IRS issues final regs on minimum required contributions for single-employer DB plans

The IRS has issued final regulations on the determination of minimum required contributions for single-employer defined benefit (DB) plans under Code Sec. 430. In addition, final regulations concerning the related excise tax rules of Code Sec. 4971 are included, which are applicable to both single-employer and multiemployer defined benefit plans. These regulations also make changes relating to benefit restrictions under Code Sec. 436.

The final regulations are generally similar to the April 2008 proposed regulations, but a number of changes have been made in response to comments received and to reflect subsequent legislation (i.e., the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA, P.L. 110-458), the Cooperative and Small Employer Charity Pension Flexibility Act of 2014 (CSEC Act, P.L. 113-97), and the Highway and Transportation Funding Act of 2014 (HATFA, P.L. 113-159)). The final regulations also provide the IRS with flexibility to extend certain regulatory deadlines.

Minimum required contribution for terminating plans

The proposed regulations provided rules for determining the amount of a minimum required contribution for a short plan year (which would normally be followed by another plan year with its own minimum required contribution). If a plan terminates before the last day of the year, the final regulations clarify that the rules for short plan years apply for the year of termination by specifying that if a plan terminates before the last day of a plan year, the plan is treated as having a short plan year that ends on the termination date. As a result, the minimum required contribution for the plan is determined based on that short plan year. If a plan terminates before the date that would otherwise have been the valuation date for a plan year, then the valuation date for the plan year must be changed so that it falls within the short plan year.

The final regulations provide that, in the case of a plan subject to Title IV of ERISA, the termination date is the plan’s termination date established under ERISA Sec. 4048(a). In the case of a plan not subject to Title IV of ERISA, the termination date is the plan’s termination date established by the plan administrator, provided that the termination date may be no earlier than the date on which all actions necessary to effect the plan termination (other than the distribution of plan assets) are taken. However, a plan is not treated as terminated on that date if the plan assets are not distributed as soon as administratively feasible after that date.

Interest rates used to determine present value

The final regulations reflect a technical correction made by Section 2003(d) of HATFA. Under the regulations, in general, the first segment rate is used to determine the present value of benefits expected to be payable during the five-year period beginning on the valuation date for the plan year. However, with respect to a plan year beginning before January 1, 2014, for a plan with a valuation date other than the first day of the plan year, the five-year period beginning on the first day of the plan year is permitted to be used in lieu of the five-year period beginning on the valuation date. Thus, plan administrators must follow the statute as amended for this technical correction for plan years beginning on or after January 1, 2014, and are permitted to apply this technical correction for earlier years as well.

Crediting early contributions with interest

The proposed regulations would have credited interest on an early election to use a funding balance for purposes of satisfying the quarterly contribution requirement, but would not have credited interest on an early contribution for this purpose. Pursuant to commenters’ requests, the final regulations provide that early contributions are to be credited with interest toward quarterly contribution requirements on the same basis as an early election to use a funding balance.

Standing election to satisfy quarterly installments

The proposed regulations would have permitted plans to satisfy the requirement to pay quarterly installments with an election to use funding balances. The final regulations include rules for providing a standing election to satisfy quarterly installments. Under these rules, a plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to use the funding standard carryover balance and the prefunding balance to satisfy any otherwise unpaid portion of a required installment under Code Sec. 430(j)(3). If the amount of the prefunding and funding standard carryover balances available is less than the amount needed to satisfy any otherwise unpaid portion of a required installment, then the entire amount available will be used under the standing election. Any election made pursuant to a standing election is deemed to occur on the later of the last date for making the required installment under Code Sec. 430(j)(3) and the date the standing election is provided to the enrolled actuary.

The regulations provide that, generally, any standing election to use the funding balances to satisfy quarterly installments remains in effect for the plan with respect to the enrolled actuary named in the election, unless the standing election is revoked or the plan’s enrolled actuary is changed. However, a plan sponsor may suspend operation of a standing election for the remainder of a plan year by providing written notice to the enrolled actuary.

Unpaid liquidity amounts

Under Code Sec. 430(j)(4)(C), any unpaid liquidity amount is treated as unpaid until the close of the quarter in which the due date for that installment occurs. Under the proposed regulations, this rule would have applied only for purposes of applying the additional interest for late quarterly installments, and the unpaid liquidity amount due during a quarter would have been treated as unpaid until a contribution of liquid assets satisfied that requirement, even if the period of underpayment extended beyond the end of the quarter. Some commentators suggested that the rule should be interpreted so that the unpaid liquidity amount is treated as paid at the end of the quarter for all purposes. The final regulations are modified to provide that any portion of a required installment for a quarter that is treated as unpaid by reason of the liquidity requirements is treated as unpaid until the close of the quarter in which the due date for the installment occurs (without regard to any contribution of liquid assets that is made after the due date of the required installment).

Effective\applicability dates

The final regulations are effective September 9, 2015. Reg. Secs. 1.430(a)–1 and 1.430(j)–1 and the changes made by this Treasury decision to Reg. Sec. 1.430(f)–1 apply generally to plan years beginning on or after January 1, 2016. Plans are permitted to apply these provisions for plan years beginning before 2016 and after 2007. In addition, for plan years beginning before 2016 and after 2007, plans are also permitted to rely on either these final regulations or the proposed regulations published in April 2008 that are finalized by this Treasury decision.

The regulations under Code Sec. 4971 generally apply at the same time the statutory changes to Code Sec. 4971 under the Pension Protection Act of 2006 (P.L. 109-280) become effective, but do not apply to any taxable years ending before April 15, 2008.

Source: 80 FR 54373.

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