IRS issues guidance on MAP-21 funding rules for single-employer DB plans

The IRS has issued guidance, in a question and answer format, on the special rules related to pension funding stabilization for single-employer defined benefit pension plans that were enacted by the Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141). The guidance addresses the application of MAP-21 segment rates generally, as well as measurements for which MAP-21 interest rates do not apply, statutory hybrid plans, transition issues, MAP-21 elections, and Schedule SB reporting.

Code Sec. 430 specifies minimum funding requirements applicable generally to single-employer defined benefit pension plans. Interest rates are specified for purposes of calculating the minimum required contribution. The rates used for this purposes are a set of three segment rates or, alternatively, a full yield curve. Each month, the IRS prescribes a corporate bond yield curve applicable to that month. MAP-21 added Code Sec. 430(h)(2)(C)(iv), effective for plan years beginning in 2012 or later. Under this provision, each of the three segment rates is adjusted to fall within a specified range determined based on a percentage of the average of the corresponding segment rates for a 25-year period ending on September 30 preceding the calendar year that includes the first day of that plan year. Segment rates for plans starting in 2012 were provided in Notice 2012-55.

General guidance provided

The IRS guidance initially addresses the application of MAP-21 segment rates generally, including:

    • how the adjusted segment rates are determined for a plan year,
    • the purposes for which the MAP-21 segment rates apply,
    • the effect of MAP-21 amendments on the application of interest rates for a plan using the full yield curve instead of segment rates,
    • how MAP-21 affects the annuity substitution rule under IRS Reg. §1.430(d)-1(f)(4)(iii),
    • the effect of MAP-21 segment rates on the value of plan assets,
    • the effect of MAP-21 segment rates on the determination of the funding standard carryover balance and prefunding balance, and
    • reliance on guidance prior to expected changes in the regulations.

Where MAP-21 segment rates do not apply

The IRS guidance confirms that the MAP-21 segment rates do not apply for purposes that are specifically excluded under the Act or related guidance.

Thus, in general, the MAP-21 segment rates should not be used for the purpose of applying Code Sec. 404(o) to determine the maximum deductible limit for employer contributions to a plan; calculating the minimum present value requirement for distributions subject to Code Sec. 417(e)(3); determining the amount of excess assets that can be transferred to retiree health or retiree group term life insurance accounts; or determining whether certain information must be reported to the PBGC under ERISA §4010.

The IRS specifically addresses how the value of plan assets is determined for purposes for which the MAP-21 segment rates do not apply. The PBGC has issued a separate technical release providing additional guidance on how this asset calculation affects the reporting requirements under ERISA §4010.

Hybrid plans

In order to comply with Code Sec. 411(b)(1)(H), a statutory hybrid plan cannot provide for interest credits at an interest crediting rate that exceeds a market rate of return. Regulations issued in 2010 provide that the third segment rate is an interest crediting rate that is not in excess of a market rate of return and the first and second segment rates are safe harbor rates that are deemed not to exceed a market rate of return. In Notice 2011-85, the IRS said that it intended to amend the regulations to postpone the effective/applicability dates for the interest crediting rules. According to the just-issued guidance, those final regulations will not be effective for plan years beginning before January 1, 2014.

For a plan that currently defines the interest crediting rate by reference to a segment rate, prior to the effective date of the regulations that are described in Notice 2011-85, the IRS specifies that a plan administrator’s “reasonable interpretation” of plan terms that provide for interest credits by reference to one of the segment rates could reflect either of the following: (1) that the plan terms provide an interest crediting rate by reference to the segment rate without reflecting the changes made by MAP-21 or (2) that the plan terms provide an interest crediting rate by reference to the corresponding MAP-21 segment rate.

If a plan is timely amended to reflect the plan administrator’s reasonable interpretation of plan terms, the amendment would not be considered to violate the anti-cutback rules. In addition, the amendment would not trigger the requirement to furnish a notice to participants under ERISA §204(h).

Transition and election issues

The MAP-21 provisions are generally effective for plan years beginning after December 31, 2011. However, the plan sponsor may elect to defer the application of the MAP-21 segment rates to plan years beginning on or after January 1, 2013, either (a) for all purposes, or (b) solely for purposes of determining the adjusted funding target attainment percentage (AFTAP) when applying the funding-based benefit restrictions under Code Sec. 436.

A plan sponsor makes an election by providing written notice to the enrolled actuary for the plan and to the plan administrator. The notice must specify the name of the plan, employer identification number and plan number, and whether the use of MAP-21 segment rates is deferred for all purposes or only for determination of the AFTAP. The election is irrevocable, and must be made no later than the deadline for filing the Form 5500, Form 5500-SF, or Form 5500-EZ (including extensions) for a plan year beginning in 2012, or the date the applicable form is actually filed, if earlier.

The guidance provides additional details on how to make the various elections permitted by MAP-21 and whether changes may be made prospectively or retroactively.

Schedule SB reporting

Finally, the IRS provides guidance on the effect of MAP-21 elections on 2012 Schedule SB reporting. According to the IRS, the information reported on the 2012 Schedule SB should generally reflect the assumptions used to determine the minimum required contribution under Code Sec. 430. Thus, for example, the funding target, effective interest rate and target normal cost reported on lines 3 through 6 and the assumed discount rates reported on line 21 of the 2012 Schedule SB must reflect the MAP-21 segment rates if those are used to determine the minimum required contribution for 2012. Otherwise, the information reported should generally be based on the unadjusted segment rates or the full yield curve, whichever is used to determine the 2012 minimum required contribution.

Source: IRS Notice 2012-61.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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