i) Plan A has a funding target of $2,500,000 and 
assets totaling $1,800,000 as of January 1, 2008. The 2008 actuarial 
valuation is performed using the 24-month average segment rates 
applicable for September 2007 (determined without regard to the 
transitional rule of section 430(h)(2)(G)).
    (ii) A $700,000 shortfall amortization base is established for 
2008, which is equal to the $2,500,000 funding target less 
$1,800,000 of assets.
    (iii) With respect to this shortfall amortization base of 
$700,000, there is a shortfall amortization installment of $116,852 
(which is equal to the $700,000 shortfall amortization base 
amortized over 7 years) for each year from 2008 through 2014. The 
amount of this shortfall amortization installment is determined by 
discounting the first five installments using the first segment 
interest rate of 5.26%, and by discounting the sixth and seventh 
installments using the second segment rate of 5.82%.
    Example 2. (i) The facts are the same as in Example 1, except 
that the plan was granted a funding waiver of $300,000 in 2006, as 
of December 31, 2006. The valuation interest rate for the January 1, 
2007, actuarial valuation is 8.50% (which exceeds 150% of the 
applicable federal mid-term rate).
    (ii) The waiver amortization installment for the plan year 
beginning January 1, 2007, is $70,166, which is equal to the 
$300,000 funding waiver base amortized over 5 years at the valuation 
interest rate of 8.50%.
    (iii) As of January 1, 2008, the present value of the remaining 
waiver amortization installments is $260,318, which is determined by 
discounting the remaining four waiver amortization installments of 
$70,166 to January 1, 2008, using the first segment rate of 5.26%. 
See paragraph (h)(3) of this section.
    (iv) A $439,682 shortfall amortization base is established for 
2008, which is equal to the $2,500,000 funding target, less 
$1,800,000 of assets, less $260,318 (which is the present value of 
the remaining waiver amortization installments).
    (v) With respect to this shortfall amortization base of 
$439,682, there is a shortfall amortization installment of $73,397 
(which is equal to the $439,682 shortfall amortization base 
amortized over 7 years) for each year from 2008 through 2014.
    Example 3. (i) The facts are the same as in Example 2. Plan A 
has a $100,000 target normal cost for the 2008 plan year and was 
granted a funding waiver for 2008 to the largest extent permitted 
under section 412(c).
    (ii) The minimum required contribution is $243,563 as of January 
1, 2008. This is equal to the $100,000 target normal cost, plus the 
$70,166 waiver amortization installment from the 2006 waiver, plus 
the $73,397 January 1, 2008, shortfall amortization installment.
    (iii) In accordance with section 412(c)(1)(C), the portion of 
the minimum required contribution attributable to the amortization 
of the 2006 funding waiver cannot be waived. Therefore, the maximum 
amount of the January 1, 2008, minimum

[[Page 20212]]

required contribution that can be waived is $173,397.
    (iv) In accordance with paragraph (d) of this section, a waiver 
amortization base of $173,397 is established as of January 1, 2008, 
to be amortized over 5 years beginning with the 2009 plan year. 
Although the waiver amortization installments for the 2008 funding 
waiver are not included in the minimum required contribution until 
2009, the amount of those installments is determined based on the 
interest rates used for the 2008 plan year.
    (v) The waiver amortization installments are calculated using 
the first segment interest rate of 5.26% for the first four 
installments (calculated as of January 1, 2009, through January 1, 
2012) and the second segment interest rate of 5.82% for the final 
installment payable as of January 1, 2013. Accordingly, the waiver 
amortization installments that are payable beginning January 1, 
2009, are $40,530 each.
    Example 4. (i) The facts are the same as in Example 3. As of 
January 1, 2009, Plan A has a funding target of $2,750,000 and 
assets totaling $1,900,000. The 2009 actuarial valuation is 
performed using the 24-month average segment rates applicable for 
September 2008 (determined without regard to the transitional rule 
of section 430(h)(2)(G)). For the 2009 plan year, the first segment 
rate is equal to 5.50%, the second segment rate is equal to 6.00%, 
and the third segment rate is equal to 6.50%.
    (ii) As of January 1, 2009, the present value of the remaining 
three waiver amortization installments with respect to the 2006 
waiver is $199,715, which is determined using the first segment rate 
of 5.50%.
    (iii) As of January 1, 2009, the present value of the remaining 
five waiver amortization installments with respect to the 2008 
waiver is $182,594, which is determined using the first segment rate 
of 5.50%.
    (iv) As of January 1, 2009, the present value of the remaining 
six shortfall amortization installments with respect to the 2008 
shortfall amortization base is $385,511, which is determined using 
the first segment rate of 5.50% for the first five installments and 
the second segment rate of 6.00% for the sixth installment.
    (v) A shortfall amortization base of $82,180 is established for 
2009, which is equal to the $2,750,000 funding target, less 
$1,900,000 of assets, less $199,715 (the present value of the 
remaining waiver amortization installments with respect to the 2006 
waiver), less $182,594 (the present value of the remaining waiver 
amortization installments with respect to the 2008 waiver), less 
$385,511 (the present value of the remaining installments with 
respect to the 2008 shortfall amortization base).
    (vi) With respect to this shortfall amortization base of 
$82,180, there is a shortfall amortization installment of $13,795 
(which is equal to the $82,180 shortfall amortization base amortized 
over 7 years) for each year from 2009 through 2015.
    Example 5. (i) The facts are the same as in Example 4, except 
that Plan A has assets totaling $2,000,000 as of January 1, 2009. 
Plan A has a target normal cost of $110,000 as of January 1, 2009.
    (ii) A shortfall amortization base of -$17,820 is established 
for 2009, which is equal to the $2,750,000 funding target, less 
$2,000,000 of assets, less $199,715 (the present value of the 
remaining installments with respect to the 2006 waiver), less 
$182,594 (the present value of the remaining installments with 
respect to the 2008 waiver), less $385,511 (the present value of the 
remaining installments with respect to the 2008 shortfall 
amortization base).
    (iii) The shortfall amortization installment for the 2009 
shortfall amortization base is -$2,991, which is equal to the -
$17,820 shortfall amortization base amortized over 7 years. The 
first five shortfall amortization installments are discounted using 
the first segment rate of 5.50% and the sixth and seventh shortfall 
amortization installments are discounted using the second segment 
rate of 6.00%.
    (iv) The minimum required contribution for the 2009 plan year is 
$291,102. This is equal to the target normal cost of $110,000 plus 
the shortfall amortization charge of $70,406 (that is, $73,397 minus 
$2,991) plus the waiver amortization charge of $110,696 (that is, 
$70,166 plus $40,530).
    Example 6. (i) The facts are the same as in Example 5, except 
that Plan A has assets totaling $2,800,000 as of January 1, 2009.
    (ii) Because the assets of $2,800,000 exceed the funding target 
of $2,750,000 as of January 1, 2009, no new shortfall amortization 
base is established under paragraph (c)(2) of this section.
    (iii) Furthermore, under paragraph (e) of this section, all 
shortfall amortization bases and waiver amortization bases (and all 
shortfall amortization installments and waiver amortization 
installments associated with those bases) are reduced to zero as of 
January 1, 2009.
    (iv) The minimum required contribution for the 2009 plan year is 
$60,000, which is equal to the $110,000 target normal cost less the 
excess of the assets over the funding target ($2,800,000 minus 
$2,750,000).
    Example 7. (i) The actuarial valuation for Plan B as of January 
1, 2008, based on a 12-month plan year, determines a target normal 
cost of $110,000 and a shortfall amortization installment for 2008 
of $185,000. The plan year for Plan B is changed to April 1 through 
March 31, effective April 1, 2008, resulting in a short plan year 
beginning January 1, 2008, and ending March 31, 2008.
    (ii) The target normal cost for the short plan year is 
redetermined in order to reflect the fact that there is a short plan 
year. An actuarial valuation shows that the target normal cost is 
$25,000 for the short plan year based on the accruals for that short 
plan year (determined in accordance with 29 CFR Sec.  2530.204-
2(e)).
    (iii) In accordance with paragraph (b)(2)(ii)(A) of this 
section, the shortfall amortization base is prorated to reflect the 
three months covered by the short plan year. Accordingly, the 
shortfall amortization installment for the short plan year is 
$46,250 (that is, $185,000 multiplied by 3/12).
    (iv) The total minimum required contribution for the short plan 
year (without offset for any carryover balance as of January 1, 
2008) is $71,250 (that is, the sum of the target normal cost of 
$25,000 plus the shortfall amortization installment of $46,250).
    Example 8. (i) The facts are the same as in Example 7. The first 
segment rate for the plan year beginning April 1, 2008, is 5.30%, 
and the second segment rate is 5.80%.
    (ii) The present value of the remaining shortfall amortization 
installments with respect to the January 1, 2008, shortfall 
amortization base is equal to $1,074,937.
    This is determined by discounting the remaining installments (6 
full-year installments due April 1, 2008 through April 1, 2013, and 
a final 9-month installment due April 1, 2014) using the first 
segment rate of 5.30% for the first five installments and the second 
segment rate of 5.80% for the remaining installments.

    (h) Effective/applicability dates and transition rules--(1) In 
general. Section 430 generally applies to plan years beginning on or 
after January 1, 2008. In general, this section applies to plan years 
beginning on or after January 1, 2009. However, plans are permitted to 
apply this section in determining the minimum required contribution for 
plan years beginning in 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 PPA '06, this section applies to plan years 
beginning on or after the date section 430 first applies with respect 
to the plan.
    (3) Treatment of pre-2008 funding waivers. In the case of a plan 
that has received a funding waiver under section 412 for a plan year 
for which section 430 was not yet effective with respect to the plan, 
the waiver is treated as giving rise to a waiver amortization base and 
the amortization charges with respect to that funding waiver are 
treated as waiver amortization installments as described in paragraph 
(d) of this section. With respect to such a preexisting funding waiver, 
the amount of the waiver amortization installment is equal to the 
amortization charge with respect to that waiver determined using the 
interest rate or rates that applied for the pre-effective plan year.
    (4) Transition rule for determining whether shortfall amortization 
base is established--(i) In general. Except as provided in paragraphs 
(h)(4)(iii) and (iv) of this section, in the case of plan years 
beginning after 2007 and before 2011, only the applicable percentage of 
the funding target is taken into account in determining whether a 
shortfall amortization base is established for the plan year under 
paragraph (c)(2) of this section.
    (ii) Applicable percentage. For purposes of paragraph (h)(4)(i) of 
this section, the applicable percentage is

[[Page 20213]]

determined in accordance with the following table:

------------------------------------------------------------------------
                                                              Applicable
        Calendar year in which the plan year begins           percentage
------------------------------------------------------------------------
2008.......................................................           92
2009.......................................................           94
2010.......................................................           96
------------------------------------------------------------------------

    (iii) Transition rule not available if funding falls below 
applicable percentage. The transition rule of paragraph (h)(4)(i) of 
this section does not apply with respect to any plan year beginning 
after 2008 if a shortfall amortization base was required to be 
established under paragraph (c)(2) of this section for any preceding 
year.
    (iv) Transition rule not available for new plans or deficit 
reduction plans. The transition rule of paragraph (h)(4)(i) of this 
section does not apply to a plan--
    (A) That was not in effect for a plan year beginning in 2007; or
    (B) That was subject to section 412(l) for the pre-effective plan 
year, determined after the application of sections 412(l)(6) and (9) 
(regardless of whether the deficit reduction contribution for the pre-
effective plan year was equal to zero).
    (v) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
section 430 applies to the plan. 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.
    Par. 3. Section 1.430(j)-1 is added to read as follows:


Sec.  1.430(j)-1  Payment of minimum required contributions.

    (a) In general--(1) Overview. This section provides rules related 
to the payment of minimum required contributions, including the payment 
of quarterly contributions. Section 430(j) and this section apply to 
single employer defined benefit plans (including multiple employer 
plans as defined in section 413(c)) but do not apply to multiemployer 
plans (as defined in section 414(f)). Paragraph (b) of this section 
describes the general timing requirement for minimum required 
contributions. Paragraph (c) of this section describes the accelerated 
quarterly contribution schedule for plans with a funding shortfall in 
the preceding plan year. Paragraph (d) of this section provides rules 
regarding liquidity requirements. Paragraph (e) of this section 
provides definitions. Paragraph (f) of this section provides examples 
that illustrate the rules of this section. Paragraph (g) of this 
section sets forth effective/applicability dates and transition rules.
    (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 section 430 and this section are applied separately for each 
employer under the plan, as if each employer maintained a separate 
plan. Thus, for example, required quarterly contributions are 
determined separately for each employer 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 rules of section 430 and this section are applied as if all 
participants in the plan were employed by a single employer.
    (3) Applicability of section 430(j) to plans of commercial 
passenger airlines--(i) In general. Except as otherwise provided in 
this section, the rules of section 430(j) and this section apply to a 
plan for which an election described in section 402 of the Pension 
Protection Act of 2006, Public Law 109-280 (120 Stat. 780) (PPA '06), 
has been made in the same manner as those rules apply to any other plan 
subject to section 430.
    (ii) Special rules for plans for which election was made pursuant 
to section 402(a)(1) of PPA '06. For purposes of applying the rules of 
section 430(j) and this section to a plan with respect to which the 
election under section 402(a)(1) of PPA 06 has been made, the effective 
interest rate for the plan is deemed to be 8.85% during the period for 
which the election applies. In addition, see paragraph (e)(4)(ii) of 
this section for a special determination of the funding shortfall for a 
plan for which the election in section 402(a)(1) of PPA '06 has been 
made.
    (b) General timing requirement for minimum required contributions--
(1) Earliest date for contributions. A payment of the minimum required 
contribution under section 430 for a plan year can be made no earlier 
than the first day of the plan year.
    (2) Deadline for contributions. The deadline for any payment of any 
minimum required contribution for a plan year is 8\1/2\ months after 
the close of the plan year. See section 4971 and the regulations 
thereunder regarding an excise tax that applies with respect to minimum 
required contributions not paid by this deadline. See also section 
430(k) of the Code and section 101(d) of the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1021(d), for additional rules 
that apply in the case of a failure to pay minimum required 
contributions by this deadline.
    (3) Adjustment for interest. Any payment of the minimum required 
contribution under section 430 for a plan year that is made on a date 
other than the valuation date for that plan year is adjusted for 
interest accruing for the period between the valuation date and the 
payment date, at the effective interest rate for the plan for that plan 
year determined pursuant to Sec.  1.430(h)(2)-1(f)(1). The direction of 
the adjustment depends on whether the contribution is paid before or 
after the valuation date for the plan year. If the contribution is paid 
after the valuation date for the plan year, the contribution is 
discounted to the valuation date using the plan's effective interest 
rate. By contrast, if the contribution is paid before the valuation 
date for the plan year (which could only occur in the case of a small 
plan described in section 430(g)(2)(B)), the contribution is increased 
for interest using the plan's effective interest rate.
    (c) Accelerated quarterly contribution schedule for underfunded 
plans--(1) In general--(i) Plan subject to quarterly contribution 
requirement. In any case in which the plan has a funding shortfall for 
the preceding plan year, the employer maintaining the plan shall make 
the required installments described in paragraph (c)(3) of this section 
by the due dates described in paragraph (c)(4) of this section.
    (ii) Satisfaction of installments through use of funding balances. 
In the case of a plan that is subject to the quarterly contribution 
requirement under this paragraph (c), if the plan sponsor makes an 
election to use the plan's prefunding balance or funding standard 
carryover balance under section 430(f), then the plan sponsor is 
treated as satisfying the obligation to make a required installment 
under paragraph (c)(1)(i) of this section on the date of the election 
to the extent of the amount elected, as adjusted with interest. This 
interest adjustment is made at the plan's effective interest rate under 
section 430(h)(2)(A) for the plan year from the valuation date through 
the due date of the installment.
    (iii) Consequences of failure to make quarterly contribution--(A) 
Interest adjustment. If the full amount of a required installment is 
not paid by the due date for that installment, then an increased rate 
of interest applies in adjusting the payment to the valuation date. 
This increased rate of interest is equal to the rate otherwise used 
under paragraph (b) of this section plus 5

[[Page 20214]]

percentage points, and applies with respect to the underpayment of the 
required installment (determined pursuant to paragraph (c)(2) of this 
section) for the period of time that begins on the due date for the 
required installment and that ends on the date on which payment is 
made.
    (B) Application to required installments due before the valuation 
date. The modified interest rate described in paragraph (c)(1)(iii)(A) 
of this section only applies to a required installment that is due on 
or after the valuation date for the plan year. See paragraph (c)(6) of 
this section for rules that apply to required installments that are due 
before the valuation date for the plan year.
    (C) Additional consequences. See section 430(k) of the Code and 
section 101(d) of ERISA for examples of additional consequences of 
failure to make quarterly contributions.
    (2) Determination of underpayment--(i) Underpayment for a quarter. 
For purposes of this section, the amount of the underpayment with 
respect to a required installment for a quarter is equal to the excess 
of--
    (A) The required installment; over
    (B) The amount (if any) of the installment contributed to or under 
the plan on or before the due date for the installment.
    (ii) Order of crediting contributions. For purposes of this 
section, contributions are first credited against the earliest unpaid 
required installments.
    (3) Amount of required installment--(i) In general. For purposes of 
this section, the amount of any required installment is equal to 25% of 
the required annual payment described in paragraph (c)(3)(ii) of this 
section.
    (ii) Required annual payment. The required annual payment is equal 
to the lesser of--
    (A) 90% of the minimum required contribution under section 430 for 
the plan year; or
    (B) 100% of the minimum required contribution under section 430 
(determined without regard to any funding waiver under section 412) for 
the preceding plan year.
    (iii) Treatment of funding balances. For purposes of paragraph 
(c)(3)(ii) of this section, the minimum required contribution for a 
plan year is determined without regard to the use of the prefunding 
balance or funding standard carryover balance in the current year or 
any prior year. However, see paragraph (c)(1)(ii) of this section 
regarding a plan sponsor's election to use the plan's prefunding 
balance or funding standard carryover balance in the current year for 
the payment of quarterly installments.
    (4) Due dates for installments. For purposes of this section, there 
is a required installment for each quarter of the plan year. The due 
dates for the four required quarterly installments with respect to a 
full plan year are set forth in the following table:

------------------------------------------------------------------------
                Installment                           Due date
------------------------------------------------------------------------
First quarter's installment...............  15th day of 4th plan month.
Second quarter's installment..............  15th day of 7th plan month.
Third quarter's installment...............  15th day of 10th plan month.
Fourth quarter's installment..............  15th day after the close of
                                             the plan year.
------------------------------------------------------------------------

    (5) Special rules for short plan years--(i) In general. In the case 
of a short plan year, the rules of this paragraph (c) are modified as 
provided in this paragraph (c)(5).
    (ii) Current plan year is short plan year--(A) Amount of required 
annual payment. In determining the required annual payment pursuant to 
paragraph (c)(3)(ii) of this section for a short plan year, the amount 
otherwise determined under paragraph (c)(3)(ii)(B) (based on the prior 
year's minimum required contribution) is multiplied by a fraction, the 
numerator of which is the duration of the short plan year and the 
denominator of which is 1 year.
    (B) Number and due dates of installments. If the plan has a short 
plan year, then an installment is due 15 days after the close of that 
short plan year. In addition, an installment is required for each due 
date determined under paragraph (c)(4) of this section that falls 
within the short plan year. Thus, for example, if the short plan year 
ends before the 15th day of the 4th plan month of the plan year, there 
will be only one installment for that short plan year, and that 
installment will be due on the 15th day after the close of the short 
plan year.
    (C) Amount of installments. The amount of each installment required 
to be paid for the short plan year is equal to the required annual 
payment determined pursuant to paragraph (c)(3)(ii) of this section (as 
modified by paragraph (c)(5)(ii)(A) of this section) divided by the 
number of installments determined pursuant to paragraph (c)(5)(ii)(B) 
of this section.
    (iii) Prior plan year is short plan year. If the prior plan year is 
a short plan year, then the rule of paragraph (c)(3)(ii)(B) regarding 
the use of 100% of the prior year's minimum required contribution in 
determining the required annual payment does not apply. Accordingly, in 
such a case, the required annual payment is equal to 90% of the minimum 
required contribution under section 430 for the current plan year.
    (6) Special rule for plans with valuation dates after the first day 
of the plan year. [Reserved]
    (d) Liquidity requirement in connection with quarterly 
contributions--(1) In general--(i) Requirement to make additional 
quarterly contributions. Except as provided in paragraphs (d)(1)(ii) 
and (iii) of this section, if a plan is subject to the requirement to 
make quarterly contributions under paragraph (c) of this section, then 
the plan is treated as failing to pay the full amount of a required 
installment for a quarter to the extent that the value of the liquid 
assets contributed after the close of that quarter and on or before the 
due date for the installment is less than the liquidity shortfall for 
that quarter.
    (ii) Limitation on increase. The amount by which any required 
installment is increased by reason of paragraph (d)(1)(i) of this 
section cannot exceed the amount that, when added to prior required 
installments for the plan year, would increase the funding target 
attainment percentage of the plan for the plan year (taking into 
account the expected increase in the funding target due to benefits 
accruing or earned during the plan year) to 100%.
    (iii) Small plan exception. The liquidity requirement of this 
paragraph (d) does not apply to a small plan that is described in Sec.  
1.430(g)-1(b)(2).
    (2) Period of underpayment--(i) General rule. For purposes of 
applying the additional 5 percentage point interest adjustment pursuant 
to paragraph (c)(1)(iii) of this section, the liquidity increment with 
respect to a quarter as described in paragraph (d)(2)(ii) of this 
section continues to be treated as unpaid until the close of the 
quarter in which the due date for that installment occurs without 
regard to when that portion is paid. However, for purposes of adjusting 
the contribution to the valuation date at the effective interest rate 
under paragraph (b)(3) of this section, the adjustment is made from the 
contribution date (rather than the close of the quarter).
    (ii) Liquidity increment. For purposes of this paragraph (d), the 
liquidity increment with respect to a quarter is the portion of the 
required installment for that quarter that is treated as not paid 
solely by reason of paragraph (d)(1)(i) of this section.
    (iii) Ordering rule. If the employer makes a contribution for a 
quarter that,

[[Page 20215]]

after application of paragraph (c)(2)(ii) of this section, is less than 
the total amount needed to satisfy the requirements of paragraph (c) of 
this section as increased by this paragraph (d) for a quarter, then the 
contribution is first attributed toward satisfying the requirements of 
paragraph (c) of this section (without regard to this paragraph (d)) 
and then to the liquidity increment.
    (3) Consequences of failure to pay liquidity shortfall. See section 
4971(f) for an excise tax on the failure to pay a liquidity shortfall. 
See also section 206(e) of ERISA.
    (e) Definitions--(1) In general. The definitions set forth in this 
paragraph (e) apply for purposes of this section.
    (2) Adjusted disbursements. The term adjusted disbursements means 
disbursements from the plan reduced by the product of--
    (i) The plan's funding target attainment percentage determined 
under section 430(d)(2) for the plan year; and
    (ii) The sum of the purchases of annuities and payments of single 
sums.
    (3) Disbursements from the plan. The term disbursements from the 
plan means all disbursements from the trust, including purchases of 
annuities, payments of single sums and other benefits, and 
administrative expenses.
    (4) Funding shortfall--(i) In general. The term funding shortfall 
means the excess (if any) of--
    (A) The funding target of the plan for a plan year; over
    (B) The value of plan assets for the plan year (as reduced to 
reflect the subtraction of certain funding balances as provided under 
Sec.  1.430(f)-1(c), but not below zero).
    (ii) Special rule for plans of commercial passenger airlines. In 
the case of a plan year for which an election described in section 
402(a)(1) of PPA '06 is in effect, the term funding shortfall means the 
unfunded liability for that plan year determined under Sec.  1.430(a)-
1(b)(4)(ii).
    (iii) Special rule for first effective plan year. See paragraph 
(g)(5)(ii) of this section for a calculation of the funding shortfall 
for the plan's pre-effective plan year.
    (iv) Special rule for plan spinoffs and mergers. [Reserved]
    (5) Liquid assets--(i) In general. The term liquid assets means 
cash, marketable securities, and other assets described in this 
paragraph (e)(5)(i). For this purpose, marketable securities include 
financial instruments such as stocks and other equity interests, 
evidences of indebtedness (including certificates of deposit), options, 
futures contracts, and other derivatives, for which there is a liquid 
financial market, and other interests in entities (such as 
partnerships, trusts, or regulated investment companies) for which 
there is a liquid financial market. For purposes of the preceding 
sentence, a liquid financial market is an established financial market 
described in Sec.  1.1092(d)-1(b) (other than an interbank market or an 
interdealer market described in Sec.  1.1092(d)-1(b)(1)(v) and (vi), 
respectively). Any security that is issued or guaranteed by the 
government of the United States or an agency or instrumentality thereof 
for which there is an established financial market described in Sec.  
1.1092(d)-1(b) is a marketable security. Finally, any financial 
instrument or other interest in an entity that, under its terms, 
contains a right by which the instrument or other interest may 
immediately be redeemed, exchanged, or converted into cash or a 
marketable security, is a marketable security, provided there are no 
restrictions on the exercise of that right.
    (ii) Insurance and annuity contracts. Other assets that are treated 
as liquid assets of a plan are insurance, annuity, or other contracts 
issued by an insurance company that is licensed to do business under 
the laws of any State, but only if the insurance, annuity, or other 
contract--
    (A) Would be treated as a marketable security under paragraph 
(e)(5)(i) of this section if it were a financial instrument;
    (B) Provides for substantially equal monthly disbursements to the 
extent provided in paragraph (e)(5)(iii) of this section; or
    (C) Is benefit responsive within the meaning of paragraph 
(e)(5)(iv) of this section.
    (iii) Insurance and annuity contracts providing for substantially 
equal periodic payments. If the contract provides for substantially 
equal monthly disbursements (for example, an annuity contract in pay 
status), the only portion of the contract that may be treated as liquid 
assets for a quarter is the amount equal to 36 times the monthly 
disbursement (in the month containing the last day of the quarter) 
which is available under the terms of the contract, provided there are 
no restrictions (within the meaning of paragraph (e)(5)(v) of this 
section) on the disbursements.
    (iv) Benefit responsive insurance and annuity contracts. A contract 
is considered benefit responsive if, under applicable law and 
contractual provisions, the plan has the right to receive disbursements 
from the contract in order to pay plan benefits for any participant in 
the plan, without restrictions (within the meaning of paragraph 
(e)(5)(v) of this section).
    (v) Restrictions. For purposes of paragraphs (e)(5)(iii) and (iv) 
of this section, a restriction on a redemption, exchange or conversion 
right, or a restriction on a disbursement, may result not only from 
applicable law or contractual provisions, but also from rehabilitation, 
conservatorship, receivership, insolvency, bankruptcy or similar 
proceedings.
    (6) Liquidity shortfall--(i) In general. The term liquidity 
shortfall means, with respect to any required installment, an amount 
equal to the excess (as of the last day of the quarter for which that 
installment is made) of--
    (A) The base amount with respect to the quarter, over
    (B) The value (as of the last day of the quarter) of the plan's 
liquid assets.
    (ii) Base amount--(A) In general. For purposes of this paragraph 
(e)(6)(ii), the term base amount means, with respect to any quarter, an 
amount equal to 3 times the sum of the adjusted disbursements from the 
plan for the 12 months ending on the last day of such quarter.
    (B) Special rule. If the generally applicable base amount for a 
quarter determined under paragraph (e)(6)(ii)(A) of this section 
exceeds an amount equal to 2 times the sum of the adjusted 
disbursements from the plan for the 36 months ending on the last day of 
the quarter and the enrolled actuary for the plan certifies to the 
satisfaction of the Commissioner that such excess is the result of 
nonrecurring circumstances, the base amount with respect to that 
quarter is determined without regard to amounts related to those 
nonrecurring circumstances.
    (7) Plan month--(i) Plan year begins on the first day of a calendar 
month. For a plan year that begins with the first day of a calendar 
month, the term plan month means any calendar month that begins during 
the plan year.
    (ii) Plan year begins on a date other than the first day of a 
calendar month. For a plan year that begins on a date other than the 
first day of a calendar month, the first day of each plan month is the 
day of the calendar month that corresponds to the day of the calendar 
month that is the first day of the plan year. Thus, for example, if the 
first day of a plan year is January 15, then a plan month starts on the 
15th of each calendar month. However, if a calendar month does not 
contain a day that corresponds to the day of the calendar month which 
is the first day of the plan year (for example, if a calendar month has 
only 30 days and the first day of the plan year is the 31st day of a 
calendar

[[Page 20216]]

month), then the first day of the plan month that begins during that 
calendar month is the last day of that calendar month.
    (8) Quarter. The term quarter means, with respect to any required 
installment, the 3-plan-month period preceding the plan month in which 
the due date for that installment occurs.
    (9) Short plan year. The term short plan year means a plan year 
that is shorter than 12 months (and is not a 52-week plan year of a 
plan that uses a 52-53 week plan year).
    (f) Examples. The following examples illustrate the rules of this 
section.

    Example 1. (i) Plan A has a calendar year plan year and a 
January 1 valuation date. Plan A has a funding standard carryover 
balance of $15,000 as of January 1, 2008, and the plan's funding 
ratio for 2007 (determined using the transition rule in Sec.  
1.430(f)-1(h)(5)) was over 80%. The minimum required contribution 
for Plan A (prior to any offset for the carryover balance) is 
$100,000 for 2008 and is $125,000 for 2009.
    The effective interest rate for the 2009 plan year is 5.90%. 
Plan A is subject to the quarterly contribution requirements for 
2008.
    (ii) The required annual payment for 2009 is equal to the lesser 
of (a) 100% of the 2008 minimum required contribution ($100,000) or 
(b) 90% of the 2009 minimum required contribution (90% of $125,000, 
or $112,500). Therefore, each required quarterly installment for 
2009 is 25% of $100,000, or $25,000.
    (iii) Installments of $25,000 each are due by April 15, 2009, 
July 15, 2009, October 15, 2009, and January 15, 2010. The final 
contribution for the 2009 plan year is due by September 15, 2010. 
The amount of this contribution is equal to $125,000, less the 
contributions made prior to that date, with all contributions 
adjusted to the valuation date using the effective interest rate for 
the 2009 plan year. If the plan sponsor makes each required 
quarterly installment on the date due, the remaining amount due is 
determined as follows:
    (A) The contribution paid April 15, 2009, is adjusted by 
discounting the contribution amount for 3 \1/2\ months at the 
effective interest rate ($25,000 / 1.0590 (3.5[sol]12) = $24,585).
    (B) The contribution paid July 15, 2009, is discounted for 6\1/
2\ months at the effective interest rate ($25,000 / 1.0590 
(6.5[sol]12) = $24,236).
    (C) The contribution paid October 15, 2009, is discounted for 
9\1/2\ months at the effective interest rate ($25,000 / 1.0590 
(9.5[sol]12) = $23,891).
    (D) The contribution paid January 15, 2010, is discounted for 
12\1/2\ months at the effective interest rate ($25,000 / 1.0590 
(12.5[sol]12) = $23,551).
    (E) The sum of the above contributions for the 2009 plan year 
paid through January 15, 2010, adjusted for interest to the 
valuation date, is $96,263. The remaining amount due for the 2009 
plan year is $125,000 minus $96,263, or $28,737, as of January 1, 
2009.
    (iv) If the final contribution is made on September 15, 2010, 
the remaining amount due must be increased for interest at the 
plan's effective interest rate for the 20\1/2\ months between 
January 1, 2009, and September 15, 2010 (so that when it is 
discounted with interest for those 20\1/2\ months the resulting 
amount will equal $28,737). Therefore, the remaining contribution 
made on September 15, 2010, is $28,737 x 1.0590 (20.5[sol]12) = 
$31,694.
    Example 2. (i) The facts are the same as in Example 1, except 
that the plan sponsor elects to use the $15,000 carryover balance as 
of January 1, 2008, to offset the minimum required contribution for 
the 2008 plan year. The plan sponsor makes a contribution on January 
1, 2008, of $85,000, which satisfies the minimum contribution 
requirement for 2008.
    (ii) The required quarterly installment for 2009 is unaffected 
by the plan sponsor's election to offset the minimum required 
contribution by the carryover balance for 2008. Therefore, the 
required annual payment is $100,000 (determined as the lesser of (a) 
100% of $100,000 or (b) 90% of $125,000) and the amount of each 
required quarterly installment for 2009 is 25% of the required 
annual payment, or $25,000.
    Example 3. (i) The facts are the same as in Example 1. Plan A's 
funding standard carryover balance has increased to $17,000 as of 
January 1, 2009, based on the actual rate of return of plan assets 
for the 2008 plan year. Plan A's funding ratio for 2008 (determined 
under Sec.  1.430(f)-1(d)(3)) is over 80%. On April 13, 2009, the 
plan sponsor elects to use the entire amount of the carryover 
balance to offset the minimum required contribution for 2009.
    (ii) The plan sponsor's election to use the carryover balance to 
offset the minimum required contribution is treated as satisfying 
the requirement to make a required installment to the extent of the 
amount elected, adjusted with interest. This adjustment is made at 
the plan's effective interest rate for the 2009 plan year, and 
applies for the period between January 1, 2009, and April 15, 2009. 
Therefore, the $17,000 carryover balance as of January 1, 2009, 
offsets $17,000 x 1.0590 (3.5[sol]12) or $17,287 of the $25,000 
quarterly contribution installment due April 15, 2009, and the 
remaining contribution due on April 15, 2009, is $25,000 minus 
$17,287, or $7,713.
    (iii) The interest adjustments in paragraph (ii) of this Example 
3 are based on the effective interest rate even if that rate is not 
determined by the time that the quarterly contribution is due. If 
the plan's effective interest rate for the plan year has not been 
determined at the time that the quarterly contribution is due, the 
actual amount of the required installment satisfied by the use of 
the carryover balance is determined after the effective interest 
rate is determined. If the extent to which the carryover balance 
satisfies the installment requirement is overestimated and the 
result is the full amount of the required quarterly installment is 
not paid by the due date, the plan is subject to the consequences 
for late or unpaid quarterly contributions as described in paragraph 
(c)(1)(iii) of this section.
    Example 4. (i) The facts are the same as in Example 3. The plan 
sponsor makes a contribution of $7,713 (which is equal to the 
remaining portion of the first required quarterly installment) on 
April 15, 2009. For the 2009 plan year, the plan sponsor makes 
another contribution of $200,000 on June 30, 2009. No further 
contributions are made for the 2009 plan year.
    (ii) The contributions made for the 2009 plan year are adjusted 
to the valuation date using the plan's effective interest rate for 
the 2009 plan year. The contribution paid April 15, 2009, is 
discounted for the 3\1/2\ months between January 1, 2009, and the 
date of payment, using the effective interest rate of 5.90% ($7,713/
1.0590 (3.5[sol]12) = $7,585). The contribution paid June 30, 2009, 
is discounted for 6 months using the effective interest rate 
($200,000/1.0590 (6[sol]12) = $194,349), for a total interest-
adjusted contribution of $201,934.
    (iii) The minimum required contribution for 2009 (prior to any 
offset for the carryover balance) is $125,000 and, under Sec.  
1.430(f)-1(b)(1)(ii)(B), this amount is used to determine the 
interest-adjusted excess contribution. Accordingly, the interest-
adjusted excess contribution for 2009 is $201,934 minus $125,000, or 
$76,934, increased for interest to January 1, 2010, using the 
effective interest rate for 2009 of 5.90%. Thus, the interest-
adjusted excess contribution as of January 1, 2010, is $76,934 
multiplied by 1.059, or $81,473. All or a portion of this amount may 
be credited to the prefunding balance at the election of the plan 
sponsor.
    Example 5. (i) The facts are the same as in Example 3. The plan 
sponsor pays the required quarterly installment of $7,713 on April 
15, 2009, and installments of $25,000 each on July 15, 2009, and 
October 15, 2009. However, only $10,000 of the installment due on 
January 15, 2010, is paid. No additional contributions are made 
until the final contribution for the plan year of $55,000 is paid on 
September 15, 2010.
    (ii) The 2009 Schedule SB shows that the contributions for the 
plan year exceed the minimum required contribution. This is 
determined by comparing the minimum required contribution of 
$108,000 ($125,000 offset by $17,000 for the amount of carryover 
balance used) and the interest-adjusted contributions made for the 
2009 plan year, developed as shown below:
    (A) The contribution paid April 15, 2009, is adjusted by 
discounting the contribution amount for 3\1/2\ months at the 
effective interest rate ($7,713 / 1.0590 (3.5[sol]12) = $7,585).
    (B) The contribution paid July 15, 2009, is discounted for 6\1/
2\ months at the effective interest rate ($25,000 / 1.0590 
(6.5[sol]12) = $24,236).
    (C) The contribution paid October 15, 2009, is discounted for 
9\1/2\ months at the effective interest rate ($25,000 / 1.0590 
(9.5[sol]12) = $23,891).
    (D) The contribution paid January 15, 2010, is discounted for 
12\1/2\ months at the effective interest rate ($10,000 / 1.0590 
(12.5[sol]12) = $9,420).
    (E) Pursuant to paragraph (c)(1)(iii)(A) of this section, the 
adjustment for interest on the $15,000 underpayment of the quarterly 
installment due January 15, 2010, is increased by 5 percentage 
points for the 8-

[[Page 20217]]

month period of underpayment (January 15, 2010, through September 
15, 2010). Accordingly, $15,000 of the contribution paid on 
September 15, 2010, is discounted using a rate of 10.90% for 8 
months and at the 5.90% effective interest rate for the remaining 
12\1/2\ months between the quarterly contribution due date of 
January 15, 2010, and the valuation date of January 1, 2009. This 
portion of the September 15, 2010, contribution results in an 
adjusted amount of $13,189 as of January 1, 2009 ($15,000 / 1.1090 
(8[sol]12) / 1.0590 (12.5[sol]12)).
    (F) The remaining $40,000 of the contribution paid on September 
15, 2010, is discounted using the effective interest rate of 5.90% 
for the 20\1/2\-month period between the date of payment and the 
valuation date. This portion of the payment is therefore adjusted to 
$36,268 as of the valuation date (that is, $40,000 / 1.0590 
(20.5[sol]12)).
    (G) The sum of the above contributions for the 2009 plan year 
paid through January 15, 2010, adjusted for interest to the 
valuation date, is $114,589. This is greater than the minimum 
required contribution for the 2009 plan year of $108,000.
    Example 6. (i) The facts are the same as in Example 5, except 
that the plan sponsor does not make a contribution on September 15, 
2010. Another contribution is not made until December 15, 2010.
    (ii) The 2009 Schedule SB shows an unpaid minimum required 
contribution of $42,868 as of January 1, 2009. This is equal to the 
difference between the minimum required contribution of $108,000 
($125,000 offset by $17,000 for the amount of carryover balance 
used) and $65,132 (the interest-adjusted contributions made for the 
2009 plan year before the 8\1/2\ month deadline, as illustrated in 
paragraphs (ii)(A) through (ii)(D) of Example 5).
    Example 7. (i) The facts are the same as in Example 1, except 
that the plan year is changed to an August 1-July 31 plan year 
effective August 1, 2009. This results in a short plan year 
beginning January 1, 2009, and ending July 31, 2009. The minimum 
required contribution for the 7-month period covered by the plan 
year is calculated as $72,917 in accordance with Sec.  1.430(a)-
1(b)(2)(ii).
    (ii) As provided in paragraph (c)(5) of this section, a required 
installment is due 15 days after the close of the short plan year 
(August 15, 2009), and required installments are also due on the 
regularly scheduled due dates for quarterly installments that occur 
within the short plan year (April 15, 2009, and July 15, 2009).
    (iii) The required installments are determined based on the 
lesser of (a) 90% of the minimum required contribution for the short 
plan year ending July 31, 2009 (90% of $72,917, or $65,625) or (b) 
7/12 of 100% of the 2008 minimum required contribution ($100,000 x 
7/12, or $58,333). The required installments are thus based on 
$58,333 since that is the smaller amount.
    (iv) The amount of each required installment is determined by 
dividing the amount determined in paragraph (iii) of this Example 7 
by the number of required installments for the short plan year. This 
calculation results in required installments of $19,444 each (that 
is, $58,333 divided by 3 installments).
    (v) The deadline for the remaining payment is 8\1/2\ months 
after the end of the short plan year, or April 15, 2010. If the plan 
sponsor pays the minimum required amount at each installment date, 
does not elect to offset any amounts by any carryover or prefunding 
balance, and makes a final payment on April 15, 2010, then the 
remaining payment is $17,429, determined as follows:
    (A) The contribution paid April 15, 2009, is adjusted by 
discounting the contribution amount for 3\1/2\ months at the 
effective interest rate ($19,444 / 1.0590 (3.5[sol]12) = $19,122).
    (B) The contribution paid July 15, 2009, is discounted for 6\1/
2\ months at the effective interest rate ($19,444 / 1.0590 
(6.5[sol]12) = $18,850).
    (C) The contribution paid August 15, 2009, is discounted for 
7\1/2\ months at the effective interest rate ($19,444 / 1.0590 
(7.5[sol]12) = $18,760).
    (D) The sum of the above contributions for the 2009 plan year 
paid through August 15, 2009, adjusted for interest to the valuation 
date, is $56,732. The remaining amount paid April 15, 2010, for the 
2009 plan year is ($72,917 - $56,732) x 1.059 (15.5[sol]12) = 
$17,429.
    Example 8. (i) Plan B has an August 10 to August 9 plan year. 
Quarterly installments are required for the plan year that begins 
August 10, 2009.
    (ii) For the plan year that begins on August 10, 2009, a plan 
month begins on the 10th day of each calendar month. Accordingly, 
the due dates for the required installments for that plan year are 
November 24, 2009, February 24, 2010, May 24, 2010, and August 24, 
2010. The deadline for the final contribution for the plan year is 
April 24, 2011.
    Example 9. (i) Plan C has a calendar-year plan year and is not a 
small plan described in section 430(g)(2)(B). Plan C is subject to 
the requirement to pay quarterly contributions under paragraph (c) 
of this section for the 2009 plan year. The valuation date for Plan 
C is January 1, and Plan C's funding target attainment percentage 
(``FTAP'') is 85% as of January 1, 2009. Before taking the liquidity 
requirement of paragraph (d) of this section into account, quarterly 
contributions are required for the 2009 plan year in the amount of 
$50,000 each. During the 12-month period ending March 31, 2009, 
periodic annuity payments of $350,000 and lump sum payments of 
$200,000 were made by Plan C. None of these payments were due to 
nonrecurring circumstances. In addition, administrative expenses of 
$100,000 were paid from the plan trust. The market value of Plan C's 
assets is $1,500,000 as of March 31, 2008, of which $1,300,000 is in 
liquid assets. The amount needed to increase the plan's FTAP 
(including the expected increase in the funding target due to 
benefits accruing or earned during the plan year) to 100% is 
$500,000.
    (ii) The amount of the adjusted disbursements from Plan C for 
the 12-month period ending March 31, 2009, is calculated as the sum 
of the annuity benefits, lump sum payments, and administrative 
expenses paid during the 12-month period, reduced by the product of 
the lump sum payments and the plan's FTAP. This results in adjusted 
disbursements for the period of $480,000 (that is, $350,000 plus 
$200,000 plus $100,000, reduced by 85% of $200,000 in lump sum 
payments).
    (iii) The base amount is calculated in accordance with paragraph 
(e)(6)(ii) of this section as three times the adjusted disbursements 
determined in paragraph (ii) of this Example 9, or $1,440,000.
    (iv) The liquidity shortfall is the difference between the base 
amount of $1,440,000 determined in paragraph (iii) of this Example 9 
and the $1,300,000 in liquid assets as of March 31, 2008, or 
$140,000. The quarterly contribution due on April 15, 2009, is 
therefore $140,000, since this amount is larger than the $50,000 
quarterly contribution requirement otherwise applicable but less 
than the $500,000 needed to increase the plan's FTAP (including the 
expected increase in the funding target due to benefits accruing or 
earned during the plan year) to 100%. The liquidity increment is 
$90,000.
    (v) Note that any contributions made through March 31, 2009, are 
included in Plan C's assets as of March 31, 2009, and would 
therefore not be applied toward satisfying the liquidity shortfall 
contribution requirement due April 15, 2009. Similarly, any funding 
standard carryover balance or prefunding balance as of January 1, 
2009, cannot be applied to offset the liquidity shortfall 
contribution requirement. Only contributions made in cash or other 
liquid assets made after March 31, 2009, and by April 15, 2009, can 
be used to timely satisfy this requirement.
    Example 10. (i) The facts are the same as in Example 9. The plan 
sponsor makes a contribution of $30,000 on April 15, 2009, and makes 
an additional contribution of $110,000 on April 30, 2009. The 
effective interest rate for Plan C for the 2009 plan year is 5.90%.
    (ii) The contribution paid on April 15, 2009, is applied first 
to the portion of the quarterly contribution that is required under 
paragraph (c) of this section (that is, the portion not attributable 
to the liquidity shortfall contribution). This results in an 
underpayment of this portion of the quarterly contribution due April 
15, 2009, of $20,000 (that is, $50,000 minus $30,000). In accordance 
with paragraph (c)(1)(iii)(A) of this section, the interest rate 
used to adjust this portion of the late quarterly contribution is 
increased by 5 percentage points for the \1/2\ month period of 
underpayment. Accordingly, $20,000 of the April 15, 2009, 
contribution is adjusted to the January 1, 2009, valuation date 
using an interest rate of 10.90% for the \1/2\ month between the 
April 15, 2009, due date and the April 30, 2009, payment date, and 
by 5.90% for the 3\1/2\ month period between January 1, 2009, and 
the April 15, 2009, due date. This portion results in an interest-
adjusted contribution of $19,584 as of January 1, 2009 ($20,000 / 
1.1090 (0.5[sol]12) / 1.059 (3.5[sol]12)).
    (iii) Under paragraph (d)(2) of this section, the interest rate 
used to adjust the portion of

[[Page 20218]]

the underpayment attributable to the liquidity shortfall 
contribution is increased by 5 percentage points, and the 
contribution is treated as unpaid until the close of the quarter in 
which the due date occurs. Therefore, even though the full amount of 
the liquidity shortfall was paid by April 30, 2009, the increase in 
the interest rate is applied as if the late liquidity shortfall 
contribution was not made until June 30, 2009, 2\1/2\ months after 
the contribution was due.
    (iv) However, in accordance with paragraph (d)(2) of this 
section, each payment is discounted for interest based on the date 
of the actual payment, despite the fact that the 5-percentage-point 
increase in the interest rate is calculated as if the payment was 
not made until the end of the quarter. Therefore, the portion of the 
underpayment due to the liquidity increment ($140,000 minus the 
$50,000 quarterly contribution requirement otherwise required, or 
$90,000) is adjusted for interest for the 4-month period between the 
January 1, 2009, valuation date and the April 30, 2009, date of 
payment. An interest rate of 10.90% is used for 2\1/2\ months 
(corresponding to the period between the April 15, 2009, due date 
and June 30, 2009, the end of the quarter in which the payment was 
due), and Plan C's effective interest rate for the 2009 plan year 
(5.90%) is used for the remaining 1\1/2\ months. Therefore, the 
portion of the April 30, 2009, contribution attributable to the 
liquidity increment is adjusted to $87,452 as of January 1, 2009 
($90,000 / 1.1090 (2.5[sol]12) / 1.0590 (1.5[sol]12)).
    Example 11. (i) The facts are the same as in Example 10, except 
that the plan sponsor does not make the second contribution of 
$110,000 until July 15, 2009.
    (ii) The July 15, 2009, contribution is adjusted for interest 
for a total of 6\1/2\ months for the period between January 1, 2009, 
and the payment date of July 15, 2009. In accordance with paragraph 
(d)(2) of this section, the 5-percentage-point increase in the 
interest rate used to adjust the portion of the contribution 
attributable to the unpaid liquidity shortfall contribution is 
applied as if the contribution was made at the end of the quarter in 
which the payment was due. Therefore, the interest adjustment for 
the $90,000 attributable to the late liquidity shortfall 
contribution uses an interest rate of 10.90% for the 2\1/2\-month 
period corresponding to the period between the April 15, 2009, due 
date and June 30, 2009, the end of the quarter in which the payment 
was due, and the effective interest rate of 5.90% for the remaining 
4 months.
    (iii) The liquidity shortfall is recalculated as of June 30, 
2009, and the larger of the resulting amount or the $50,000 
quarterly contribution otherwise applicable is due on July 15, 2009. 
This amount is required to be paid in addition to the unpaid 
liquidity shortfall contribution due April 15, 2009. Note that the 
amount of liquid assets as of June 30, 2009 is smaller than it would 
have been had the April 15, 2009, liquidity shortfall payment been 
made. Therefore, the fact that the April 15, 2009, liquidity 
shortfall payment was not made before June 30, 2009, means that the 
plan sponsor is required to contribute more than the amount needed 
to increase the liquid assets to the base amount as of June 30, 
2009. However, in accordance with paragraph (d)(1)(ii) of this 
section, the total amount of the required installments (including 
those due but not paid) is limited so that it is no larger than the 
amount that would increase the plan's FTAP (taking into account the 
expected increase in the funding target due to benefits accruing or 
earned during the plan year) to 100%.
    Example 12. (i) Plan D, which is a small plan described in 
section 430(g)(2)(B), has a calendar year plan year and a valuation 
date of December 31. The quarterly required installments for the 
2009 plan year are $30,000 each and each of the required 
installments is paid on the due date. The effective interest rate 
for Plan D for the 2009 plan year is 5.90%.
    (ii) The total contributions made for the plan year and before 
the valuation date, adjusted with interest to the valuation date, 
equal $92,402. This is developed as shown below:
    (A) The contribution paid April 15, 2009, is adjusted by 
increasing the contribution amount for 8\1/2\ months at the 
effective interest rate ($30,000 x 1.0590 (8.5[sol]12) = $31,243).
    (B) The contribution paid July 15, 2009, is increased for 5\1/2\ 
months at the effective interest rate ($30,000 x 1.0590 (5.5[sol]12) 
= $30,799).
    (C) The contribution paid October 15, 2009, is increased for 
2\1/2\ months at the effective interest rate ($30,000 x 1.0590 
(2.5[sol]12) = $30,360).
    (iii) Pursuant to Sec.  1.430(g)-1(d)(2), the interest-adjusted 
value of the contributions for the 2009 plan year that are made 
before the valuation date is subtracted from the December 31, 2009, 
plan assets in determining the value of plan assets for the December 
31, 2009 actuarial valuation.

    (g) Effective/applicability dates and transition rules--(1) In 
general. Section 430 generally applies to plan years beginning on or 
after January 1, 2008. In general, this section applies to plan years 
beginning on or after January 1, 2009. However, plans are permitted to 
apply this section in applying the rules of section 430(j) for plan 
years beginning in 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 PPA '06, this section applies to plan years 
beginning on or after the first day of the first effective plan year.
    (3) First effective plan year. For purposes of this section, the 
first effective plan year for a plan is the first plan year for which 
section 430 applies to the plan.
    (4) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year before the first 
effective plan year. Thus, except for plans with a delayed effective 
date under paragraph (g)(2) of this section, the pre-effective plan 
year for a plan is the last plan year beginning before January 1, 2008.
    (5) Special rules relating to first effective plan year--(i) 
Determination of minimum required contribution for pre-effective plan 
year. In the case of the plan's first effective plan year, the minimum 
required contribution for the preceding plan year for purposes of 
paragraph (c)(3)(ii)(B) of this section is equal to the minimum 
required contribution under section 412 for the pre-effective plan year 
(determined without regard to any funding waiver under section 412), 
which is determined as of the last day of the pre-effective plan year 
and is determined without regard to the use of the plan's credit 
balance.
    (ii) Determination of funding shortfall for pre-effective plan 
year. [Reserved]

PART 54--PENSION EXCISE TAXES

    Par. 4. The authority citation for part 54 continues to read in 
part as follows:

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

    Par. 5. Section 54.4971(c)-1 is added to read as follows:


Sec.  54.4971(c)-1  Taxes on failure to meet minimum funding standards; 
definitions

    (a) In general. This section sets forth definitions that apply for 
purposes of applying the rules of section 4971.
    (b) Accumulated funding deficiency. With respect to a multiemployer 
plan, the term accumulated funding deficiency has the meaning given to 
that term by section 431. A plan's accumulated funding deficiency for a 
plan year takes into account all charges and credits to the funding 
standard account under section 412 for plan years before the first plan 
year for which section 431 applies to the plan.
    (c) Unpaid minimum required contribution--(1) In general. The term 
unpaid minimum required contribution means, with respect to any plan 
year, any minimum required contribution under section 430 for the plan 
year that is not paid on or before the due date for the plan year under 
section 430(j)(1).
    (2) Accumulated funding deficiency for pre-effective plan year. For 
purposes of this section, a plan's accumulated funding deficiency under 
section 412 for the pre-effective plan year is treated as an unpaid 
minimum required contribution for that plan year until correction is 
made under the rules of paragraph (d)(2) of this section.
    (d) Correct--(1) Accumulated funding deficiency. The term correct 
means, with respect to an accumulated funding deficiency for a plan 
year, the contribution, to or under the plan, of the

[[Page 20219]]

amount necessary to reduce the accumulated funding deficiency as of the 
end of that plan year to zero. To reduce the deficiency to zero, the 
contribution must include interest at the plan's valuation interest 
rate for the period between the end of that plan year and the date of 
the contribution.
    (2) Unpaid minimum required contribution--(i) Interest 
adjustments--(A) General rule. The term correct means, with respect to 
an unpaid minimum required contribution for a plan year, the 
contribution, to or under the plan, of an amount that, when discounted 
to the valuation date for the plan year for which the unpaid minimum 
required contribution is due at the appropriate rate of interest, 
equals or exceeds the unpaid minimum required contribution. For this 
purpose, the appropriate rate of interest is the plan's effective 
interest rate for the plan year for which the unpaid minimum required 
contribution is due except to the extent that the payments are subject 
to additional interest as provided under section 430(j) (3) or (4).
    (B) Pre-PPA accumulated funding deficiency. The term correct means, 
with respect to the accumulated funding deficiency under section 412 
for the pre-effective plan year that is described in paragraph (c)(2) 
of this section, the contribution, to or under the plan, of the amount 
of that accumulated funding deficiency increased with interest from the 
end of the pre-effective plan year to the date of the contribution at 
the plan's valuation interest rate for the pre-effective plan year.
    (ii) Ordering rule. For purposes of section 4971 and this section, 
a contribution is attributable first to the earliest plan year of any 
unpaid minimum required contribution for which correction has not yet 
been made.
    (3) Corrective action of certain retroactive plan amendments. 
Certain retroactive plan amendments that meet the requirements of 
section 412(d)(2) may reduce the minimum required contribution for a 
plan year, which would reduce the accumulated funding deficiency or the 
amount of the unpaid minimum required contribution for a plan year.
    (e) Taxable period. The term taxable period has the same meaning 
given that term under Sec.  54.4971-1(e).
    (f) Examples. The following examples illustrate the rules of this 
section.

    Example 2. (i) Example 1. Plan A, a single employer defined 
benefit plan, has a calendar year plan year and a January 1 
valuation date. The sponsor of Plan A has a calendar taxable year. 
Plan A has no funding shortfall as of the end of 2008, and Plan A 
has no unpaid minimum required contributions for 2008 or any earlier 
plan year. The minimum required contribution for the 2009 plan year 
is $250,000. The plan sponsor makes one contribution for 2009 on 
July 1, 2009, in the amount of $200,000, and the sponsor does not 
make an election to use the prefunding balance or funding standard 
carryover balance to offset the minimum required contribution for 
2009. The effective interest rate for Plan A for the 2009 plan year 
is 5.90%.
    (ii) The interest-adjusted contribution for 2009 is $200,000 
divided by 1.0590 (6/12), or $194,349, as of January 1, 2009. The 
unpaid minimum required contribution for the 2009 plan year is 
$250,000 minus $194,349, or $55,651. The excise tax due under 
section 4971(a) is 10% of the unpaid minimum required contribution, 
or $5,565.

    Example 2.(i) The facts are the same as in Example 1. The plan 
sponsor makes a contribution of $175,000 on December 31, 2010.
    (ii) Under the ordering rule in paragraph (d)(2)(ii) of this 
section, the contribution made on December 31, 2010, is applied first 
to correct the unpaid minimum required contribution for 2009. The 
portion of the contribution paid December 31, 2010, that is required to 
eliminate the unpaid minimum required contribution for 2009 (taking 
into account the 2009 effective interest rate for the 24 months between 
January 1, 2009, and the payment date of December 31, 2010), is $55,651 
multiplied by 1.059 (24/12) or $62,412. The remaining payment of 
$112,588 ($175,000 minus $62,412) is applied to the contribution 
required for the 2010 plan year.
    Example 3. (i) Plan B, a single employer defined benefit plan, 
has a calendar plan year. The sponsor of Plan B has a calendar 
taxable year. Plan B has an accumulated funding deficiency of 
$100,000 as of December 31, 2007, including additional interest due 
to late quarterly contributions during 2007. The valuation interest 
rate for the 2007 plan year is 7.5%.
    (ii) In accordance with paragraph (c)(2) of this section, the 
accumulated funding deficiency under section 412 as of December 31, 
2007, is considered an unpaid minimum required contribution until it is 
corrected. Pursuant to paragraph (d)(2)(i)(B) of this section, the 
amount needed to correct that accumulated funding deficiency is 
$100,000 plus interest at the valuation interest rate of 7.5% for the 
period between December 31, 2007, and the date of payment of the 
contribution.
    (iii) The funding shortfall as of January 1, 2008, is calculated as 
the difference between the funding target and the value of assets as of 
that date. The assets are not adjusted by the amount of the accumulated 
funding deficiency; the fact that the contribution was not made for the 
2007 plan year means that the January 1, 2008, funding shortfall is 
larger than it would have been otherwise.
    Example 4. (i) The facts are the same as in Example 3. The 
minimum required contribution for the 2008 plan year is $125,000, 
but the plan sponsor does not make any required contributions for 
2008.
    (ii) The total unpaid minimum required contribution as of 
December 31, 2008, is the sum of the $100,000 accumulated funding 
deficiency under section 412 from 2007 and the $125,000 unpaid 
minimum required contribution for 2008, or $225,000. The section 
4971(a) excise tax applies to the aggregate unpaid minimum required 
contributions for all plan years that remain unpaid as of the end of 
2008. In this case, there is an unpaid minimum required contribution 
of $100,000 for the 2007 plan year and an unpaid minimum required 
contribution of $125,000 for the 2008 plan year. The section 4971(a) 
excise tax is 10% of the aggregate of those unpaid amounts, or 
$22,500.
    Example 5. (i) The facts are the same as in Example 4, except 
that the plan sponsor makes a contribution of $150,000 on December 
31, 2008. No additional contributions are paid through September 15, 
2009. Quarterly contributions of $25,000 each are due April 15, 
2008, July 15, 2008, October 15, 2008, and January 15, 2009. Plan 
B's effective interest rate for the 2008 plan year is 5.75%.
    (ii) In accordance with paragraph (c)(2) of this section, the 
accumulated funding deficiency under section 412 as of December 31, 
2007, is treated as an unpaid minimum required contribution until it 
is corrected.
    (iii) The December 31, 2008, contribution is first applied to 
the 2007 accumulated funding deficiency under section 412 that is 
treated as an unpaid minimum required contribution. Accordingly, the 
amount needed to correct the 2007 unpaid required minimum 
contribution ($100,000 multiplied by 1.075, or $107,500) is applied 
to eliminate this unpaid minimum required contribution for the 2007 
plan year.
    (iv) The remaining December 31, 2008, contribution ($150,000 
minus $107,500, or $42,500) is then applied to the 2008 minimum 
required contribution. This amount is first allocated to the 
quarterly contribution due April 15, 2008. In accordance with Sec.  
1.430(j)-1(c)(1)(iii)(A), the adjustment for interest on late 
quarterly contributions is increased by 5 percentage points for the 
period of underpayment. Therefore, $25,000 of the remaining December 
31, 2008, contribution is discounted using an interest rate of 
10.75% for the 8\1/2\-month period between the payment date of 
December 31, 2008 and the quarterly contribution due date of April 
15, 2008, and at the 5.75% effective interest rate for the 3\1/2\ 
months between April 15, 2008, and January 1, 2008. This portion of 
the December 31, 2008, contribution results in an adjusted amount of 
$22,880 (that is, $25,000 / 1.1075(8.5[sol]12) / 1.0575(3.5[sol]12)) 
as of January 1, 2008.
    (v) The remaining December 31, 2008, contribution is then 
applied to the quarterly contribution due July 15, 2008. The balance

[[Page 20220]]

of the December 31, 2008, contribution ($150,000 minus $107,500 
minus $25,000, or $17,500) is paid after the due date for the second 
required quarterly installment. Accordingly, the remaining $17,500 
contribution is adjusted using an interest rate of 10.75% for the 
5\1/2\-month period between the payment date of December 31, 2008 
and the quarterly contribution due date of July 15, 2008, and at the 
5.75% effective interest rate for the 6\1/2\ months between July 15, 
2008, and January 1, 2008. This portion of the December 31, 2008, 
contribution results in an adjusted amount of $16,202 (that is, 
$17,500 / 1.1075(5.5[sol]12) / 1.0575(6.5[sol]12)) as of January 1, 
2008.
    (vi) The remaining unpaid minimum required contribution for 2008 
is $125,000 minus the interest-adjusted amounts of $22,880 and 
$16,202 applied towards the 2008 minimum required contribution as 
determined in paragraphs (iv) and (v) of this Example 5. This 
results in an unpaid minimum required contribution of $85,918 for 
2008. The section 4971(a) excise tax is 10% of the unpaid minimum 
required contribution, or $8,592.
    Example 6. (i) Plan C, a single employer defined benefit plan, 
has a calendar year plan year and a January 1 valuation date, and 
has no funding standard carryover balance or prefunding balance as 
of January 1, 2008. Plan C's sponsor has a calendar year taxable 
year. The minimum required contributions for Plan C are $100,000 for 
the 2008 plan year, $110,000 for the 2009 plan year, $125,000 for 
the 2010 plan year, and $135,000 for the 2011 plan year. No 
contributions for these plan years are made until September 15, 
2012, at which time the plan sponsor contributes $273,000 (which is 
exactly enough to correct the unpaid minimum required contributions 
for the 2008 and 2009 plan years).
    (ii) The excise tax under section 4971(a) is 10% of the 
aggregate unpaid minimum required contributions for all plan years 
remaining unpaid as of the end of any plan year ending within the 
2008 taxable year. Accordingly, the excise tax for the 2008 taxable 
year is $10,000 (that is, 10% of $100,000). The excise tax for the 
2009 taxable year is $21,000 (that is, 10% of the sum of $100,000 
and $110,000) and the excise tax for the 2010 taxable year is 
$33,500 (that is, 10% of the sum of $100,000, $110,000, and 
$125,000).
    (iii) The contribution made on September 15, 2012, is applied to 
correct the unpaid minimum required contributions for the 2008 and 
2009 plan years by the deadline for making contributions for the 
2011 plan year. Therefore, the excise tax under section 4971(a) for 
the 2011 taxable year is based only on the remaining unpaid minimum 
required contributions for the 2010 and 2011 plan years, or $26,000 
(that is, 10% of the sum of $125,000 and $135,000).
    (iv) The plan sponsor may also be required to pay an excise tax 
of 100% under section 4971(b), if the unpaid minimum required 
contributions are not corrected by the end of the taxable period.

    (g) Effective/applicability dates and transition rules--(1) 
Statutory effective date--(i) In general. In general, the amendments 
made to section 4971 by section 114 of the Pension Protection Act of 
2006, Public Law 109-280, 120 Stat. 780 (PPA `06), apply to taxable 
years beginning on or after January 1, 2008, but only with respect to 
plan years that end with or within any such taxable year.
    (ii) Plans with delayed PPA '06 effective dates. In the case of a 
plan for which the effective date of section 430 is delayed in 
accordance with sections 104 through 106 of PPA '06, the amendments 
made to section 4971 by section 114 of PPA '06 apply to taxable years 
beginning on or after January 1, 2008, but only with respect to plan 
years beginning on or after the date section 430 first applies with 
respect to the plan.
    (2) Effective date of regulations. This section is effective for 
taxable years beginning on and after the statutory effective date 
described in paragraph (g)(1) of this section, but in no event does 
this section apply to taxable years ending before April 15, 2008.
    (3) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
section 430 applies to the plan. Thus, except for plans with a delayed 
effective date under paragraph (g)(1)(ii) of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
January 1, 2008.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 08-1133 Filed 4-11-08; 10:10 am]
BILLING CODE 4830-01-P


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