IRS issues guidance on pension funding stabilization under HATFA

The IRS has issued guidance on the changes to the funding stabilization rules for single-employer plans that were made by the Highway and Transportation Funding Act of 2014 (P.L. 113-159; HATFA). The guidance provides procedures for electing to defer the use of HATFA segment rates that relate to a plan year beginning in 2013.

In 2012, Congress enacted the pension funding relief provisions in the Moving Ahead for Progress in the 21st Century Act (MAP-21). Under MAP-21, pension plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within 10% (increasing to 30% in 2016 and thereafter) of the average of such segment rates for the 25-year period preceding the current year. This provision was designed to stabilize the fluctuation of interest rates from year to year, resulting in fewer sharp declines and fewer sharp increases in interest rates.

HATFA revised the specified percentage ranges (that is, the range from the applicable minimum percentage to the applicable maximum percentage of average segment rates) for determining whether a segment rate must be adjusted upward or downward. Under HATFA, the specified percentage range for a plan year is determined by reference to the calendar year in which the plan year begins as follows:

• 90% to 110% for 2012 through 2017,
• 85% to 115% for 2018,
• 80% to 120% for 2019,
• 75% to 125% for 2020,
• 70% to 130% for 2021 or later.

The modifications under HATFA apply with respect to plan years beginning after December 31, 2012. However, a plan sponsor can elect not to have the modifications apply to any plan year beginning in 2013, either for all purposes or solely for purposes of determining the plan’s adjusted funding target attainment percentage (AFTAP) for that plan year (which is used to apply the benefit restrictions under Code Sec. 436 limitations on benefits).

Election to defer use of HATFA segment rates

The new guidance provides procedures for electing to defer the use of HATFA segment rates until the 2014 plan year. An election is deemed to occur for a plan year beginning in 2013, if on or before December 31, 2014, the Form 5500, Form 5500-SF, or Form 5500-EZ is filed and the Schedule SB reflects the MAP-21 segment rates.

The guidance provides rules for elections and designations relating to the minimum funding requirements applicable for the 2013 plan year, including: (1) the reversal of an election to reduce funding balances; (2) late elections to add excess contributions for the 2013 plan year to the prefunding balance; (3) redesignation of a Code Sec. 436 contribution; or (4) redesignation of a contribution originally designated for 2013.

Reporting requirements

With respect to the plan year beginning in 2013, if the plan uses the segment rates and the plan sponsor has not elected to defer the use of the HATFA segment rates, the Schedule SB for that plan year must reflect the use of the HATFA segment rates.

Special rules for applying Code Sec. 436 benefit restrictions

The guidance provides special rules for applying the benefit restrictions under Code Sec. 436 and related rules for a plan year beginning after December 31, 2012, and before October 1, 2014, for a plan for which the HATFA modifications are applied to determine the plan’s AFTAP for the plan year.
The guidance discusses presumptions that apply based on prior year AFTAP, rules if the first certification uses HATFA segment rates, rules if the first certification uses MAP-21 segment rates, prospective application of change in benefit restrictions reflecting HATFA segment rates, retroactive application of change in benefit restrictions reflecting HATFA segment rates, reversal of an election to reduce funding balances and redesignation of Code Sec. 436 contributions for the 2014 plan year, and correction methods.

Source: IRS Notice 2014-53.

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