us-irs-notices-irb-2009-50-pdf•Internal Revenue Bulletin 2009-50 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2009-50 (PDF rendition): IRS Notices
us-irs-notices-irb-2009-50-pdfInternal Revenue Bulletin 2009-50 (PDF rendition): IRS NoticesGuidance
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Bulletin No. 200 9-50 December 14, 200 9 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX T.D. 9467, page 760. Final regulations under sections 430 and 436 of the Code pro- vide guidance for single employer defined benefit retirement plans regarding the measurement of assets and liabilities to determine funding requirements and regarding restrictions on payment of benefits by underfunded plans. EMPLOYEE PLANS Notice 2009–94, page 848. 2010 cost-of-living adjustments; retirement plans, etc. This notice sets forth certain cost-of-living adjustments effec- tive January 1, 2010, applicable to the dollar limitations on ben- efits and contributions under qualified retirement plans. The limitations that are adjusted by reference to section 415(d) will remain unchanged for 2010. Other limitations applicable to deferred compensation plans are also unchanged for 2010. This notice also contains cost-of-living adjustments for several pension-related amounts in restating the data in IR–2009–94 issued October 15, 2009. Finding Lists begin on page ii. The IRS Mission Provide Americ a’s taxpayers top quality service by helping them understand an d meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, mod- ify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indi- cated. Procedures relating solely to matters of internal man- agement are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—19 86 Code. This part i ncludes rulings and decisions based on provisions of the Intern al Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Leg- islation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secre- tary (Enforcement). Part IV .—Items of General Interest. This par t includes notices of proposed rulemakings, disbar- ment an d suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. The c ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402. December 14, 20092009–50 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 401.— Qualified Pension, Profit-Sharing, and Stock Bonus Plans 26 CFR 1.430(d)–1: Determination of target normal cost and funding target. T.D. 9467 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 Measurement of Assets and Liabilities for Pension Funding Purposes; Benefit Restrictions for Underfunded Pension Plans AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains fi- nal regulations providing guidance regard- ing the determination of the value of plan assets and benefit liabilities for purposes of the funding requirements that apply to single employer defined benefit plans, re- garding the use of certain funding balances maintained for those plans, and regarding benefit restrictions for certain underfunded defined benefit pension plans. These regu- lations reflect provisions added by the Pen- sion Protection Act of 2006, as amended by the Worker, Retiree, and Employer Re- covery Act of 2008. These regulations af- fect sponsors, administrators, participants, and beneficiaries of single employer de- fined benefit pension plans. DATES:Effective Date:These regulations are effective on October 15, 2009. Applicability Date:These regulations apply to plan years beginning on or after January 1, 2010. FO R FURTHER INFORMATION CO NTACT: Michael P. Brewer, La uson C. Green, or Linda S. F. Marshall at (202) 622–6090 (not a toll-free number). SUPPLEMENTAR Y INFORMATION: Paperwork Red uction Act The collecti ons of information con- tained in the se final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Pap erwork Reduction Act of 1995 (44 U.S .C. 3507(d)) under con- trol number 1545–2095. The collections of informat ioninthisfinalregulation are in §§1. 430(f)–1(f), 1.430(h)(2)–1(e), 1.436–1(f ), and 1.436–1(h). The infor- mation req uired under §1.430(f)–1(f) is required i n order for plan sponsors to make election s regarding a plan’s credit balances upon occa sion. The information required under §1. 430(h)(2)–1(e) is required in order for a plan sponsor to make an elec- tion to us e an alternative interest rate for purpose s of determining a plan’s funding obligat ions under §1.430(h)(2)–1. The informa tion required under §§1.436–1(f) and 1.43 6–1(h) is required in order for a qualif ied defined benefit plan’s enrolled actuar y to provide a timely certification of the pla n’s adjusted funding target attain- ment pe rcentage (AFTAP) for each plan year to avoid certain benefit restrictions. An agen cy may not conduct or sponsor, and a pe rson is not required to respond to, a colle ction of information unless it displays avali d control number. Books or records relating to a collection of inf ormation must be retained as long as the ir contents may become material in the ad ministration of any internal revenue law. G enerally, tax returns and tax return info rmation are confidential, as required by 26 U.S.C. 6103. Back ground This document contains final Income Tax Regulations (26 CFR part 1) under sec tions 430(d), 430(f), 430(g), 430(h)(2), 430 (i), and 436, as added to the Internal Rev enue Code (Code) by the Pension Pro- tec tion Act of 2006 (PPA ’06), Public Law 10 9–280 (120 Stat. 780), and amended by the Worker, Retiree, and Employer Re- co very Act of 2008 (WRERA ’08), Public La w 110–458 (122 Stat. 5092). Section 412 pr ovides minimum fund- ing requireme nts that generally apply for pension plans (including both defined benefit pens ion plans and money purchase pension plan s). PPA ’06 makes extensive changes to th ose minimum funding re- quirements f or defined benefit plans that generally a pply for plan years beginning on or after J anuary 1, 2008. Section 430, which was ad ded by PPA ’06, specifies the minimum fun ding requirements that apply to single em ployer defined benefit pension plans (inc luding multiple employer plans) pursuant t osection412. Section436, which was a lso added by PPA ’06, sets forth cert ain limitations on benefits that may apply to a single employer defined benefit p lan based on its funded status. Neither s ection 430 nor section 436 ap- plies to m ultiemployer plans. Section 3 02 of the Employee Retire- ment Inco me Security Act of 1974, as amended ( ERISA), sets forth funding rules that are parallel to those in section 412 of the Code , and section 303 of ERISA sets forth ad ditional funding rules for single employe r plans that are parallel to those in sect ion 430 of the Code. In addition, sectio n 206(g) of ERISA sets forth benefit limita tions that are parallel to those in sectio n 436 of the Code. Under section 101 of R eorganization Plan No. 4 of 1978 (43 FR 47713) and section 3002(c) of ERISA , the Secretary of the Treasury has inter pretive jurisdiction over the subject matte r addressed in these regulations for purpo sesofERISA,aswellastheCode. Thus , these final Treasury Department regu lations issued under sections 430 and 436 o f the Code apply for purposes of sect ions 206(g) and 303 of ERISA. If th e value of plan assets (less the sum of th e plan’s prefunding balance and fund- ing s tandard carryover balance) is less than the funding target, section 430(a)(1) def ines the minimum required contribu- tio n as the sum of the plan’s target normal cos t and the shortfall and waiver amortiza- tio n charges for the plan year. If the value of p lan assets (less the sum of the plan’s pr efunding balance and funding standard ca rryover balance) equals or exceeds the fu nding target, section 430(a)(2) defines th e minimum required contribution as 2009–50 I.R.B.760December 14, 2009 the plan’s target normal cost for the plan year reduced (but not below zero) by the amount of the excess. Under section 430(d), except as other- wise provided in section 430(i)(1) (regard- ing at-risk status), a plan’s funding target for a plan year is the present value of all benefits accrued or earned under the plan as of the beginning of the plan year. Prior to amendment by WRERA ’08, section 430(b) defined a plan’s target normal cost for a plan year as the present value of all benefits expected to accrue or be earned under the plan during the plan year (with any increase in any benefit attributable to services performed in a preceding plan year by reason of a compensation increase during the current plan year treated as having accrued during the current plan year). Section 101(b)(2) of WRERA ’08 amended section 430(b) to modify the definition of a plan’s target normal cost by adding the amount of plan-related expenses expected to be paid from plan assets during the plan year, and by subtracting the amount of mandatory employee contributions expected to be made during the plan year. This modification applies to plan years beginning after December 31, 2008; however, a plan sponsor is permitted to elect to apply this modification beginning with the first plan year beginning after December 31, 2007. Under section 430(f)(3), certain fund- ing balances — referred to as the pre- funding balance and the funding standard carryover balance — are permitted to be used to reduce the otherwise applicable minimum required contribution for a plan year in certain situations. Under section 430(f)(6), the prefunding balance repre- sents the accumulation of the contributions that an employer makes for a plan year that exceed the minimum required con- tribution for the year. An employer that makes contributions for a plan year that exceed the minimum required contribution for the year is permitted in certain circum- stances to use those excess contributions in order to satisfy the minimum funding requirement in a subsequent plan year. However, section 430(f)(6)(B)(iii) pro- vides that contributions required to avoid a benefit restriction under section 436 are disregarded for purposes of determining the extent to which contributions for a plan year exceed the minimum required con- tribution for the plan year. Under section 430(f)(7), the funding standard carryover balance is based on the funding standard account credit balance as determined un- der section 412 for a plan as of the last day of the last plan year beginning in 2007. The treatment of these balances under section 430 reflects Congressional concern with the treatment of a funding standard account credit balance under the section 412 rules in effect prior to PPA ’06. Ac- cordingly, section 430(f)(3) sets forth a new restriction on the ability of a poorly funded plan to use the prefunding balance and the funding standard carryover bal- ance as a credit against the minimum re- quired contribution for a plan year. Under section 430(f)(3)(C), the prefunding bal- ance or funding standard carryover bal- ance can only be used for a plan year if the value of plan assets for the preceding plan year (after subtracting the prefund- ing balance) was at least 80 percent of the funding target (determined without regard to the at-risk rules of section 430(i)) for that preceding plan year. In addition, sec- tion 430(f)(4) requires that the prefunding balance and the funding standard carry- over balance be subtracted from the value of plan assets for certain purposes (includ- ing the determination of the plan’s fund- ing target attainment percentage (FTAP), as defined under section 430(d)(2)), and section 430(f)(8) requires that the prefund- ing balance and the funding standard car- ryover balance be adjusted for actual in- vestment return on plan assets. In order to give employers the opportunity to mini- mize the impact of the requirement to sub- tract the prefunding balance and funding standard carryover balance from plan as- sets, section 430(f)(5) permits an employer to elect to reduce those balances. Section 430(g)(1) provides that all de- terminations made with respect to mini- mum required contributions for a plan year (such as the value of plan assets and lia- bilities) are made as of the plan’s valua- tion date. Section 430(g)(2) provides that, other than for plans with 100 or fewer par- ticipants (determined as provided in sec- tion 430(g)(2)(B) and (C)), the valuation date for a plan year must be the first day of the plan year. Under section 430(g)(2)(B), all defined benefit pension plans (other than multiemployer plans) maintained by the employer, a predecessor employer, or by any member of the employer’s con- trolled group are treated as a single plan for this purpose, but only participants with respecttotheemployerormemberofthe controlled group are taken into account. Section 430(g)(3) provides rules re- garding the determination of the value of plan assets for purposes of section 430. Under section 430(g)(3)(A), except as oth- erwise provided in section 430(g)(3)(B), the fair market value of plan assets must be used for this purpose. As an alternative to the use of fair market value, section 430(g)(3)(B) permits the use of an actuar- ial value of assets based on the average of fair market values, but only if such method is permitted under regulations prescribed by the Secretary, does not provide for averaging of such values over more than the period beginning on the last day of the 25th month preceding the month in which the valuation date occurs and ending on the valuation date (or a similar period in the case of a valuation date that is not the 1st day of a month), and does not result in a determination of the actuarial value of plan assets that, at any time, is lower than 90 percent or greater than 110 percent of the fair market value of plan assets as of the valuation date. Under section 430(g)(4), if a contribu- tion made after the valuation date for the current plan year is a contribution for a preceding plan year, the contribution is taken into account in determining the value of plan assets for the current plan year. For 2009 and future plan years, only the present value (determined as of the val- uation date for the current plan year, us- ing the plan’s effective interest rate for the preceding plan year) of the contributions made for the preceding plan year is taken into account. If any contributions for the current plan year are made before the val- uation date (which could only occur for a small plan with a valuation date that is not the first day of the plan year), plan assets as of the valuation date must ex- clude those contributions and also must ex- clude interest on those contributions (de- termined at the plan’s effective interest rate for the plan year) for the period between the date of the contribution and the valu- ation date. Under section 430(h)(2)(A), a plan’s effective interest rate for a plan year is defined as the single interest rate that, if used to determine the present value of the benefits taken into account in determining the plan’s funding target for the plan year December 14, 20097612009–50 I.R.B. in lieu of the interest rates under section 430(h)(2), would result in an amount equal to the plan’s funding target determined for the plan year under section 430(d). Under section 430(h)(1), the determi- nation of any present value or other com- putation under section 430 is to be made on the basis of actuarial assumptions and methods each of which is reasonable (tak- ing into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary’s best esti- mate of anticipated experience under the plan. Section 430(h)(2) specifies the inter- est rates that must be used in determin- ing a plan’s target normal cost and fund- ing target. Under section 430(h)(2)(B), present value is determined using three in- terest rates (segment rates) for the applica- ble month, each of which applies to ben- efit payments expected to be paid during a certain period. The first segment rate applies to benefits reasonably determined to be payable during the 5-year period be- ginning on the first day of the plan year. The second segment rate applies to bene- fits reasonably determined to be payable during the 15-year period following the initial 5-year period. The third segment rate applies to benefits reasonably deter- mined to be payable after the end of that 15-year period. Section 430(h)(2)(C) defines each segment rate as a single interest rate de- termined for a month by the Treasury Department on the basis of the corporate bond yield curve for the month. Under section 430(h)(2)(D), the corporate bond yield curve for a month is to be prescribed by the Treasury Department and is to reflect the average, for the 24-month pe- riod ending with the preceding month, of yields on investment grade corporate bonds with varying maturities that are in the top three quality levels available. Section 430(h)(2)(D)(ii) provides an al- ternativetotheuseofthethreesegment rates, under which the corporate bond yield curve (determined without regard to the 24-month average) is substituted for the segment rates. Section 430(h)(2)(G) provides a transi- tion rule for plan years beginning in 2008 and 2009 (other than for plans where the first plan year begins on or after January 1, 2008). Under this transition rule, the in- terest rates to be used in the valuation are based on a blend of the segment rates and the long-term corporate bond rates used for plan years prior to the effective date of PPA ’06. Under section 430(h)(2)(G)(iv), a plan sponsor may elect to have this tran- sition rule not apply. Section 430(i) sets forth special rules that apply to a plan that is in at-risk sta- tus. If a plan is in at-risk status, then spe- cial assumptions mustbe used in determin- ing the plan’s funding target and target nor- mal cost, a loading factor is applied to the plan’s liabilities in certain cases, and, un- der section 409A(b)(3), restrictions apply to the employer’s ability to set aside assets for purposes of paying deferred compen- sation to a covered employee under a non- qualified deferred compensation plan. Under section 430(i)(4), a plan is in at-risk status for a year if, for the preced- ing year: (1) the plan’s FTAP, determined without regard to the at-risk assumptions, was less than 80 percent (with a transi- tion rule discussed in the next sentence); and (2) the plan’s FTAP, determined us- ing the at-risk assumptions (without regard to whether the plan was in at-risk status for the preceding year), was less than 70 percent. Under a transition rule, reduced percentages apply for plan years beginning before 2011 instead of 80 percent in the first part of the test for determining at-risk status. Under section 430(i)(4), in the case of plan years beginning in 2008, the plan’s FTAP for the preceding plan year is to be determined under rules provided by the Treasury Department. Under section 430(i)(6), the at-risk rules do not apply if a plan had 500 or fewer participants on each day during the preceding plan year. For this purpose, the number of participants is determined using the same rules as apply for determining whether a plan is a small plan for purposes of eligibility for the use of a valuation date other than the first day of the plan year. Ifaplanisinat-riskstatus,theplan’s funding target and target normal cost are determined (under section 430(i)(1) and (2)) using special actuarial assumptions. Under these assumptions, all employees who are not otherwise assumed to retire as of the valuation date, but who will be eli- gible to elect to commence benefits in the current and 10 succeeding plan years, are assumed to retire at the earliest retirement date under the plan, but not before the end of the current plan year. In addition, all employees are assumed to elect the form of retirement benefit available under the plan for each assumed retirement age that results in the highest present value. The funding target of a plan in at-risk status for a plan year is generally the sum of: (1) the present value of all benefits ac- crued or earned as of the beginning of the plan year determined using the special as- sumptions described in this preamble; and (2) in the case of a plan that has been in at-risk status for atleast 2 of the 4 preced- ing plan years, a loading factor. That load- ing factor is equal to the sum of: (1) $700 multiplied by the number of participants in the plan; plus (2) 4 percent of the funding target determined as if the plan were not in at-risk status. The target normal cost of a plan in at-risk status for a plan year is generally the sum of: (1) the present value of benefits expected to accrue or be earned under the plan during the plan year, deter- mined using the special assumptions de- scribed in this preamble; and (2) in the case of a plan that has been in at-risk status for at least 2 of the 4 preceding plans years, a loading factor of 4 percent of the present value of all benefits under the plan that ac- crue, are earned, or are otherwise allocated to service for the plan year (determined as if the plan were not in at-risk status). The target normal cost of a plan in at-risk sta- tus is adjusted for plan-related expenses expected to be paid from plan assets dur- ing the plan year and mandatory employee contributions expected to be made during the plan year under the same rules that ap- ply to plans that are not in at-risk status. Under section 430(i)(3), the funding target of a plan in at-risk status and the target normal cost of a plan in at-risk status are never less than the respective funding target and target normal cost determined without regard to the at-risk rules. In ad- dition, if a plan has been in at-risk status for fewer than 5 consecutive plan years, a phase-in rule applies to the determination of the funding target and the target normal cost under section 430(i)(5). Section 401(a)(29) requires that a de- fined benefit plan (other than a multiem- ployer plan) satisfy the requirements of section 436. Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. Under section 436(g), these limitations (other than the limitations on accelerated benefit payments under section 436(d)) 2009–50 I.R.B.762December 14, 2009 do not apply to a plan for the first 5 plan years of the plan, taking into account any predecessor plan. Section 436(b) sets forth a limitation on plant shutdown and other unpredictable contingent event benefits in situations where the plan’s adjusted funding tar- get attainment percentage (AFTAP) for the plan year is less than 60 percent or would be less than 60 percent taking into account the occurrence of the event. For this purpose, anunpredictable contingent event benefitmeans any benefit payable solely by reason of (1) a plant shutdown (or a similar event), or (2) an event other than attainment of age, performance of service, receipt or derivation of compensation, or the occurrence of death or disability. Under section 436(b)(2), the limitation does not apply for a plan year if the plan sponsor makes a specified contribution (in addition to any minimum required contribution). If the AFTAP for a plan year is less than 60 percent, then the specified contribution is equal to the amount of the increase in the plan’s funding target for the plan year attributable to the occurrence of the event. If the AFTAP for a plan year is 60 percent or more but would be less than 60 percent taking into account the occurrence of the event, then the specified contribution is the amount sufficient to result in an AFTAP of 60 percent taking into account the occurrence of the event. Under section 436(c), a plan amend- ment that has the effect of increasing the liabilities of the plan by reason of any increase in benefits (including changes in vesting) may not take effect if the plan’s AFTAP for the plan year is less than 80 percent or would be less than 80 percent taking into account the amendment. Under section 436(c)(2), the limitation does not apply for a plan year if the plan sponsor makes a specified contribution (in addition to any minimum required contribution). If the plan’s AFTAP for the plan year is less than 80 percent, then the specified contribution is equal to the amount of the increase in the plan’s funding target for the plan year attributable to the amendment. If the plan’s AFTAP for the plan year is 80 percent or more but would be less than 80 percent taking into account the amendment, then the specified contribution is the amount sufficient to result in an AFTAP of 80 percent taking into account the amendment. In addition, under section 436(c)(3), the limitation does not apply to an amendment that provides for a benefit increase under a formula that is not based on compensation, but only if the rate of increase does not exceed the contemporaneous rate of increase in average wages of participants covered by the amendment. Under section 436(d), a plan is re- quired to set forth certain limitations on accelerated benefit distributions. If the plan’s AFTAP for a plan year is less than 60 percent, the plan must not make any prohibited payments after the valuation date for the plan year. If the plan’s AFTAP for a plan year is at least 60 percent but is less than 80 percent, the plan must not pay any prohibited payment to the extent the payment exceeds the lesser of (1) 50 percent of the amount otherwise payable under the plan and (2) the present value of the maximum Pension Benefit Guaranty Corporation (PBGC) guarantee with respect to a participant. In addition, if the plan sponsor is in bankruptcy proceedings, the plan may not pay any prohibited payment unless the plan’s enrolled actuary certifies that the AFTAP of the plan is at least 100 percent. However, section 436(d) does not apply to a plan for a plan year if the terms of the plan provide for no benefit accruals with respect to any participant for the period beginning on September 1, 2005, and extending throughout the plan year. Under section 436(d)(5), a prohibited payment is (1) any payment in excess of the monthly amount paid under a single life annuity (plus any social security sup- plements that are provided under the plan) to a participant or beneficiary, (2) any pay- ment for the purchase of an irrevocable commitment from an insurer to pay bene- fits, or (3) any other payment specified by the Secretary by regulations. Under section 436(e), a plan is required to provide that if the plan’s AFTAP is less than 60 percent for a plan year, all benefit accruals under the plan must cease as of the valuation date for the plan year. 1 Under section 436(e)(2), the limitation ceases to apply with respect to any plan year, effective as of the first day of the plan year, if the plan sponsor makes a contribution (in addition to any minimum required contribution for the plan year) equal to the amount sufficient to result in an AFTAP of 60 percent. Section 436(f) sets forth a series of rules relating to contributions required to avoid benefit restrictions. Under sec- tion 436(f)(1), an employer is permit- ted to provide security to the plan (in the form of a surety bond, cash, United States obligations that mature in 3 years or less, or other form satisfactory to the Treasury Department and the parties in- volved) that is treated as an asset of the plan for purposes of determining the plan’s AFTAP. Under section 436(f)(2), if an employer uses the option in section 436(b)(2), 436(c)(2), or 436(e)(2) to make the specified contribution that would avoid a limitation under section 436, the specified contribution must be an actual contribution and the employer may not use a prefunding balance or funding standard carryover balance in lieu of making the specified contribution. Section 436(f)(3) describes certain sit- uations in which an employer is deemed to have made the election in section 430(f)(5) to reduce the plan’s funding standard car- ryover balance or prefunding balance. Such an election has the effect of increas- ing the plan’s AFTAP to avoid a benefit limitation under section 436 (because the result of the election is a higher asset value used to determine the AFTAP). In particular, if the limitation under section 436(d) would otherwise apply to a plan, the plan sponsor is treated as having made an election (a deemed election) to reduce any prefunding balance or funding standard carryover balance by the amount necessary to prevent the benefit limitation from applying. A comparable rule applies to the other benefit limitations under sections 436(b), 436(c), and 436(e), but only in the case of a plan maintained pursuant to a collective bargaining agreement. In any of these cases, the deeming rule applies only if the prefunding balance and funding standard carryover balances are large enough to avoid the application of the section 436 limitation. 1 Pursuant to section 203 of WRERA, for the first plan year beginning during the period beginning on October 1, 2008, and ending on September 30, 2009, section 436(e)(1) is applied by substituting the plan’s adjusted funding target attainment percentagefor the preceding plan year for such percentage for such plan year but only if the adjusted funding target attainment percentage for the preceding plan year is greater. December 14, 20097632009–50 I.R.B. Section 436(h) sets forth a series of presumptions that apply during the portion of the planyear that is before the plan’s enrolled actuary has certified the plan’s AFTAP for the year. Under section 436(h)(1), if a plan was subject to a limitation under section 436(b), 436(c), 436(d), or 436(e) for the plan year preceding the current plan year, the plan’s AFTAP for the current year is presumed to be the same as for the preceding year until the plan’s enrolled actuary certifies the plan’s AFTAP for the current year (or until the first day of the 10 th month, if earlier). Under section 436(h)(3), if any of these limitations did not apply to the plan for the preceding year, but would have applied if the plan’s AFTAP for the preceding year was 10 percentage points lower, the plan’s AFTAP is presumed to be 10 percentage points lower than the AFTAP for the prior plan year as of the first day of the 4th month of the current plan year (and that day is deemed to be the plan’s valuation date for purposes of applying the benefit limitations), unless the plan’s enrolled actuary has certified the plan’s AFTAP for the current year by that day. If the plan’s enrolled actuary has not certified the plan’s AFTAP by the first day of the 10th month of the current plan year, section 436(h)(2) provides that the plan’s AFTAP is conclusively presumed to be less than 60 percent as of that day (and that day is deemed to be the valuation date for purposes of applying the benefit limitations). Under section 436(i), unless the plan provides otherwise, if a limitation on pro- hibited payments or future benefit accruals under section 436(d) or (e) ceases to apply to a plan, those payments and benefit ac- cruals resume, effective as of the day fol- lowing the close of the limitation period. Section 436(j) provides definitions that are used under section 436, includ- ing the definition of AFTAP. In general, a plan’s AFTAP is based on the plan’s FTAP for the plan year. However, the plan’s AFTAP is determined by adding the aggregate amount of purchases of annuities for employees other than highly compensated employees (within the meaning of section 414(q)) made by the plan during the two preceding plan years to the numerator and the denominator of the fraction used to determine the FTAP. In addition, section 436(j)(3) provides a special rule which applies to certain well-funded plans under which the plan’s FTAP for purposes of section 436 (and hence the plan’s AFTAP) is determined by using the plan’s assets without reduction for the prefunding balance and the funding standard carryover balance. Section 436(j)(3)(B) sets forth a transition rule for determining eligibility for this special rule. Section 436(k), as added by WRERA ’08, provides the Secretary with authority to issue special rules for the application of section 436 in the case of a plan that uses a valuation date other than the first day of the plan year. Section 436(m) (designated section 436(k) prior to amendment by WRERA ’08) provides that, for plan years that begin in 2008, the determination of the plan’s FTAP for the preceding year is to be made pursuant to guidance issued by the Secretary. Under section 101(j) of ERISA, as amended by PPA ’06, the plan administra- tor of a single employer plan is required to provide a written notice to participants and beneficiaries within 30 days after cer- tain specified dates. These dates include the date the plan has become subject to a restriction describedintheERISApro- visions that are parallel to Code sections 436(b) and 436(d) and, in the case of a plan that is subject to the ERISA provisions that are parallel to Code section 436(e), the valuation date for the plan year for which the plan’s AFTAP is less than 60 percent (or, if earlier, the date the AFTAP is presumed to be less than 60 percent under the ERISA provisions that parallel the presumption rules in Code section 436(h)). Under section 101(j) of ERISA, the Secretary of the Treasury can specify other dates under which notice is to be provided. Any notice under section 101(j) of ERISA must be provided in writing, except that the notice may be in electronic or other form to the extent that such form is reasonably accessible to the recipient. Sections 430 and 436 generally apply to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution and the application of section 436 is delayed for certain plans in accordance with sections 104 through 106 of PPA ’06. Under section 1107 of PPA ’06, a plan sponsor is permitted to delay adopting a plan amendment pursuant to statutory pro- visions under PPA ’06 (or pursuant to any regulation issued under PPA ’06) until the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, in the case of governmental plans). If sec- tion 1107 of PPA ’06 applies to an amend- ment of a plan, section 1107 provides that the plan does not fail to meet the anti-cut- back requirements of section 411(d)(6) by reason of such amendment, except as oth- erwise provided by the Secretary of the Treasury. Proposed regulations regarding the rules for funding balances under sec- tion 430(f) and the benefit restrictions for underfunded plans under section 436 were published on August 31, 2007 (REG–113891–07, 2007–2 C.B. 821 [72 FR 50544]). The regulations were proposed to apply to plan years beginning on or after January 1, 2008. Comments were received regarding the regulations, and a public hearing was held on January 28, 2008. Proposed regulations regarding the measurement of assets and liabilities for pension funding purposes (generally cov- ering the rules of sections 430(d), (g), (h)(2), and (i)) were published on Decem- ber 31, 2007 (REG–139236–07, 2008–9 I.R.B. 491 [72 FR 74215]). The regula- tions were proposed to apply to plan years beginning on or after January 1, 2009. Comments were received regarding the regulations, and a public hearing was held on May 29, 2008. Notice 2008–21, 2008–7 I.R.B. 431, provides that the regulations under sec- tion 430(f) and 436 will not apply to plan years beginning before January 1, 2009. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. Notice 2008–21 also provides that the IRS will not challenge a reasonable interpretation of an applicable provision under section 430 or 436 for a plan year beginning in 2008 and provides transitional guidance with respect to years before the regulations are effective. On December 23, 2008, WRERA ’08 was enacted. WRERA ’08 contains technical corrections and other changes to the rules of sections 430 and 436, including 2009–50 I.R.B.764December 14, 2009 a modification to the asset valuation method set forth in section 430(g)(3)(B). Notice 2009–22, 2009–14 I.R.B. 741, provides interim rules regarding the asset valuation method as modified by WRERA ’08. Explanation of Provisions I.Overview. These regulations finalize the rules proposed in REG–113891–07, 2008–19 I.R.B. 923 (published August 31, 2007), regarding funding balances and benefit restrictions for underfunded plans, and the rules proposed in REG–139236–07 (published December 31, 2007), regard- ing measurement of assets and liabilities for pension funding purposes, with cer- tain revisions. The Treasury Department and the IRS published proposed regu- lations relating to other portions of the rules under section 430 (including sections 430(a), (c), and (j)) on April 15, 2008 (REG–108508–08, 2009–19 I.R.B. 923 72 FR 20203). Those regulations will be finalized separately. II.Section 1.430(d)–1 Determination of Funding Target and Target Normal Cost. Section 1.430(d)–1 generally adopts the rules set forth in the proposed regulations for determining the funding target and the target normal cost under sections 430(b) and 430(d) for a plan that is not in at-risk status, including rules relating to the appli- cation of actuarial assumptions described in sections 430(h)(1) and 430(h)(4). The final regulations generally adopt the definition of target normal cost for a plan that is not in at-risk status that was set forth in the proposed regulations. How- ever, the final regulations contain modifi- cations to this definition to reflect amend- ments made by WRERA ’08. Under the proposed regulations, plan administrative expenses would not have been taken into account in determining a plan’s target normal cost or funding target for the plan year. Under the final regulations, the target normal cost of a plan for the plan year is the present value (determined as of the valuation date) of all benefits under the plan that accrue during, are earned during, or are otherwise allocated to service for the plan year, subject to certain special adjustments as added by section 101(b)(2) of WRERA ’08. These special adjustments are optional for plan years beginning during 2008, but are required to be made for later plan years. Under the special adjustments, the tar- get normal cost of the plan for the plan year is adjusted (not below zero) by adding the amount of plan-related expenses ex- pected to be paid from plan assets dur- ing the plan year, and by subtracting the amount of any mandatory employee con- tributions expected to be made during the plan year. For this purpose, the final regu- lations reserve the issue of the definition of plan-related expenses, which is expected to be addressed in forthcoming proposed regulations. The regulations clarify that the bene- fits taken into account in determining tar- get normal cost are the benefits that are accrued, earned, or otherwise allocated to service beginning with the first day of the plan year through the valuation date, plus benefits that are expected to accrue, be earned, or be otherwise allocated to ser- vice during the remainder of the plan year. Thus, for a plan with a valuation date other than the first day of the plan year, the ac- tual benefits earned during the part of the year before the valuation date must be in- cluded in the target normal cost. The fi- nal regulations generally adopt the defini- tion of the funding target for a plan that is not in at-risk status as set forth in the pro- posed regulations, butwith a few clarifica- tions that take intoaccount comments re- ceived on the proposed regulations. Under the regulations, the funding target of a plan for the plan year is the present value (deter- mined as of the valuation date) of all bene- fits under the plan that have been accrued, earned, or are otherwise allocated to years of service prior to the first day of the plan year. Under the proposed regulations, the definition of a plan’s FTAP was set forth in proposed §1.430(i)–1. These final regulations include this definition in §1.430(d)–1, and the definition is cross-referenced in §§1.430(i)–1 and 1.436–1. Under the final regulations, ex- cept as otherwise provided in a transition rule, the FTAP of a plan for a plan year is a fraction (expressed as a percentage), the numerator of which is the value of plan assets for the plan year after subtraction of the plan’s funding balances under section 430(f)(4)(B) and §1.430(f)–1, and the de- nominator of which is the funding target of the plan for the plan year (determined without regard to the at-risk rules under section 430(i) and §1.430(i)–1). The regulations provide transition rules for determining a plan’s FTAP for the 2007 plan year. These rules are generally the same as the rules set forth in the proposed regulations under section 430(i) for deter- mining a plan’s FTAP for the last plan year before section 430 applies to the plan. However, the final regulations differ from the proposed regulations in the transition rules that apply for the determination of a plan’s FTAP for a plan year that begins on or after January 1, 2008, but for which section 430 does not apply for purposes of determining the plan’s minimum required contribution. In such a case, the FTAP is determined for that plan year in the same manner as for a plan to which section 430 applies to determine the plan’s minimum required contribution, except that the value of plan assets that forms the FTAP numera- tor is determined without subtraction of the funding standard carryover balance or the credit balance under the funding standard account. These rules are needed to enable a plan described in sections 104 through 106ofPPA’06todiscloseitsFTAPfor purposes of the annual funding notice un- der section 101(f) of ERISA. 2 The regulations adopt the special rule set forth in the proposed regulations for de- termining the FTAP for a new plan. Un- der the final regulations, if the funding tar- get of the plan is equal to zero for the plan year, the FTAP is equal to 100 percent for the plan year. Unlike the proposed regula- tions, the final regulations do not limit the application of this rule to a plan that has no predecessor plan because of concerns that it is not always appropriate to carry over the FTAP from the predecessor plan. The final regulations contain rules re- garding the determination of present value in order to clarify the application of vari- ous rules that were set forth in the proposed regulations. Under the regulations, the 2 Section 430(i)(4) provides for special rules to apply in determining a plan’s FTAP only for plan years beginning during 2008. Accordingly, the regulations limit the use of the special rule under which the plan’s FTAP is determined based on the plan’s current liability to the determination of the plan’s FTAP for the 2007 plan year, even for aplan described in sections 104 through 106 of PPA ’06 for which section 430 does not apply for purposes of determining a plan’s minimum required contribution until a plan year after the 2008 plan year. December 14, 20097652009–50 I.R.B. present value of a benefit with respect to a participant that is taken into account un- der the regulations is determined as of the valuation date by multiplying the amount of that benefit by the probability that the benefit will be paid at a future date and then discounting the resulting product us- ing the appropriate interest rate. The prob- ability that the benefit will be paid with re- spect to the participant at that future date is determined using actuarial assumptions as to the probability of future service, ad- vancement in age, and other events (such as death, disability, termination of employ- ment, and selection of an optional form of benefit) that affect whether the participant or beneficiary will be eligible for the ben- efit and whether the benefit will be paid at that future date. As under the proposed regulations, these regulations provide that the bene- fits taken into account in determining the funding target and the target normal cost are all benefits earned or accrued under the plan that have not yet been paid as of the valuation date, including retirement-type and ancillary benefits. The benefits taken into account are based on the participant’s or beneficiary’s status (such as active employee, vested or partially vested termi- nated employee, or disabled participant) as of the valuation date, and those benefits are allocated to funding target or target normal cost. In order to determine a plan’s funding target and target normal cost, the future benefits to be paid from the plan must be allocated among prior plan years (in which case they will be taken into account in de- termining the funding target for the current plan year), the current plan year (in which case they will be taken into account in de- termining the target normal cost for the current plan year), and future plan years (in which case they will not be taken into ac- count in determining either the funding tar- get or the target normal cost for the current plan year). The final regulations adopt the rules set forth in the proposed regulations for this allocation of benefits where ben- efits are a function of the accrued benefit and where benefits are a function of ser- vice, but the final regulations modify those rules for benefits in other circumstances. To the extent that the amount of a bene- fit that is expected to be paid is a function of the accrued benefit, the amount of the benefit taken into account in determining the funding target for a plan year under the final regulations is determined by applying that function to the accrued benefit as of the first day of the plan year, and the por- tion of the benefit that is taken into account in the target normal cost for the plan year is determined by applying that function to the increase in the accrued benefit during the plan year. To the extent that the amount of a benefit that is expected to be paid is not a function of the accrued benefit but is a function of the participant’s service, the portion of the benefit that is taken into ac- count in determining the funding target for the plan year under the final regulations is determined by applying that function to the participant’s service as of the first day of the plan year, and the portion of the ben- efit that is taken into account in determin- ing the target normal cost for the plan year is determined by applying that function to the increase in the participant’s years of service during the plan year. For a ben- efit that is determined as the excess of a function of the participant’s service over a function of the participant’s accrued bene- fit, the amount of the funding target and the target normal cost attributable to the por- tion of the benefit that is a function of the accrued benefit is determined pursuant to the rules that apply to such benefits and the amount of the funding target and the target normal cost attributable to the net benefit (the excess of the benefit that is a function of service over the benefit that is a function of accrued benefit) is determined pursuant to the rules that apply to a benefit that is a function of service. The proposed regulations included rules for allocating benefits where the amount of a benefit that is expected to be paid is neither a function of the accrued benefit at the time the benefit is expected to be paid nor a function of the partici- pant’s service at that time. Under those rules, the benefit would have been allo- cated proportionately over the years until the participant met the age and service conditions for eligibility for the benefit. A number of commenters suggested that this allocation yielded inappropriate results in certain cases. In response to these com- ments, the final regulations provide that, to the extent the amount of a benefit that is expected to be paid is neither a function of the accrued benefit nor a function of the participant’s service (and is not the excess of a function of the participant’s service over a function of the accrued benefit), the portion of the participant’s benefit that is taken into account in determining the funding target for a plan year is equal to the total benefit multiplied by the ratio of the participant’s years of service as of the first day of the plan year to the years of service the participant will have at the time of the event that causes the benefit to be payable (whether the benefit is expected to be paid at the time of that decrement or at a future time), and the portion of the benefit that is taken into account in deter- mining the target normal cost for the plan year is the increase in the proportionate benefit attributable to the increase in the participant’s years of service during the plan year. Under the proposed regulations, the de- termination of the funding target and the target normal cost would not have taken into account any benefit limitations or an- ticipated benefit limitations under section 436. The reason for this provision was to avoid the circularity in calculations that would result from calculating the funding target based on the imposition of bene- fit restrictions for purposes of determining whether the benefit restrictions need to be imposed. In response to comments, the final regulations contain modifications to the rules regarding recognition of the sec- tion 436 benefit restrictions. In particular, the final regulations provide that benefits that were not paid or accrued prior to the valuation date as a result of the benefit lim- itations are generally not included in the funding target and the target normal cost, but that the determination of the funding target and the target normal cost is not per- mitted to anticipate any future applications of the section 436 benefit restrictions. The final regulations retain the treat- ment from the proposed regulations re- garding the non-recognition of the benefit accrual limitations ofsection 436(e) in de- termining target normal cost. This has the effect of requiring an employer sponsoring a plan that provides for ongoing benefit accruals to include the present value of those accruals in the target normal cost, even if the plan is temporarily not per- mitted to provide for accruals, with the goal of improving the plan’s funded sta- tus. However, if the plan sponsor actually adopts a plan freeze, the target normal cost will reflect that plan freeze. In connection with this provision, the final regulations 2009–50 I.R.B.766December 14, 2009 provide that if the plan contains a provi- sion under which missed benefit accruals are automatically restored once the plan’s AFTAP is above 60 percent (taking into account the missed benefit accruals), then any missed benefit accruals for the prior plan year are taken into account in determining the funding target if, as of the valuation date, the period of the missed benefit accruals is 12 months or less. The final regulations also contain rules regarding restrictions that arise as a result of benefit limitations that are imposed under section 401(a)(32) as a result of a liquidity shortfall and benefit limitations that are imposed under §1.401(a)(4)–5(b) with respect to certain highly compensated employees. As under the proposed regulations, these regulations provide that a plan gen- erally is required to reflect in the plan’s funding target and target normal cost the li- ability for benefits that are funded through insurance contracts held by the plan, and to include the corresponding insurance contracts in plan assets. 3 As an alterna- tive treatment of benefits that are funded through insurance contracts, the regula- tions provide that the plan is permitted to exclude benefits provided under such contracts from the plan’s funding target and target normal cost and to exclude the corresponding insurance contracts from plan assets. This treatment is only avail- able with respect to insurance purchased from an insurance company licensed under the laws of a State and only to the extent that a participant’s or beneficiary’s right to receive those benefits is an irrevoca- ble contractual right under the insurance contract, based on premiums paid to the insurance company prior to the valuation date under the insurance contracts. Thus, the alternative treatment is not available if the plan trustee can surrender a contract to the insurer for its cash value because the participant’s or beneficiary’s rights to receive those benefits is not an irrevocable contractual right. Aplan’s treatment of benefits funded through insurance con- tracts pursuant to either of these methods is part of the plan’s funding method. Ac- cordingly, that treatment can be changed only with the consent of the Commis- sioner. Except as otherwise provided, the de- termination under the regulations of a plan’s funding target and target normal cost for a plan year are determined based on plan provisions that are adopted no later than the valuation date for the plan year and that take effect during that plan year. For example, a plan amendment adopted on or before the valuation date for the plan year that has an effective date occurring in the current plan year is taken into account in determining the funding target and the target normal cost for the current plan year if it is permitted to take effect under the rules of section 436(c) for the current plan year; however, an amendment is not taken into account if it does not take effect until a future plan year. The regulations apply the rules under section 436(c) (as described in section VII.C of this preamble) to determine when an amendment that increases benefits takes effect. For an amendment that decreases benefits, the amendment takes effect under a plan on the first date on which the ben- efits of any individual who is or could be a participant or beneficiary under the plan would be decreased due to the amendment if the individual were on that date to satisfy the applicable conditions for the benefits. The regulations provide that section 412(d)(2) applies for purposes of deter- mining whether a plan amendment is treated as having been adopted on the first day of the plan year (including a plan amendment adopted no later than 2–1/2 months after the close of the plan year). This is consistent with the IRS’s prior interpretations of the pre-PPA ’06 counter- part to section 412(d)(2) (section 412(c)(8) as in effect prior to amendments made by PPA ’06) as set forth in Rev. Rul. 79–325, 1979–2 C.B. 190, which provides that section412(c)(8)appliestoplanamend- ments made during the plan year (as well as to plan amendments made within 2–1/2 months after the end of the plan year). Thus, if an amendment is adopted after the valuation date for a plan year (and no later than 2–1/2 months after the close of the plan year) but takes effect during that plan year, the full increase in liability is taken into account as of the valuation date for that plan year if a section 412(d)(2) election is made, and none of the increase in liability is taken into account as of the valuation date for that plan year if no sec- tion 412(d)(2) election is made. Accordingly, the rule in section 2.02 of Revenue Ruling 77–2, 1977–1 C.B. 120, under which the charges for a plan year are based on a blend of the charges de- termined with and without regard to the plan amendment, and the alternative to that rule in section 3 of Revenue Ruling 77–2, no longer apply. However, the rule in section 2.01 of Revenue Ruling 77–2 (under which a change in benefit struc- ture that does not become effective until a future plan year is disregarded) contin- ues to apply. This is because section 430 does not contain any provision that corre- sponds to section 412(c)(12) as in effect prior to amendments made by PPA ’06 (un- der which the provisions of a collective bargaining agreement were taken into ac- count for funding purposes before the cor- responding plan amendments became ef- fective). The regulations clarify that if an amend- ment is taken into account for a plan year, then the allocation of benefits that is used for purposes of determining the funding target and the target normal cost for the plan year is based on the plan as amended. Thus, the present value of the increase in the participant’s accrued benefit attribut- able to service before the beginning of the plan year is taken into account in the fund- ing target for the year. 4 To address a concern regarding avoid- ance of the benefit restrictions under sec- tion 436(c), the final regulations contain a new rule regarding amendments adopted after the valuation date that increase the target normal cost for the plan year. Un- der this rule, in any case in which an in- crease in the target normal cost as the re- sult of a plan amendment made after the valuation date would have caused the ben- efit restrictions of section 436(c) to apply if the increase were included in the plan’s funding target (after taking into account all unpredictable contingent event bene- 3 The PBGC has informed the IRS and Treasury Department that this inclusion of insurance contracts in plan assets and the associated benefit liabilities in the funding target does not apply for purposes of Title IV of ERISA and its regulations,which generally require that, if an insurer makes an irrevocable commitment to provide all benefit liabilities with respect to an individual, those benefits cease to be benefit liabilities of the plan, the individual is no longer a plan participant, and theirrevocable commitment is excludedfrom plan assets. 4 The regulations do not address the effect on the determination of a plan’s funding shortfall of an amendment that is permitted to take effect on accountof a contribution under section 436(c)(2). December 14, 20097672009–50 I.R.B. fits permitted to be paid for unpredictable contingent events thatoccurred during the current plan year and plan amendments that went into effect in the current plan year), the amendment must be taken into account in determining the plan’s funding target and target normal cost for the plan year. This rule is necessary to prevent the avoidance of the benefit restrictions of sec- tion 436(c) by means of a mid-year plan amendment that purports not to increase benefits earned prior to the beginning of the plan year (so that the amendment does not increase the funding target for the plan year and the amount required to “buy up” the amendment under section 436(c)(2) by paying the increase to the funding target on account of the amendment would be zero). Like the proposed regulations, the regu- lations require all currently employed plan participants, formerly employed plan par- ticipants (including retirees and terminated vested participants), and other individu- als currently entitled to benefits under the plan to be included in the valuation. Un- like §1.412(c)(3)–1(c)(3)(ii), the regula- tions do not permit exclusion from the val- uation of those plan participants who could have been excluded from participation in the plan under the rules of section 410(a). However, the final regulations adopt the rules of §1.412(c)(3)–1(c)(3)(iii) (relating to the exclusion of terminated employees who do not have a vested benefit under the plan and whose service might be taken into account in future years upon return to service, but only if the plan’s experi- ence as to separated employees returning to service has been such that the exclusion would not be unreasonable) and the rules of §1.412(c)(3)–1(d)(2) (under which the future participation in the plan of current employees who are not yet participants is permitted to be anticipated). Whether for- mer employees who are terminated with partially vested benefits are assumed to return to service is determined under the same rules that apply to former employees without vested benefits. The regulations provide that the de- termination of any present value or other computation undersection 430 must be made on the basis of actuarial assump- tions and a funding method. Except as specifically provided, the same actuarial assumptions and funding method must be used for all computations under sections 430 and 436. The final regulations cross reference other regulations for the details of the statutorily specified interest rates, mortal- ity tables, and actuarial assumptions that apply to plans in at-risk status. Under the final regulations, with respect to the actu- arial assumptions used for the plan other than those that are specified by statute, each of those actuarial assumptions must be reasonable (taking into account the experience of the plan and reasonable expectations). In addition, the actuarial assumptions (other than the statutorily specified assumptions), in combination, must offer the plan’s enrolled actuary’s best estimate of anticipated experience un- der the plan. The final regulations provide that, in the case of a plan which has fewer than 100 participants and beneficiaries who are not in pay status, the actuarial assumptions are permitted to assume no pre-retirement mortality, but only if that assumption would be a reasonable as- sumption. The regulations provide that actuarial assumptions established for a plan year cannot subsequently be changed for that plan year unless the Commissioner deter- mines that the assumptions that were used are unreasonable. Similarly, the regula- tions provide that a funding method es- tablished for a plan year cannot subse- quently be changed for that plan year un- less the Commissioner determines that the use of that funding method for that plan year is impermissible. For this purpose, actuarial assumptions and funding meth- ods are established by the timely comple- tion (and filing, if required) of the actuar- ial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Informa- tion” of Form 5500,“Annual Return/Re- port of Employee Benefit Plan”)for a plan year under section 6059. If the Schedule SB is not completed (and filed, if required) by the deadline, then the prior plan year ac- tuarial assumptions and methods will con- tinue to apply, unless the Commissioner permits or requires other actuarial assump- tions or another funding method permitted under section 430 to be used for the current plan year. The regulations provide that a plan’s funding method includes not only the over- all funding method used by the plan, but also each specific method of computation used in applying the overall method. How- ever, the choice of which actuarial assump- tions are appropriate to the overall method or to the specific method of computation is not a part of the funding method. The assumed earnings rate used for purposes of determining the actuarial value of assets under section 430(g)(3)(B) is treated as an actuarial assumption, rather than as part of the funding method. In accordance with section 430(h)(4), the regulations provide rules relating to the probability that benefit payments will be paid as single sums or other optional forms under a plan and the impact of that proba- bility on the determination of the present value of those benefit payments under sec- tion 430. In general, any determination of present value or any other computa- tion under the regulations must take into account the probability that future bene- fit payments under the plan will be made in the form of optional forms of bene- fits provided under the plan (including sin- gle-sum distributions), determined on the basis of the plan’s experience and other re- lated assumptions, and any difference in the present value of future benefit pay- ments that results from the use of actuarial assumptions in determining benefit pay- ments in any such optional form of benefits that are different from those prescribed by section 430(h). The proposed regulations would have provided that, in the case of a distribution that is subject to section 417(e)(3) and that is determined using the applicable interest rates and applicable mortality table under section 417(e)(3), the computation of the present value of that distribution is treated as having taken into account any difference in present value that results from the use of actuarial assumptions that are different from those prescribed by section 430(h) if the present value of the distribution is de- termined by valuing, using special actuar- ial assumptions, the annuity (either the de- ferred or immediate annuity) that is used under the plan to determine the amount of the distribution. The final regulations adopt that method and clarify that its use is mandatory for benefits determined using the section 417(e) actuarial assumptions. Under this special computation, for the period beginning with the annuity starting date for the distribution, the applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the val- uation date is substituted for the mortality 2009–50 I.R.B.768December 14, 2009 table under section 430(h)(3) that would otherwise be used. In determining the present value of a distribution, the final regulations adopt the rules in the proposed regulations and provide that if a plan uses the generational mortality tables under §1.430(h)(3)–1(a)(4) or §1.430(h)(3)–2, the plan is permitted to use a 50–50 male-female blend of the annuitant mor- tality rates under the §1.430(h)(3)–1(a)(4) generational mortality tables in lieu of the applicable mortality table under section 417(e)(3) that would apply to a distribu- tion with an annuity starting date occurring on the valuation date. In addition, under this special compu- tation, the valuation interest rates under section 430(h)(2) are used for purposes of discounting the projected annuity pay- ments from their expected payment dates to the valuation date (rather than the inter- est rates under section 417(e)(3) which the plan uses to determine the amount of the benefit). However, a plan is permitted to make adjustments to the interest rates in order to reflect differences between the phase-in of the section 430(h)(2) segment rates un- der section 430(h)(2)(G) and the adjust- ments to the segment rates under section 417(e)(3)(D)(iii). The proposed regulations would have provided that, in the case of a distribu- tion that is subject to section 417(e)(3) but is determined as the greater of the bene- fit determined using the assumptions re- quired under section 417(e)(3) and some other actuarial basis, the computation of present value must take into account the extent to which the present value of the dis- tribution is greater than the present value determined using this annuity substitution method. Commenters requested a simi- lar rule where the value of the distribu- tion is lower because of the use of differ- ent actuarial assumptions that are not more favorable, citing the situation where sec- tion 415 may require the use of less favor- able actuarial assumptions. In response to these concerns, the final regulations pro- vide that, if a distribution that is subject to section 417(e)(3) is determined on a ba- sis other than using the applicable inter- est rates and the applicable mortality ta- ble under section 417(e)(3), then the com- putation of present value must take into account the extent to which the present value of the distribution is different from the present value determined using this an- nuity substitution method. As under the proposed regulations, the final regulations provide that, in the case of an applicable defined benefit plan described in section 411(a)(13)(C), the amount of a future distribution is based on the amount determined by projecting the future interest credits or equivalent amounts under the plan’s interest credit- ing rules using actuarial assumptions that satisfy the requirements of the regula- tions. Thus, the present value of a future distribution is not necessarily the current amount of a participant’s hypothetical account balance. Commenters requested that various safe harbors be provided for making this determination. The IRS and the Treasury Department believe that this determination should be made using the actuary’s best estimate of the projected future interest credits, and that the use of broadly applicable safe harbors for this purpose is not appropriate. In the case of a single-sum distribu- tion determined under the rules of sec- tion 411(a)(13)(A), the amount of the fu- ture distribution is equal to the projected account balance at the expected date of payment calculated in accordance with the regulations. In the case of a distribution determined as an annuity, the regulations provide that the amount of the future dis- tribution must be determined by convert- ing the projected account balance to an an- nuity using the plan’s annuity conversion provisions and actuarial assumptions that satisfy the requirements of the regulations. The regulations provide that, if the plan bases the conversion of the projected account balance to an annuity using the applicable interest rates and applicable mortality table under section 417(e)(3), the future annuity is determined by di- viding the projected account balance (or accumulated percentage of final average compensation) by an annuity factor corre- sponding to the assumed form of payment using, for the period beginning with the annuity starting date,the current applica- ble mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date (in lieu of the mortality table under section 430(h)(3) that would otherwise be used) and the valuation in- terest rates under section 430(h)(2) (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit). In determining the amount of a future annuity for this pur- pose, if a plan uses the generational mor- tality tables under §1.430(h)(3)–1(a)(4) or §1.430(h)(3)–2, the plan is permit- tedtousea50–50male-femaleblendof the annuitant mortality rates under the §1.430(h)(3)–1(a)(4) generational mortal- ity tables in lieu of the applicable mortality table under section 417(e)(3) that would applytoadistributionwithanannuity starting date occurring on the valuation date. In the case of a plan that determines an annuity under the regulations using a variable interest rate or rates other than the applicable interest rates under section 417(e)(3), the amount of the annuity must be based on actuarial assumptions that satisfy the requirements of the regulations. Some commenters maintained that unpredictable contingent event benefits should not be taken into account for min- imum funding purposes before the oc- currence of the unpredictable contingent event. The final regulations provide that any determination of present value or any other computation under this section must take into account, based on information as of the valuation date, the probability that future benefits (or increased benefits) un- der the plan will become payable due to the occurrence of an unpredictable contingent event (as described in §1.436–1(j)(9)). However, if, as of the valuation date, the likelihood of the occurrence of the event isde minimis, the regulations permit the use of a zero probability of the occurrence of the event. The regulations provide that any rea- sonable technique can be used to deter- mine the present value of the benefits ex- pected to be paid during a plan year, based on the interest rates and mortality assump- tions applicable for the plan year. For example, the present value of a monthly retirement annuity payable at the begin- ning of each month can be determined us- ing estimating techniques such as the stan- dard actuarial approximation that reflects 13/24ths of the discounted expected pay- ments for the year as of the beginning of the year and 11/24ths of the discounted ex- pected payments for the year as of the end of the year; or by assuming that the pay- ment is made in the middle of the year. In the case of a participant for whom there is a less than 100 percent probability that December 14, 20097692009–50 I.R.B. the participant will terminate employment during the plan year, for purposes of de- termining the benefits expected to accrue, be earned, or otherwise allocated to ser- vice during the plan year (which are used to determine the target normal cost), it is permissible to assumethe participant will not terminate during the plan year, unless using this method of calculation would be unreasonable. Like the proposed regulations, the final regulations reflect the provisions of sec- tion 430(h)(5), requiring approval of the Commissioner for changes in actuarial as- sumptions for certain large plans. Under the regulations, except as otherwise pro- vided, any change in actuarial assumptions used to determine a plan’s funding target for a plan year cannot be changed from the actuarial assumptions that were used for the preceding year without the approval of the Commissioner if the plan is spon- sored by a member of a controlled group which maintains plans with over $50 mil- lion in unfunded vested benefits and the change in assumptions results in a decrease in the plan’s funding shortfall (within the meaning of section 430(c)(4)) for the cur- rent plan year (disregarding the effect on the plan’s funding shortfall resulting from changes in interest and mortality assump- tions) that exceeds $50,000,000, or that ex- ceeds $5,000,000 and is 5 percent or more of the funding target of the plan before such change. The proposed regulations did not con- tain an exception to this rule for a plan exit- ing at-risk status. Commenters maintained that a plan exiting at-risk status should be able to resume use of its previously used actuarial assumptions without obtain- ing the Commissioner’s approval. To ad- dress these concerns, the final regulations provide that a plan that is not in at-risk sta- tus for the current plan year and that was in at-risk status for the prior plan year (but not for a period of 5 or more consecutive plan years) is granted automatic approval to use the actuarial assumptions that were applied before the plan entered at-risk sta- tus and that were used in combination with the required at-risk assumptions during the period the plan was in at-risk status. These regulations provide automatic approval for changes in funding method for the first plan year section 430 applies to determine the minimum required con- tribution for the plan (the first plan year beginning in 2008, or a later year for plans described in sections 104 through 106 of PPA ’06). The regulations also provide automatic approval for changes in funding method for the first plan year that a plan applies all the provisions of the regula- tions under section 430(d), section 430(f), section 430(g), section 430(i), and section 436 (which could be the first plan year beginning on or after January 1, 2010 or an earlier plan year). Thus, a plan can receive automatic approval for a change in funding method for the first plan year beginning on or after January 1, 2009, if it applies all of these regulation provisions, without regard to whether it applies the provisions of §1.430(h)(2)–1 for that plan year. In addition, the regulations provide automatic approval for a change of fund- ing method that is necessary to reflect the new allocation rules for benefits under §1.430(d)–1(c)(1)(ii). III.Section 1.430(f)–1 Effect of Prefunding Balance and Funding Standard Carryover Balance. Section 1.430(f)–1 of these regulations provides rules relating to the application of prefunding and funding standard carryover balances under section 430(f). The regula- tions generally adopt the rules that were set forth in the corresponding proposed regu- lations. Subject to the limitations otherwise pro- vided, the regulations provide that in the case of any plan year with respect to which the plan sponsor elects to use all or a por- tion of the prefunding balance or the fund- ing standard carryover balance to offset the minimum required contribution for the plan year, the minimum required contribu- tion for the plan year (determined after tak- ing into account any waiver under section 412(c)) is offset as of the valuation date for the plan year by the amount so used. The regulations also provide rules that ap- plywheretheplansponsorelectstouseall or a portion of the prefunding balance or the funding standardcarryover balance to satisfy the requirement to make quarterly contributions under section 430(j)(3) that are due after the valuation date. Rules with respect to use of the prefunding balance or funding standard carryover balance to satisfy quarterly contribution requirements with respect to installments due before the valuation date are expected to be addressed in future proposed regulations. Under the regulations, a plan sponsor is permitted to elect to maintain a prefund- ing balance for a plan. A prefunding bal- ance maintained for a plan consists of a be- ginning balance of zero, increased by the amount of excess contributions to the ex- tent the employer elects to do so, and de- creased (but not below zero) by the sum of, as of the first day of a plan year, any amount of the prefunding balance that was used to offset the minimum required con- tribution of the plan for the preceding plan year and any reduction in the prefunding balance for the plan year. The plan spon- sor’s initial election to add to the prefund- ing balance constitutes an election to main- tain a prefunding balance (so that no spe- cial election is necessary to establish a pre- funding balance). The prefunding balance is adjusted further for actual investment re- turn for the plan year. The regulations provide that if the plan sponsor elects to add to the plan’s prefund- ing balance, as of the first day of a plan year, the prefunding balance is increased by the amount so elected by the plan spon- sor. The amount added to the prefunding balance cannot exceed the present value of the excess contribution for the preceding plan year increased for interest. The present value of the excess contri- bution for the preceding plan is the excess, if any, of the present value of the employer contributions (other than contributions to avoid or terminate section 436 benefit lim- itations) to the plan for such preceding plan year over the minimum required contribu- tion for such preceding plan year. In addi- tion, a contribution for a plan year to cor- rect an unpaid minimum required contri- bution for a prior plan year is not treated as part of the present value of excess con- tributions. This present value is increased with interest from the valuation date for the preceding plan year to the first day of the current plan year. The regulations pro- vide that the plan’s effective interest rate under section 430(h)(2)(A) for the preced- ing plan year is generally used to calculate the present value of the contributions for the preceding plan year and for adjusting the excess amount. The proposed regulations would have prohibited an employer from adding to the prefunding balance any amount of contri- butions that are excess contributions for a 2009–50 I.R.B.770December 14, 2009 plan year solely by reason of a reduction in the minimum required contribution for the year through the use of the prefunding balance or funding standard carryover bal- ance. This rule was intended to preclude an employer from avoiding the require- ment to adjust the prefunding balance and funding standard carryover balance by the actual rate of return on plan assets in the situation where the plan assets have expe- rienced a loss (or a rate of return that is lower than the effective interest rate that is used for interest adjustment with respect to minimum required contributions for the plan year). Commenters argued that this rule was unwarranted and would prevent plan sponsors from adding excess contri- butions to the prefunding balance in situ- ations where balance amounts were used to offset minimum contributions earlier for reasons other than interest arbitrage. The final regulations permit an excess contribution to be added to the prefunding balance for a plan year notwithstanding that the amount is an excess contribution solely because an election is made for that plan year to use the funding standard carryover balance or prefunding balance to offset minimum required contributions (or required installments), but provide that the interest adjustment with respect to such a contribution is made using the plan’s actual investment experience for the plan year, rather than the effective interest rate under section 430(h)(2)(A). Thus, the funding standard carryover balance and prefunding balance are adjusted with the plan’s actual investment return when the balances are not actually used to satisfy the minimum contribution requirement for a plan year, regardless of whether the plan sponsormakesanelectiontousethebal- ance to offset the minimum contribution requirement and subsequently replenishes the prefunding balance. The proposed regulations would have provided that the plan sponsor is per- mitted to maintain a funding standard carryover balance for a plan that had a positive balance in the funding standard account under section 412(b) (as in ef- fect prior to PPA ’06) as of the end of the plan’s pre-effective plan year (the plan year immediately preceding the first plan year that section 430 applies for purposes of determining the minimum required contribution for the plan). Some commenters suggested that no formal election should be required in order to maintain a funding standard carryover balance. In response, the regulations provide that a funding standard carryover balance is automatically established for a plan that had a positive balance in the funding standardaccount under section 412(b) (as in effect prior to PPA ’06) as of theendofthepre-effectiveplanyearfor the plan. A plan sponsor that does not wish to have the funding standard carryover balance established can elect to reduce it to zero. The final regulations provide that the plan’s funding standard carryover balance as of the beginning of the first effective plan year (the first plan year beginning on or after the date section 430 applies for purposes of determining the minimum re- quired contribution for the plan) is the pos- itive balance in the funding standard ac- count under section 412(b) (as in effect prior to PPA ’06) as of the end of the pre-effective plan year for the plan. For subsequent plan years, the funding stan- dard carryover balance is decreased (but not below zero) by the sum of, as of the first day of each plan year, any amount of the funding standard carryover balance that was used to offset the minimum re- quired contribution of the plan for the pre- ceding plan year and any reduction in the funding standard carryover balance for the plan year. The regulations also provide that the funding standard carryover bal- ance is adjusted further to reflect the actual rate of return on plan assets for the preced- ing plan year. For both the funding standard carry- over balance and the prefunding balance, the regulations provide that the adjustment for investment return is applied to the bal- ance as of the beginning of the preceding plan year after subtracting amounts used to offset the minimum required contribu- tion for the preceding plan year and after any reduction of balances for that preced- ing plan year. For this purpose, the actual rate of return on plan assets for the preced- ing plan year is determined on the basis of fair market value and must take into ac- count the amount and timing of all contri- butions, distributions, and other plan pay- ments made during that period. If a plan’s valuation date is not the first day of the plan year, then, for purposes determining a plan’s prefunding balance and funding standard carryover balance as of the valuation date, the plan’s prefunding balance and funding standard carryover balance (if any) are increased to the valua- tion date using the plan’s effective interest rate under section 430(h)(2)(A) for the plan year. Any elections to reduce the prefunding balance and funding standard carryover balance, to use the prefunding balance and funding standard carryover balance to offset the minimum required contribution for the year, or to add to the prefunding balance occur as of the valua- tion date for the plan year. After the elec- tions are applied as of the valuation date, the resulting amount of the prefunding balance and funding standard carryover balance is adjusted to the first day of the plan year (discounted using the effective interest rate under section 430(h)(2)(A) for that year) before applying the adjust- ments for investment experience for the plan year. The regulations provide that, in the case of any plan with a prefunding balance or a funding standard carryover balance, the amount of those balances must be sub- tracted from the value of plan assets for purposes of sections 430 and 436, except as otherwise provided in the regulations. For purposes of determining whether a plan is exempt from the requirement to establish a new shortfall amortization base under section 430(c)(5), the amount of the prefunding balance is subtracted from the value of plan assets only if an election to use all or any portion of the prefunding balance to offset the minimum required contribution is made for the plan year. In addition, for this purpose, the funding standard carryover balance is not subtracted from the value of plan assets regardless of whether any portion of either the funding standard carryover balance or the prefunding balance is used to offset the minimum required contribution for the plan year. If there is in effect for a plan year a bind- ing written agreement with the Pension Benefit Guaranty Corporation (PBGC) which provides that all or a portion of the prefunding balance or funding standard carryover balance (or both balances) is not available to offset the minimum required contribution for a plan year, the regula- tions provide that the specified amount is not subtracted from the value of plan assets for purposes of determining the funding shortfall under section 430(c)(4). December 14, 20097712009–50 I.R.B. For this purpose, an agreement with the PBGC is taken into account with respect to a plan year only if the agreement was executed prior to the valuation date for the plan year. To address questions raised by com- menters, the final regulations provide ordering rules regarding the application of use and reduction elections with respect to prefunding and funding standard car- ryover balances. The regulations provide that the amount of prefunding balance or funding standard carryover balance that maybeusedtooffsettheminimumre- quired contribution for the plan year must take into account any decrease in those balances which result from a prior elec- tion either to use the prefunding balance or funding standard carryover balance under section 430(f) or to reduce those balances under section 430(f) (including deemed elections under section 436(f)(3) and §1.436–1(a)(5)). The regulations describe the appli- cation of the ordering rules of section 430(f)(5)(A). Underthese rules, an elec- tion to reduce the funding standard car- ryover balance or prefunding balance is deemed to occur on the valuation date for the plan before any election to use the balance to offset the minimum required contribution for the current year. Thus, if an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for the plan year (including an election to satisfy the quarterly contribution re- quirement) has been made prior to the election to reduce the prefunding balance or funding standard carryover balance, then the amount available for use to offset the otherwise applicable minimum re- quired contribution for the plan year will be retroactively reduced and may result in a missed quarterly contribution. If an election is made to reduce the pre- funding balance or funding standard car- ryover balance or to use the prefunding balance or funding standard carryover bal- ance to offset the minimum required con- tribution with respect to a plan year, a spe- cial rule applies to determine the amount of remaining prefunding balance or fund- ing standard carryover balance that may be used to offset the minimum required con- tribution for the prior plan year. Under this special rule, an election to reduce the prefunding balance or the funding standard carryover balance that is made with respect to the later plan year is taken into account by decreasing the funding standard carry- over balance or prefunding balance as of the valuation date for the prior plan year by the prior plan year equivalent of the current year election. The prior plan year equiv- alent of the current year election is deter- mined by dividing the amount of the cur- rent year election by a number equal to 1 plus the rate of investment return for the prior plan year. The funding standard car- ryover balance and prefunding balance are nonetheless adjusted in accordance with the rules described above, after adjusting for all elections for that prior year. Thus, the amount used to offset the minimum re- quired contribution forthe earlier plan year is subtracted from the prefunding balance or funding standard carryover balance as of the valuation date for that year prior to the adjustment for investment return for that plan year, and the amount by which the prefunding balance or funding standard carryover balance is decreased for the sec- ond year is based on the elections made for the second year. Accordingly, under the final regula- tions, a prefunding balance or a funding standard carryover balance is maintained in a manner that tracks the way the bal- ances are reported on Schedule SB, “Sin- gle-Employer Defined Benefit Plan Actu- arial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”. Thus, the balances at the beginning of the year are increased (by investment expe- rience or by addition to the prefunding balance) or decreased (by elections to use or reduce the balances or by investment experience) at the first day of the next plan year. These increases and decreases are made before any elections (whether made or deemed) are applied for the next plan year. To the extent that a plan has a fund- ing standard carryover balance greater than zero, the regulations provide that no amount of the plan’s prefunding bal- ance may be used to offset the minimum required contribution. Thus, a plan’s fund- ing standard carryover balance must be exhausted before the plan’s prefunding balance may be used to offset the mini- mum required contribution. The regulations provide that an elec- tion to use the prefunding balance or fund- ing standard carryover balance to offset the minimum required contribution is not available for a plan year if the plan’s prior plan year funding ratio is less than 80 per- cent. The plan’s prior plan year funding ratio generally is equal to the fraction (ex- pressed as a percentage), the numerator of which is the value of plan assets on the valuation date for the preceding plan year, reduced by the amount of any prefunding balance (but not the amount of any fund- ing standard carryover balance), and the denominator of which is the funding target of the plan for the preceding plan year (de- termined without regard to the at-risk rules of section 430(i)(1)). If the prior plan year was the first year of a new plan and the funding target for the prior plan year was zero, the regulations provide that the prior plan year’s funding ratio is deemed to be 80 percent for pur- poses of this limitation on the use of the prefunding or funding standard carryover balances. Thus, the sponsor of a new plan that has no funding target in its first year can use a prefunding balance that resulted from first year contributions in excess of the target normal cost in order to offset the otherwise minimum required contribu- tion in the second year of the plan. Com- mentators requested rules with respect to plan mergers and spin-offs. The IRS and the Treasury Department expect to address these issues in future proposed regulations. The regulations provide that a plan sponsor may make an election for a plan year to reduce any portion of a plan’s prefunding balance and funding standard carryover balance. If such an election is made, the amount of those balances that must be subtracted from the value of plan assets will be smaller and, accordingly, the value of plan assets taken into account for purposes of sections 430 and 436 will be larger. This election to reduce a plan’s prefunding balance and funding standard carryover balance is taken into account in the determination of plan assets for the plan year and applies for all purposes under sections 430 and 436, including for purposes of determining the plan’s prior plan year funding ratio for the fol- lowing plan year. Section 436(f)(3) and §1.436–1(a)(5) provide a rule under which the plan sponsor is deemed to make this election. To the extent that a plan has a funding standard carryover balance greater than zero, no election is permitted to be made that reduces the plan’s prefunding 2009–50 I.R.B.772December 14, 2009 balance. Thus, a plan must exhaust its funding standard carryover balance before it is permitted to make an election to re- duce its prefunding balance. Like the proposed regulations, these regulations provide that any election un- der this section by the plan sponsor must be made by providing written notifica- tion of the election to the plan’s enrolled actuary and the plan administrator. The written notification must set forth the rel- evant details of the election, including the specific dollar amounts involved in the election. Thus, a conditional or for- mula-based election generally does not satisfy the requirements. The final regulations provide rules re- garding the timing of elections to use or reduce the prefunding balance or funding standard carryover balance that are gener- ally the same as under the proposed reg- ulations. Under the final regulations, any election to add to the prefunding balance or to use the prefunding balance or fund- ing standard carryover balance to offset the minimum required contribution for a plan year must be made no later than the last date for making the minimum required contribution for the plan year as described in section 430(j)(1). Any election to re- duce the prefunding balance or funding standard carryover balance for a plan year (for example, in order to avoid a benefit re- striction under section 436) must be made by the end of the plan year to which the election relates. These timing rules estab- lish the latest date that an election can be made. An employer is permitted to make an earlier election, and, in certain circum- stances, may need to make such an earlier election in order to timely satisfy a quar- terly contribution requirement under sec- tion 430(j). In response to comments received on the desirability of standing elections, the final regulations permit a plan sponsor to provide a standing election in writing to the plan’s enrolled actuary to use the fund- ing standard carryover balance and the pre- funding balance to the extent needed to avoid an unpaid minimum required contri- bution under section 4971(c)(4) taking into account any contributions that are or are not made. In addition, the regulations al- low a plan sponsor to provide a standing election in writing to the plan’s enrolled actuary to add the maximum amount pos- sible each year to the prefunding balance. 5 Any election made pursuant to a stand- ing election is deemed to occur on the last day available to make the election for the plan year. The regulations provide that any standing election remains in effect for the plan with respect to the enrolled actuary named in the election, unless the standing election is revoked by notice to the plan’s enrolled actuary and the plan administra- tor on or before the date the corresponding election is deemed to occur, or the plan’s enrolled actuary who signs the Schedule SB is not the enrolled actuary named in the standing election. If there is a change in enrolled actuary for the plan year which would result in a revocation of the standing election, then the plan sponsor may rein- state the revoked standing election by pro- viding a replacement to the new enrolled actuary by the due date of the Schedule SB of Form 5500. In general, a plan sponsor’s election with respect to the plan’s prefunding balance or funding standard carryover balance is irrevocable (and must be uncon- ditional). However, an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for a plan year (in- cluding an election to satisfy the quarterly contribution requirements for a plan year) is permitted to be revoked to the extent the amount the plan sponsor elected to use to offset the minimum contribution re- quirements exceeds the minimum required contribution for a plan year (determined without regard to the offset), if and only if the election is revoked by providing written notification of the revocation to the plan’s enrolled actuary and the plan administrator by the end of the plan year (or, for plans with a valuation date other than the first day of the plan year, the deadline for contributions for the plan year as described in section 430(j)(1)). The final regulations defer the deadline for making this revocation for the first plan year beginning in 2008 until the due date (including extensions) of the Schedule SB, “Single-Employer Defined Bene- fit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan.” Thus, a plan sponsor that made an election to use the funding stan- dard carryover balance for the first plan year beginning in 2008 to offset the min- imum required contribution for that plan year determined prior to the enactment of WRERA ’08 has an opportunity to revoke that election to the extent it exceeds the minimum required contribution for that plan year taking into account WRERA ’08. However, plan sponsors should note that any such revocation made after the enrolled actuary has certified the AFTAP for the plan year, could result in a change in the AFTAP for that plan year, which could be a material change. If such an excess election is not timely revoked, it has the same effect as an election to reduce the applicable balance to the extent of the excess. The proposed regulations provided a transition rule for determining a plan’s funding ratio for the pre-effective plan year (that is, the plan’s prior year funding ratio with respect to the plan’s first effec- tive plan year). These regulations adopt this transition rule, but limit its application to the 2007 plan year (rather than apply it to a later plan year for a plan described in sections 104 through 106 of PPA ’06). Under the regulations, a plan’s funding ratio for the plan year preceding the first plan year beginning on or after January 1, 2008 (the “2007 plan year”) is generally the same as the computation of FTAP for the 2007 plan year. However, the assets are determined without subtracting the funding standard account balance from the plan assets. IV.Section 1.430(g)–1 Valuation Date and Valuation of Plan Assets. Section 1.430(g)–1 provides rules relat- ing to a plan’s valuation date and the valua- tion of a plan’s assets for a plan year under section 430(g). The rules under the regula- tions relating to valuation dates do not re- flect significant changes from those under the proposed regulations. The regulations provide that the determination of the fund- ing target, target normal cost, and value of plan assets for a plan year is made as of the valuation date of the plan for that plan year. Except in the case of a small plan, the valuation date of a plan for any plan year 5 The regulations do not provide for a standing election to be made with respect to quarterly contributions. The issue of standing elections with respect to quarterly contributions will be considered in conjunction with future regulations regarding quarterly contributions. December 14, 20097732009–50 I.R.B. is the first day of the plan year. For this purpose, a small plan is defined as a plan that, on each day during the preceding plan year, had 100 or fewer participants (includ- ing active and inactive participants and all other individuals entitled to future bene- fits). For purposes of making this deter- mination, all defined benefit plans (other than multiemployer plans as defined in section 414(f)) maintained by an employer or members of the controlled group are treated as one plan, but only participants with respect to that employer are taken into account. The regulations provide that, in the case of the first plan year of any plan, this exception for small plans is applied by taking into account the number of partici- pants that the plan is reasonably expected to have on each day during the first plan year. The regulations provide that the selec- tion of a plan’s valuation date is part of the plan’s funding method and, accordingly, may only be changed with the consent of the Commissioner. However, a change of a plan’s valuation date that is required by section 430 is treated as having been ap- proved by the Commissioner and does not require the Commissioner’s prior specific approval. Under the regulations, the value of plan assets for purposes of section 430 is deter- mined in one of two ways: as the fair mar- ket value of plan assets on the valuation date, or as the average of the fair market values of assets on the valuation date and the adjusted fair market value of assets de- termined for one or more earlier determi- nation dates, subject to a 90 to 110 percent corridor. The method of determining the value of assets is part of the plan’s fund- ing method and, accordingly, may only be changed with the consent of the Commis- sioner. The regulations provide that the fair market value of an asset is determined as the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Except as otherwise provided by the Com- missioner, any guidance on the valuation of insurance contracts under Subchapter D of Chapter 1 of the Internal Revenue Code applies for purposes of the regulations. Such guidance has been issued in Revenue Procedure 2005–25, 2005–1 C.B. 962 and Revenue Procedure 2006–13, 2006–1 C.B. 315. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bul- letin. The regulations provide rules for the treatment of contributions that are made after the valuation date for a plan year that are attributable to a prior plan year. These rules are generally the same as under the proposed regulations. Under these rules, only the present value of the contributions (discounted using the effective interest rate for the prior plan year) is included in the value of plan assets. The final regulations clarify that a contribution for a prior plan year is taken into account only if the con- tribution is made by the deadline for con- tributions for the immediately preceding plan year under section 430(j). However, for the first plan year that begins on or af- ter January 1, 2008, any such prior plan year contribution is taken into account at the full value without a present value dis- count, provided it is made by the deadline for contributions under section 412(c)(10), as in effect before amendment by PPA ’06. The regulations also provide rules for the treatment of a contribution that is made before the valuation date of the plan year to which it is attributable. Such a con- tribution (and any interest on the contri- bution for the period between the contri- bution date and the valuation date, deter- mined using the effective interest rate un- der section 430(h)(2)(A) for the plan year) must be subtracted from plan assets in de- termining the value of plan assets as of the valuation date. If the result of this subtrac- tion is a number less than zero, the value of plan assets as of the valuation date is equal to zero. Subject to the plan asset corridor rules, a plan is permitted to determine the value of plan assets on the valuation date as the average of the fair market value of assets on the valuation date and the adjusted fair market value of assets determined for one or more earlier determination dates. The regulations require that the period of time between each determination date (treating the valuation date as a determination date) must be equal and that the period of time cannot exceed 12 months. In addition, the earliest determination date with respect to a plan year cannot be earlier than the last day of the 25th month before the valuation date of the plan year (or a similar period in the case of a valuation date that is not the first day of a month). In a typical sit- uation, the earlier determination dates will be the two immediately preceding valua- tion dates. However, these rules also per- mit the use of more frequent determination dates (for example, monthly or quarterly determination dates). The regulations provide that the ad- justed fair market value of plan assets for a prior determination date is the fair market value of plan assets on that date, increased for contributions included in the plan’s as- set balance on the valuation date that were not included in the plan’s asset balance on the earlier determination date, reduced for benefits and all other amounts paid from plan assets during the period beginning with the prior determination date and end- ing immediately before the valuation date, and adjusted for expected earnings. The fair market value of assets as of a deter- mination date includes any contribution for a plan year that ends with or prior to the determination date that is receivable as of the determination date (but only if the contribution is actually made within 81/2 months after the end of the applicable plan year). For this purpose, the present value of a contribution receivable for the applicable plan year is determined using the effective interest rate under section 430(h)(2)(A) for the applicable plan year. For purposes of determining the value of plan assets for the first plan year that be- gins in 2008, if the plan sponsor makes a contribution to the plan after the valuation date for that plan year but by the deadline for contributions under section 412(c)(10) as in effect before the effective date of PPA ’06 and the contribution is for the preceding plan year, then the contribution is taken into account as a plan asset with- out applying any present value discount. The final regulations provide that, for purposes of determining the adjusted fair market value of plan assets, assets spun off from a plan as a result of a spin-off de- scribed in §1.414(l)–1(b)(4) are treated as an amount paid from plan assets. In addi- tion, except as otherwise provided by the Commissioner, for purposes of this deter- mination, assets that are added to a plan as a result of a plan-to-plan transfer are treated in the same manner as contribu- tions. It is expected that future proposed 2009–50 I.R.B.774December 14, 2009 regulations will provide additional rules, including rules relating to plan mergers. The regulations provide that if the value of plan assets determined under the av- eraging method would otherwise be less than 90 percent of the fair market value of plan assets, then the value of plan as- sets is equal to 90 percent of the fair mar- ket value of plan assets. If the value of plan assets determined under the averaging method would otherwise be greater than 110 percent of the fair market value of plan assets, then the value of plan assets is equal to 110 percent of the fair market value of plan assets. The rules for accounting for contribution receipts are applied prior to the application of this 90 to 110 percent corridor. To reflect changes to the rules regard- ing determination of average plan assets made by WRERA ’08, portions of the regulations have been reserved to provide rules regarding adjustments for expected earnings that are appliedindetermining average plan assets. These issues are expected to be addressed in future proposed regulations. In the interim, Notice 2009–22, 2009–14 I.R.B. 741, provides guidance regarding these issues. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. As provided under that guidance, the final regulations permit the use of an assumed earnings rate of zero for purposes of determining the actuarial value of assets for a plan year beginning during 2008 using the averaging rules (even if zero is not the actuary’s best estimate of the anticipated annual rate of return on plan assets). The regulations provide that any change in a plan’s valuation date or asset valua- tion method that is made for the first plan year beginning in 2008, the first plan year beginning in 2009, or the first plan year be- ginning in 2010 is automatically approved and does not require the Commissioner’s specific prior approval. In addition, the regulations provide that a change in a plan’s valuation date or asset valuation method for the first plan year to which section 430 applies to determine the plan’s minimum required contribution (even if that plan year begins after December 31, 2010) that satisfies the requirements of the regulations is automatically approved and does not require the Commissioner’s specific prior approval. V.Section 1.430(h)(2)–1 Interest Rates Used to Determine Present Value. Section 1.430(h)(2)–1 provides rules relating to the interest rates used in deter- mining the present value of the benefits that are included in the target normal cost and the funding target for the plan for a plan year. These rules follow the rules set forth in the proposed regulations except for a few changes that are noted in this preamble. The interest rates used under the regula- tions are generally based on the 24-month moving averages of 3 separate segment rates for the month that includes the valua- tion date (which are determined based on the monthly corporate bond yield curves for the preceding 24 months). The first segment rate, which is based on the por- tion of the corporate bond yield curve over the period from 0 to 5 years, applies for purposes of discounting benefits that are expected to be paid during the 5-year pe- riod beginning on the valuation date for the plan year in the case of a plan with a be- ginning of year valuation date. The second segment rate, which is based on the portion of the corporate bond yield curve over the period between 5 and 20 years, applies for purposes of discounting benefits that are expected to be paid within 15 years after that initial 5 year-period. The third seg- ment rate, which is based on the portion of the corporate bond yield curve over the period between 20 years and 60 years, ap- plies to benefit payments that are expected to be paid after the 20-year period. For ex- ample, if a series of monthly payments is assumed to be made beginning on the valu- ation date, the second segment rate will ap- ply beginning with the 61 st such payment andthethirdsegmentrate will apply be- ginning with the 241 st such payment. Ex- cept in the case of a new plan, a transition rule applies for plan years beginning in 2008 and 2009 under which these segment rates are blended with the long-term corpo- rate bond rate that applies under pre-PPA ’06 law. The monthly corporate bond yield curve is, with respect to any month, a yield curve that is prescribed by the Com- missioner for that month based on yields for that month on investment grade cor- porate bonds with varying maturities that are in the top three quality levels avail- able. Notice 2007–81, 2007–2 C.B. 899, provides guidance on the monthly corpo- rate bond yield curve and the related first, second, and third segment rates, includ- ing a description of the methodology for determining the monthly corporate bond yield curve. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenuerulings and revenue procedures in the Internal Revenue Bul- letin. The proposed regulations would have used the rules for applying the first seg- ment rate as stated in this preamble to all plans, regardless of the valuation date for the plan. Some commenters noted that sec- tion 430(h)(2)(B)(i) applies the first seg- ment rates to benefits expected to be paid in the 5 years from the beginning of the plan year rather than the valuation date. These commenters argued that the regu- lations should likewise base the period to which the first segment rate applies on the beginning of the plan year rather than the valuation date. The IRS and the Trea- sury Department continue to believe that the position set forth in the proposed reg- ulations remains the best method of valu- ing assets and liabilities as of the valuation date. Accordingly, the final regulations re- serve the issue of guidance on the interest rates to be used by plans with valuation dates other than the first day of the plan year. A technical correction to the statute mayaddressthisinthefuture. The regulations reflect the special in- terest rate for determining a plan’s funding target in the case of airlines that make the 10-year amortization election described in section 402(a)(2) of PPA ’06, in ac- cordance with section 6615 of the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appro- priations Act, 2007, Public Law 110–28 (121 Stat. 112). This special interest rate does not apply for other purposes such as the determination of the plan’s target normal cost. The regulations provide for elections that a plan sponsor can make to use alterna- tive interest rates rather than the segment rates for the month that includes the val- uation date. These elections are made by providing written notification of the elec- tion to the plan’s enrolled actuary. These elections may be adopted for a plan year December 14, 20097752009–50 I.R.B. without obtaining the consent of the Com- missioner but, once adopted, they will ap- ply for that plan year and all future plan years and may be changed only with the consent of the Commissioner. Under one such election, a plan sponsor that is using segment rates may elect the use of an al- ternative month as the applicable month, provided that the alternative month is one of the 4 months preceding that month that as the applicable month. In such a case, the segment rates for an applicable month are based upon data through the end of the immediately preceding month. Under an- other election, for purposes of determin- ing the funding target, target normal cost, shortfall amortization installments, waiver amortization installments, and the present value of those installments, the plan spon- sor may elect to use interest rates under the monthly corporate bond yield curve — which is a set of spot rates for the month preceding the valuation date rather than a 24-month moving average for that month — in lieu of the segment rates. The tar- get normal cost and funding target deter- mined using the monthly corporate bond yield curve will also be used for purposes of sections 404 and 436. Some commenters have maintained that the rules under which an applicable month earlier than the month before the valuation date can be used should be permitted to be applied when the plan sponsor elects to use the monthly corporate bond yield curve. The IRS and the Treasury Depart- ment believe that, while this is a reason- able interpretation of the statute, the bet- ter view is that this option should not be available when the plan elects to use the monthly corporate bond yield curve. Ac- cordingly, this interpretation can be used for plan years beginning during 2008 and 2009 (so, for example, for a plan year be- ginning on January 1, 2009, the plan spon- sor could elect to use the monthly corpo- rate bond yield curvefor September, Octo- ber, November 2008, or December 2008, or January 2009, based on data for that month), but such an election is not permit- ted for plan years beginning on or after the regulations become effective. The proposed regulations would have required plan sponsors to obtain approval for an election to use alternative interest rates as described above that is made for a plan year after the first plan year for which section 430 applies to the plan. Some commenters argued that the statute per- mits these elections to be made without ap- proval, with approval required only for a later change or revocation of election. In response to the comments, the final reg- ulations do not require approval for the initial adoption of these elections for any year. For example, a plan sponsor that was using segment rates for the plan year be- ginning in 2010 can elect to switch to use the monthly corporate bond yield curve for the plan year beginning in 2011 and subse- quent years without approval of the Com- missioner (and, in such a case, if the plan had been using a different month for the segment rates, then the change to use the yield curve makes the applicable month election irrelevant). However, once an election has been made, any change re- quires the approval of the Commissioner. The final regulations provide that, in the case of a plan sponsor using the monthly corporate bond yieldcurve, if with respect to a decrement the benefit is only expected to be paid for one-half of a year (because the decrement was assumed to occur in the middle of the year), the interest rate for that year can be determined as if the benefit were being paid for the entire year. The final regulations provide that the interest rate elections are made by the plan sponsor, which is generally the employer or employers responsible for making con- tributions to or under the plan. In the case of plans that are multiple employer plans to which section 413(c)(4)(A) does not ap- ply, the regulations provide that any refer- ence to the plan sponsor means the plan ad- ministrator within the meaning of section 414(g). The regulations provide that, except as otherwise provided, the effective in- terest rate determined under section 430(h)(2)(A) for the plan year is the single interest rate that, if used to determine the present value of the benefits that are taken into account in determining the plan’s funding target for the plan year, would result in an amount equal to the plan’s funding target determined for the plan year under section 430(d) (without regard to calculations for plans in at-risk status under section 430(i)). Some commenters asked how to deter- mine the effective interest rate for a plan year for which a plan’s funding target is equal to zero. The final regulations pro- vide that if, for the plan year, the plan’s funding target is equal to zero, then the ef- fective interest rate determined under sec- tion 430(h)(2)(A) for the plan year is the single interest rate that, if used to deter- mine the present value of the benefits that are taken into account in determining the plan’s target normal cost for the plan year, would result in an amount equal to the plan’s target normal cost determined for the plan year under section 430(b) (without regard to calculations for plans in at-risk status under section 430(i)). The final regulations provide that the interest rates used to determine the amount of shortfall amortization installments and waiver amortization installments and the present value of those installments are de- termined based on the dates those install- ments are assumed to be paid, using the same timing rules that apply in determin- ing target normal cost. Thus, for a plan that uses the segment rates, the first segment rate applies to installments assumed to be paid during the first five plan years, and the second segment rate applies to any install- ments assumed to be paid during the sub- sequent 15-year period. For this purpose, the shortfall amortization installments for a plan year are assumed to be paid on the valuation date for that plan year. Under the regulations, notwithstand- ing the general rules for determination of segment rates, for plan years begin- ning in 2008 or 2009, the first, second, or third segment rate for a plan with respect to any month is equal to the sum of the product of that rate for that month, multi- plied by the applicable percentage and the product of the weighted average interest rate determined under the rules of section 412(b)(5)(B)(ii)(II)(as that provision was in effect for plan years beginning in 2007), multiplied by a percentage equal to 100 percent minus the applicable percentage. This transition rule does not apply to a plan if the first plan year of the plan begins on or after January 1, 2008. A plan spon- sor may elect not to apply the transition rule, but once an election has been made any change to that election requires the approval of the Commissioner. The proposed regulations would have required that the pre-PPA ’06 weighted av- erage be determined as of the same month as the segment rates. In response to com- ments, the final regulations provide that this weighted average interest rate can be determined for the same month that is used 2009–50 I.R.B.776December 14, 2009 to determine the segment rates, or for the month that contains the first day of the plan year (that is, the month that was used un- der section 412(b)(5)(B)(ii)(II) as in effect before amendment by PPA ’06). The final regulations provide that any change to any interest rate election that is made for the first plan year beginning in 2009 or 2010 is automatically approved by the Commissioner and does not require the Commissioner’s specific prior approval. VI.Section 1.430(i)–1 Special Rules for Plans in At-risk Status. Section 1.430(i)–1 of the final regu- lations provides special rules related to determining the funding target and mak- ing other computations for certain defined benefit plans that are in at-risk status for the plan year due to their significantly underfunded status. The at-risk rules do not apply to small plans. For this purpose, a small plan is defined as a plan sponsored by an employer that had 500 or fewer participants (including both active and inactive participants) in defined benefit plans (other than multiemployer plans) sponsored by the employer or any mem- ber of the employer’s controlled group on each day during the preceding plan year. The regulations generally adopt the rules set forth in the proposed regulations, with a few modifications that are noted in this preamble. In general, the regula- tions provide that a plan is in at-risk status for a plan year if the FTAP for the pre- ceding plan year is less than 80 percent (65, 70, and 75 percent, respectively, for plan years beginning in 2008, 2009, and 2010), and the at-risk FTAP for the pre- ceding plan year is less than 70 percent. For this purpose, the FTAP is defined in the same manner as under §1.430(d)–1. Theat-riskFTAPofaplanforaplanyear is a fraction (expressed as a percentage) the numerator of which is the value of plan assets for the plan year after sub- traction of the prefunding balance and the funding standard carryover balance under section 430(f)(4)(B), and the denomina- tor of which is the at-risk funding target of the plan for the plan year (determined using the special actuarial assumptions that apply to plans in at-risk status, but without regard to the loading factor that is imposed with respect to certain plans in at-risk status). In the case of a new plan that was nei- ther the result of a merger nor involved in a spin-off, the FTAP and the at-risk FTAP are equal to 100 percent for years before the plan exists. As a result, such a plan will not be in at-risk status in its first year. In addition, if the funding target of the plan is equal to zero for a plan year, the FTAP and the at-risk FTAP are equal to 100 percent for that plan year. Accordingly, a plan that is established without benefits accruing for periods prior to establishment will not be in at-risk status in its second year. The fi- nal regulations reserve a place for rules re- garding a plan that is involved in a merger or a spin-off and a newly established plan with a predecessor plan that was in at-risk status. In accordance with section 430(i)(1), the final regulations provide that the at-risk funding target and the at-risk target normal cost of the plan for the plan year are gener- ally determined in the same manner as for plans not in at-risk status, but using spe- cial actuarial assumptions. In addition, the at-risk funding target and the at-risk target normal cost are increased to take into ac- count a loading factor if the plan has been in at-risk status for at least 2 out of the pre- ceding 4 plan years. In any case, the at-risk funding target and the at-risk target nor- mal cost of a plan for a plan year cannot be less than the plan’s funding target and tar- get normal cost determined without regard to the at-risk rules. This minimum value is determined on a plan-wide (rather than a participant-by-participant) basis. The actuarial assumptions used to de- termine a plan’s at-risk funding target for a plan year are the actuarial assumptions that are applied under section 430, with certain modifications as set forth in the final regu- lations. Under the proposed regulations, if by the end of the plan year that begins 10 years after the end of the current plan year (that is, the end of the 11th plan year be- ginning with the current plan year) an em- ployee would be eligible to commence an immediate distribution upon termination of employment, then the employee would be assumed to terminate and commence an immediate distribution at the earliest re- tirement date under the plan, or, if later, at the end of the current plan year. For this purpose, the proposed regulations defined the earliest retirement age under the plan as the earliest age at which a participant could terminate employment and receive an immediate distribution. The proposed regulations provided that, under the spe- cial at-risk actuarial assumptions, all em- ployees who are subject to the special early retirement assumption are also assumed to elect the optional form of benefit available under the plan at the assumed retirement age that would result in the highest present value of benefits. In response to comments, the final reg- ulations clarify that the special early re- tirement assumption applies to all partic- ipants (employees, terminated vested par- ticipants, and beneficiaries) who have not commenced payment and is not limited to employees. In addition, the final regula- tions provide that the earliest retirement age is not earlier than the age at which the participant’s benefit is fully vested. The regulations also provide that, under the special at-risk actuarial assumptions, all participants and beneficiaries (not just the participants who are subject to the special early retirement assumption) who are as- sumedtoretireonaparticulardateareas- sumed to elect the optional form of bene- fit available under the plan that would re- sult in the highest present value of benefits commencing at that date. If a plan that is in at-risk status for the plan year has not been in at-risk status for one or more of the preceding 4 plan years, the plan’s funding target for the plan year is determined as a blend of the funding tar- get determined as if the plan were not in at-risk status and the funding target deter- mined as if the plan had been in at-risk sta- tus for each of the preceding 4 plan years. For this purpose, the funding target deter- mined as if the plan had been in at-risk sta- tus for each of the preceding 4 plan years is determined without applying the load- ing factor if the plan has not been in at-risk status for two of the preceding four plan years. The increase in the funding target to reflect the at-risk rules is phased in over 5 years at 20 percent per year. The final regulations provide similar rules for deter- mining the at-risk target normal cost of a plan that has been in at-risk status for fewer than 5 consecutive plan years. For purposes of applying the rules un- der section 430(i), the regulations set forth rules for making certain calculations with respect to the first plan year to which sec- tion 430 applies to the plan. These rules are generally the same as the rules that ap- December 14, 20097772009–50 I.R.B. ply for that plan year for purposes of sec- tion 436. There is no specialrule for determin- ing the at-risk funding target for the plan year preceding the plan year section 430 first applies to the plan. This is because, for a plan to which section 430 applies be- ginning in 2008, if the plan’s FTAP for the preceding plan year was less than the 65 percent needed to be in at-risk status (pur- suant to the transition rule described in sec- tion 430(i)(4)(B)), then the at-risk FTAP would necessarily be below the 70 percent needed for the plan to be in at-risk sta- tus (because the at-risk funding target can- not be less than the funding target for a plan that is not in at-risk status). However, plans for which the effective date of sec- tion 430 is delayed for purposes of deter- mining the minimum required contribution will have to determine the at-risk funding target for the plan year that precedes the plan year for which section 430 is first ef- fective with respect to the plan. VII.Section 1.436–1 Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans. A.Overview and general rules. 1.In general. The final regulations set forth the rule that a defined benefit pension plan that is subject to section 412 and that is not a mul- tiemployer plan is a qualified plan only if it satisfies the requirements of section 436. This requirement is a qualification require- ment. A plan satisfies the requirements of section 436 only if the plan meets the re- quirements of these regulations. The fi- nal regulations generally adopt the rules set forth in the proposed regulations, but with a number of modifications that are discussed in this preamble. 2.New plans. In accordance with section 436(g), the final regulations provide that the limita- tions described in sections 436(b), 436(c), and 436(e) do not apply to a plan for the first five plan years of the plan. Thus, the only benefit limitation under section 436 that could apply under a plan that is not a successor plan during the first five years of its existence is the section 436(d) limita- tion applicable to accelerated benefit pay- ments (such as single-sum distributions). Except as otherwise provided by the Com- missioner in guidance of general applica- bility, plan years of the plan include the following (in addition to plan years dur- ing which the plan was maintained by the employer or plan sponsor): (1) plan years when the plan was maintained by a pre- decessor employer within the meaning of §1.415(f)–1(c)(1); (2) plan years of an- other defined benefit plan maintained by a predecessor employer within the meaning of §1.415(f)–1(c)(2) within the preceding five years if any participants in the plan participated in that other defined benefit plan (even if the plan maintained by the employer is not the plan that was main- tained by the predecessor employer); and (3) plan years of another defined benefit plan maintained by the employer within the preceding five years if any participants in the plan participated in that other de- fined benefit plan. 3.Terminated plans. The proposed regulations did not con- tain any special rules regarding terminated plans. Commenters asked whether, upon plan termination, the benefit restrictions under section 436(d) operate to prevent the purchase of annuities to satisfy plan benefits or the distribution of single sums. In response, these regulations contain spe- cial rules for plan terminations. Under the final regulations, in general, any section 436 limitations in effect immediately be- fore the termination of a plan continue to apply. However, the limitations under sec- tion 436(d) do not apply to prohibited pay- ments that are made to carry out the ter- mination of a plan in accordance with ap- plicable law. For example, a plan spon- sor’s purchase of an irrevocable commit- ment from an insurer to pay benefit lia- bilities with respect to participants in con- nection with the standard termination of a plan, in accordance with 4041(b)(3) of ERISA and 29 CFR §4041.28, does not vi- olate section 436(d). 4.Multiple employer plans. The regulations under section 436 ap- ply to plans maintained by one employer (including a controlled group of employ- ers) and to multiple employer plans (within the meaning of section 413(c)). In the case of a multiple employer plan to which section 413(c)(4)(A) applies, the rules un- der the regulations apply separately with respect to each employer under the plan, as if each employer maintained a separate plan. Thus, the benefit limitations under section 436 can apply differently to em- ployees of different employers under such a multiple employer plan. In the case of a multiple employer plan to which sec- tion 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 regulations ap- ply as if all participants in the plan were employed by a single employer. Some commenters objected to the separate ap- plication of the rules of section 436 for a multiple employer plan to which section 413(c)(4)(A) applies. These commenters argued that, because it is impossible for an employer to make a contribution that in- ures only to the benefit of its employees in the event of plan termination, it is in- appropriate to apply the requirements of section 436 separately for each employer. No change has been made to reflect this comment because the IRS and the Trea- sury Department believe that this rule is consistent with the applicable statutory re- quirement under section 413(c)(4)(A) that applies that the funding rules apply sepa- rately to each employer. 5.Treatment of plan as of close of prohibited or cessation period. The final regulations use the termsec- tion 436 measurement dateto identify the dates on which a section 436 limitation may apply or cease to apply (as discussed in section VII.A.8 of this preamble). The regulations provide that, if a limitation on prohibited payments under section 436(d) (such as single-sum distributions) applies to a plan as of a section 436 measurement date, but that limit subsequently ceases to apply to the plan as of a later section 436 measurement date, then the limitation does not apply to benefits with annuity starting dates that are on or after that later section 436 measurement date.In addition, the fi- nal regulations provide that, if a limitation on benefit accruals under section 436(e) applies to a plan, then, unless the plan pro- vides otherwise, benefit accruals under the plan will resume effective as of the section 2009–50 I.R.B.778December 14, 2009 436 measurement date as of which benefit accruals are no longer restricted. If the ac- cruals resume effective in the middle of a plan year, the plan must comply with the rules relating to partial years of participa- tion and the prohibition on double prora- tion under Department of Labor regulation 29 CFR §2530.204–2(c) and (d). With respect to a participant who was barred from receiving an optional form of benefit that would have been payable but for the application of a restriction on prohibited payments pursuant to section 436(d), once the restriction ceases to ap- ply, the participant’s benefits will continue to be paid in the form previously elected unless the plan offers the participant a new election that modifies the prior election. The final regulations permit a plan to pro- vide that the participant will be offered the opportunity to have a new election un- der which the form of benefit previously elected may be modified, subject to appli- cable qualification requirements, and clar- ify that any such new election will result in a new annuity starting date for purposes of section 417. Similarly, a plan is permitted to be amended to provide that any benefit ac- cruals that were limited under the rules of section 436(e) are credited under the plan once the limitation no longer ap- plies, subject to applicable qualification requirements (including the limitations of section 436(c)). If a plan provides for the restoration of benefit accruals for the period of the limitation under preexisting plan terms, the plan is generally treated as having adopted an amendment that has the effect of increasing liabilities under the plan. The proposed regulations would have provided an exception to this rule if the period of limitation is 12 months or less. The final regulations retain that exception, but clarify that the exception is available only if the plan’s AFTAP would be at least 60 percent taking into account the restored accruals. 6 In response to questions raised by commenters, the final regulations clarify the treatment of unpredictable contingent event benefits that are limited under the rules of section 436(b). The regulations provide that, in general, if any unpre- dictable contingent event benefits are limited under section 436(b) with respect to an unpredictable contingent event, then that limitation applies to all such benefits that otherwise would have been paid to any plan participant with respect to that unpredictable contingent event. However, if the limitations of section 436(b) with respect to an unpredictable contingent event cease to apply for a plan year as a result of a contribution that satisfies the requirements of section 436(b)(2) or a cer- tification of the AFTAP for the plan year, then any unpredictable contingent event benefits that were limited under the rules of section 436(b) for the plan year must automatically become payable, retroactive to the period those benefits would have been payable under the terms of the plan (other than plan terms implementing the requirements of section 436(b)). If the benefits do not become payable during the plan year in accordance with the preceding sentence, then the plan is treated as if it does not provide for those benefits. However, all or any portion of those benefits can be restored pursuant to a plan amendment that meets the requirements of section 436(c) and other applicable qualification requirements. 6.Treatment of plan amendments that do not go into effect. The proposed regulations did not con- tain rules regarding the treatment of plan amendments that do not go into effect because of the restrictions under section 436(c). To clarify the application of these rules, the final regulations provide that, if a plan amendment does not go into effect as of the effective date of the amendment be- cause of the limitations of section 436(c), but is permitted to go into effect later in the plan year as a result of additional contributions that satisfy the requirements of section 436(c)(2) or a certification of the AFTAP for the plan year, then the plan amendment must automatically take effect as of the first day of the plan year (or, if later, the original effective date of the amendment). However, if the plan amendment cannot take effect during the plan year, then it must be treated as if it were never adopted, unless the plan amendment provides otherwise. For example, a plan amendment that provides a benefit increase pursuant to a collective bargaining agreement could provide that if the plan amendment does not take effect pursuant to the rules of section 436(c), it will take effect at the earliest time it is permitted to take effect pursuant to the rules of section 436(c). 7.Deemed election to reduce prefunding and funding standard carryover balances. Pursuant to section 436(f)(3), the final regulations provide that, if a limitation on prohibited payments under section 436(d)(1) or (d)(3) would otherwise apply to a plan, the employer is treated as having made an election under section 430(f) to reduce the prefunding balance or fund- ing standard carryover balance by such amount as is necessary for the AFTAP to be at or above the applicable threshold (60 or 80 percent, as the case may be) 7 in order for the benefit limitation not to apply to the plan. In such a case, the plan sponsor is treated as having made that election on the section 436 measurement date as of which the benefit limitation would otherwise apply. This deemed election applies if the plan provides for prohibited payments that would be limited in a plan year, regardless of whether a plan participant is eligible or elects to receive such a distribution during the plan year (but does not apply if the plan does not provide for prohibited payments that are subject to the benefit limitation or if the plan is not subject to section 436(d) because the plan was frozen before September 1, 2005). However, the deemed reduction applies with respect to this limitation only if the prefunding and funding standard carryover balances to be reduced are large enough to avoid the application of the limitation. Thus, no reduction of prefunding and funding 6 The PBGC has informed the IRS and the Treasury Department that it expects similarly to treat such an automatic restoration of missed benefit accruals as a plan amendment, unless it is covered by the 12-month exception. 7 Pursuant to section 436(j)(3), for any plan year, if the FTAP is 100 percent or more (or at a lower transition threshold for 2008 through 2010) determined without subtracting the prefunding balance and funding standard carryover balance from the value of plan assets, then the AFTAP is determined without regard to that subtraction. The deemed election under section 436(f)(3) is irrelevant in the case of the 100% funding threshold that applies under section 436(d)(2) when an employer is in bankruptcy because, either the planis 100 percent or more funded without the subtraction (and therefore no subtraction need be made under section 436(j)(3)), or the plan is less than 100 percent funded without the subtraction so that the value of plan assets must necessarily be insufficient for a deemed election to increase the plan’s AFTAP to 100%. December 14, 20097792009–50 I.R.B. standard carryover balances is required if the limitation would still apply for a year even if those balances were reduced to zero. The final regulations provide that, if a plan is presumed to have an AFTAP of less than 60 percent because the plan did not receive a certification of the AFTAP before the first day of the 10th month of the plan year under the section 436(h)(2) presumption rules, then the plan is treated as if the plan’s funding standard carryover balance and prefunding balance are insufficient to increase the plan’s AFTAP to the threshold percentage. In addition, the regulations provide that, in the case of a plan maintained pur- suant to one or more collective bargaining agreements between an employee repre- sentative and one or more employers in which a benefit limitation under section 436(b), 436(c), or 436(e) would otherwise apply to the plan, the employer is treated as having made an election under section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for the AFTAP to be at or above the applicable threshold for the benefit limitation not to apply to the plan, taking into account the unpredictable contingent event benefits or plan amendment, as applicable. In such a case, the plan sponsor is treated as having made that election on the section 436 measurement date as of which the benefit limitation would otherwise apply. As in the case of the deemed reduction in funding balances to avoid the application of section 436(d), the deemed reduction applies only if the prefunding and funding standard carryover balances to be reduced are large enough to avoid the application of the limitation under section 436(b), 436(c), or 436(e), as applicable. The proposed regulations would have provided that, in the case of a plan with respect to which a collective bargaining agreement applies to some, but not all, of the plan participants, the plan is consid- ered a collectively bargained plan if at least 25 percent of the participants in the plan are members of collective bargaining units for which the benefit levels under the plan are specified under a collective bargain- ing agreement. A number of commenta- tors asked which participants are taken into account in this calculation. The final regu- lations adopt the definition in the proposed regulations, but also provide that such a plan is considered a collectively bargained plan if at least 50 percent of the employ- ees benefiting under the plan (within the meaning of §1.410(b)–3(a)) are members of collective bargaining units for which the benefit levels under the plan are specified under a collective bargaining agreement. 8.Section 436 measurement date. Thesection 436 measurement dateis a defined term under the final regulations that is used to describe the date that stops or starts the application of the limitations of sections 436(d) and 436(e) and is also used for calculations with respect to apply- ing the limitations of sections 436(b) and 436(c). The regulations provide that the date of the enrolled actuary’s certification of the AFTAP for the plan year is a section 436 measurement date if it is made during the plan year. The regulations further provide that a section 436 measurement date also occurs where there is a change in the plan’s presumed AFTAP under the presumption rules of section 436(h). In addition, the regulations provide a series of rules in cases where the enrolled actuary’s certification of the AFTAP for a plan year is made after the end of the plan year, as described in section VII.G of this preamble. 9.Notice requirement under section 101(j) of ERISA. Section 101(j) of ERISA requires the plan administrator of a single employer plan to provide a written notice to partic- ipants and beneficiaries within 30 days after certain specified dates, including the date the plan has become subject to a restriction describedintheERISApro- visions that are parallel to Code sections 436(b) and 436(d); and, in the case of a plan that is subject to the ERISA pro- visions that are parallel to Code section 436(e), the valuation date for the plan year for which the plan’s AFTAP is less than 60 percent (or, if earlier, the date the AFTAPispresumedtobelessthan60 percent). These regulations do not include any guidance on section 101(j) of ERISA. The benefit restrictions under section 436 (and the parallel provisions under section 206(g) of ERISA) apply without regard to whether the requirements of section 101(j) of ERISA are satisfied. B.Limitation on plant shutdown and other unpredictable contingent event benefits. In accordance with section 436(b), the final regulations provide that a plan that provides for any unpredictable contingent event benefit 8 must provide that the ben- efit will not be paid to a plan participant during a plan year if the AFTAP for the plan year is less than 60 percent (or is 60 percent or more but would be less than 60 percent if the AFTAP were redetermined applying an actuarial assumption that the likelihood of the occurrence of the unpredictable contingent event during the plan year is 100 percent). However, this prohibition on payment of unpredictable contingent event benefits no longer applies for a plan year, effective as of the first day of the plan year, if the plan sponsor makes the contributionspecified in section 436(b)(2), as described in section VII.F of this preamble. The regulations provide that anunpre- dictable contingent event benefitis any benefit or increase in benefits to the ex- tent the benefit or increase would not be payable but for the occurrence of an un- predictable contingent event, and that an unpredictable contingent eventis a plant shutdown (whether full or partial) or simi- lar event, or an event other than the attain- ment of any age, performance of any ser- vice, receipt or derivation of any compen- sation, or the occurrence of death or dis- ability. For example, if a plan provides for an unreduced early retirement bene- fit upon the occurrence of an event other than the attainment of any age, perfor- mance of any service, receipt or deriva- tion of any compensation, or the occur- rence of death or disability, then that unre- duced early retirement benefit is an unpre- dictable contingent event benefit to the ex- tent of any portion of the benefit that would not be payable but for the occurrence of the event, even if the remainder of the benefit is payable without regard to the occurrence of the event. Similarly, if a plan includes a benefit payable upon the presence (includ- 8 See also Notice 2007–14, 2007–1 C.B. 501 (see §601.601(d)(2) of this chapter), requesting comments on the types of benefits that are permitted to be provided in a qualified defined benefit plan, including benefits payable in the event of a plant shutdown or similar event. 2009–50 I.R.B.780December 14, 2009 ing the absence) of circumstances speci- fied in the plan (other than the attainment of any age, performance of any service, re- ceipt or derivation of any compensation, or the occurrence of death or disability), but not upon a severance from employment that does not include those circumstances, that benefit is an unpredictable contingent event benefit. Unpredictable contingent event ben- efits attributable to a plant shutdown or other unpredictable contingent event that occurred within a period during which no limitation under section 436(b) applied to the plan are not affected by the limitation as it applies in a subsequent period. For example, if a plant shutdown occurs in 2010 and the plan’s funded status is such that benefits contingent upon that plant shutdown are not subject to the limitation described in section 436(b) for that cal- endar plan year, section 436(b) does not apply to restrict payment of those benefits even if another plant shutdown occurs in 2012 that results in the restriction of bene- fits that are contingent upon that later plant shutdown under section 436(b) (where the plan’s adjusted funding target attainment percentage for 2012 would be less than 60 percent taking into account the liability attributable to those shutdown benefits). Conversely, if a plant shutdown occurs in 2010 and a plan’s funded status is such that its shutdown benefits are subject to the limitation under section 436(b) for that plan year and cannot be paid, those shut- down benefits related to the 2010 plant shutdownarenotpermittedtobepaidina later year even if the plan’s AFTAP for the later year is at or above 60 percent (subject to the rules permitting plan amendments to reinstate previously restricted benefits, including unpredictable contingent event benefits, as described in section VII.A.5 of this preamble). To clarify the operation of the rules regarding unpredictable contingent event benefits, the final regulations contain rules of application that were not provided in the proposed regulations. The regula- tions clarify that the limitations of section 436(b) apply on a participant-by-par- ticipant basis. Thus, whether payment or commencement of an unpredictable contingent event benefit under a plan is restricted with respect to a participant is determined based on whether the partici- pant satisfies the plan’s eligibility require- ments (other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability) for such a benefit in a plan year in which the limita- tions of section 436(b) apply. In addition, in the case of a plan that provides for a benefit that depends upon the occurrence of more than one unpredictable contingent event with respect to a participant, the un- predictable contingent event for purposes of section 436(b) occurs upon the last of those unpredictable contingent events. Cessation of a benefit under a plan upon the occurrence of a specified event does not trigger the application of a limitation under section 436(b). Thus, section 436(b) does not prohibit provisions of a plan that provide for cessation, suspension, or re- duction of any benefits upon occurrence of any event. C.Limitations on plan amendments increasing plan liabilities. In accordance with section 436(c), the regulations provide that a plan satisfies the limitation on plan amendments increas- ing liability for benefits only if the plan provides that no amendment to the plan that has the effect of increasing liabili- ties of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits be- come nonforfeitable is permitted to take effect if the AFTAP for the plan year is less than 80 percent (or is 80 percent or more but would be less than 80 percent if the AFTAP were redetermined taking into account the benefits attributable to the amendment). However, this prohibition on plan amendments no longer applies for a plan year if the employer makes the contribution specified in section 436(c)(2), as described in section VII.F of this preamble. Thus, an amendment that provides for an increase in benefits under a formula that is based solely on service performed by participants after the amendment is adopted is always permitted to take effect in a plan year because the amount of contribution described in section 436(c)(2) is $0. However, see §1.430(d)–1(d)(2) for a rule that requires such an amendment to be taken into account in determining the funding target and the target normal cost in certain situations. The final regulations clarify the ap- plication of section 436(c) to certain pre-existing plan provisions. Under the regulations, if a plan contains a provision that provides for theautomatic restora- tion of benefit accruals that were not permitted to accrue because of the appli- cation of section 436(e), the restoration of those accruals is generally treated as a plan amendment that is subject to section 436(c). However, the automatic restora- tion of benefit accruals that were not permitted to accrue because of the ap- plication of section 436(e) is not treated as a plan amendment that is subject to section 436(c) if the continuous period of the limitation is 12 months or less and the AFTAP for the plan would not be less than 60 percent taking into account the restored benefit accruals for the prior plan year. The application of section 436(c) to other pre-existing plan provisions that result in benefit increases is expected be addressed in future proposed regulations. In accordance with section 436(c)(3), the limitation on amendments increasing liabilities does not apply to any amend- ment that provides for an increase in ben- efits under a formula that is not based on a participant’s compensation, but only if the rate of increase in benefits does not ex- ceed the contemporaneous rate of increase in average wages of participants covered by the amendment. Like the proposed reg- ulations, the final regulations provide that the determination of the rate of increase in average wages is made by taking into consideration the net increase in average wages from the period of time beginning with the effective date of the most recent benefit increase applicable to all of those participantswhoarecoveredbythecur- rent amendment and ending on the effec- tive date of the current amendment. If the participants covered by an amend- ment include both currently employed par- ticipants and terminated participants, all covered participants are included in de- termining the increase in average wages of the participants covered by the amend- ment. For this purpose, terminated partic- ipants who are not employees at any time during the period from the effective date of the most recent benefit increase appli- cable to all the participants who are cov- ered by the current amendment and ending December 14, 20097812009–50 I.R.B. on the effective date of the current amend- ment are treated as having no increase or decrease in wages for the period after sev- erance from employment. Alternatively, the employer can adopt two amendments — one that increases benefits for currently employed participants that is eligible for this exception based solely on the wages of those current employees, and another that increases benefits for terminated partici- pants. However, the amendment that ap- pliesonlytoterminatedparticipants(who received no increase in wages from the em- ployer during the period over which the increase in average wages is determined) would not be eligible for this exception. As under the proposed regulations, the final regulations exempt a plan amend- ment (or any pre-existing plan provision) that provides for a mandatory increase in the vesting of benefits under the Code or ERISA (such as vesting rate increases pur- suant to statute, plan termination amend- ments or partial terminations under section 411(d)(3), and vesting increases required by the rules for top-heavy plans under sec- tion 416) from the requirements of section 436(c) to the extent the increase in vest- ing is necessary to enable the plan to con- tinue to satisfy the requirements for qual- ified plans. In addition, the final regula- tions provide that the Commissioner may, in guidance of generalapplicability, issue additional rules under which other amend- ments to a plan are not treated as amend- ments to which section 436(c) applies. The final regulations contain a rule to clarify when an amendment is consid- ered to take effect for purposes of section 436(c). Under these regulations, in the case of an amendment that increases ben- efits, the amendment takes effect under a plan on the first date on which any indi- vidual who is or could be a participant or beneficiary under the plan would obtain a legal right to the increased benefit if the individual were on that date to satisfy the applicable requirements for entitlement to the benefit (such as the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death, disability, or sever- ance from employment). Thus, if a plan’s operations change to provide increased benefits so that participants obtain a legal right to the benefit at the time of the change (with the corresponding plan amendment adopted in that year or in a subsequent year that is within the remedial amend- ment period under section 401(b)), the amendment takes effect at the time of the change and must satisfy the requirements of section 436(c) for that earlier year. By contrast, if an amendment is adopted to provide increased benefits retroactively with respect to a prior year, but no par- ticipant’s benefits are increased until the amendment is adopted, the amendment takes effect at the time of adoption and must satisfy the requirements of section 436(c) for the plan year the amendment is adopted. D.Limitations on prohibited payments. 1.Funding percentage less than 60 percent. In accordance with section 436(d)(1), under the final regulations, a plan must provide that, if the plan’s AFTAP for a plan year is less than 60 percent, a participant or beneficiary is not permitted to elect an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date that is on or after the applicable section 436 measurement date. The proposed regulations would have provided that, if a participant requests such a prohibited payment, the plan must permit the participant to elect another form of benefit available under the plan and this rule is retained in these regulations. Thus, if a participant elects a single-sum payment which is not available because of the section 436 limitations, the participant has to retain the right to elect the annuity forms offered under the plan which do not contain prohibited payments. Similar rules apply in any case in which a beneficiary is entitled to a prohibited payment (for example, where a qualified pre-retirement survivor annuity is offered in an alternative single-sum payment). The proposed regulations would also have provided that, if a participant re- quests such a prohibited payment, the plan must permit the participant to elect to de- fer payment to a later date to the extent permitted under applicable qualification requirements. Questions have arisen re- garding whether this deferral right must be provided to a participant who has sepa- rated from service and has attained normal retirement age if the plan does not other- wise provide such a participant with the right to defer commencement of benefits. The final regulations clarify that, if a par- ticipant requests a prohibited payment at a time when that form of payment can- not be made, the participant retains the right to delay commencement of benefits only if the right to delay commencement is in accordance with the terms of the plan and applicable qualification require- ments (such as sections 411(a)(11) and 401(a)(9)). Thus, where payment of an op- tional form of benefit is restricted pursuant to section 436(d), the plan is not required to provide participants with deferral rights that would not be otherwise available. Some commenters requested that the regulations permit a plan under which prohibited payments are restricted to han- dle an election for a prohibited payment by paying the maximum amount permit- ted under section 436(d) each year, with payments resuming under the originally elected schedule as soon as permitted under section 436(d) (with appropriate catch-up payments). The final regulations do not permit this approach because the IRS and the Treasury Department believe that a plan should pay benefits in accor- dance with a participant’s actual election (with the associated spousal consent, if applicable). However, the final regula- tions clarify that a plan can offer special optional forms of benefit during the period in which section 436(d)(1) applies to the plan. For example, a plan may permit par- ticipants or beneficiaries who commence benefits during this period to elect, within a specified period after the date on which the limitation ceases to apply to the plan, to receive the remaining benefit in the form of a single-sum payment equal to the present value of the remaining benefit to the extent then permitted under sec- tion 436(d)(3). Any such optional forms must satisfy section 436(d) and applicable qualification requirements, including sat- isfaction of section 417(e) and section 415 (at each annuity starting date). 2.Bankruptcy. In accordance with section 436(d)(2), under the final regulations, a plan must provide that a participant or beneficiary is not permitted to elect an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited 2009–50 I.R.B.782December 14, 2009 payment, with an annuity starting date that occurs during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, until the date on which the enrolled actuary of the plan certifies that the plan’s AFTAP for the plan year is not less than 100 percent. Participants and beneficiaries can still elect those forms of distribution offeredunder the plan which do not contain a prohibited payment, as well as the right to defer distribution, as described in section VII.D.1 of this preamble. 3.Limited payment if percentage at least 60 percent but less than 80 percent. In accordance with section 436(d)(3), under the final regulations, a plan must provide that, in any case in which the plan’s AFTAP for a plan year is 60 percent or more but is less than 80 percent, a participant or beneficiary is not permitted to elect the payment of an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date that is on or after the applicable section 436 measurement date, unless the present value, determined in accordance with section 417(e)(3), of the portion of the benefit that is being paid in a prohibited payment does not exceed the lesser of: (A) 50 percent of the present value (determined in accordance with section 417(e)(3)) of the benefit payable in the optional form of benefit that includes the prohibited payment; or (B) 100 percent of the PBGC maximum benefit guarantee amount. Commenters asked a number of ques- tions about this limitation, including how to determine the portion of the benefit that is being paid in a prohibited payment. Under the final regulations, this determi- nation is made based on the applicable optional form of benefit. If the benefit is being paid in an optional form for which any of the payments is greater than the amount payable under a straight life annu- ity to the participant or beneficiary (plus any social security supplements described in the last sentence of section 411(a)(9) payable to the participant or beneficiary) with the same annuity starting date, then the portion of the benefit that is being paid in a prohibited payment is the excess of each payment over the smallest payment during the participant’s lifetime under the optional form of benefit (treating a period during the participant’s lifetime in which no payments are made as a payment of zero). Thus, for an optional form of ben- efit in the form of a single sum or in the form of installments over a fixed period of years, the entire optional form of benefit would be a prohibited payment, whereas in the case of a social security leveling op- tional form of benefit (under which higher payments are made before an assumed social security commencement date, with lower payments thereafter for life), only the amount payable before the assumed social security commencement date that exceeds the ultimate life annuity amount would be a prohibited payment (so that a social security leveling form could go into effect under section 436(d)(3) if the present value of the payments before the assumed social security commencement date that exceed the ultimate life annu- ity amount does not exceed the present value of 50 percent of the total benefit or, if less, the PBGC maximum benefit guarantee amount). In addition, the PBGC maximum benefit guarantee amount is the present value (determined under guid- ance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assumptions under section 417(e)) of the maximum benefit guarantee with respect to a participant (based on the participant’s age or the beneficiary’s age at the annuity starting date) under section 4022 of ERISA for the year in which the annuity starting date occurs. Like the proposed regulations, the fi- nal regulations require that, if an optional form of benefit that is otherwise available under the terms of the plan is not avail- able as of the annuitystarting date because of the application of the requirements of section 436(d)(3), the plan must permit a participant or beneficiary to elect to bifur- cate the benefit into unrestricted and re- stricted portions. The plan must also offer the participant or beneficiary any other op- tional form of benefit otherwise available under the plan at that annuity starting date that would satisfy the 50 percent/PBGC maximum benefit guarantee amount limi- tation, as well as any general right to defer commencement of benefits under the plan (in the same manner described in section VII.D.1 of this preamble). Commenters had raised a number of questions concerning calculation of the un- restricted portion of the benefit for pur- poses of the rule requiring the participant’s benefit to be bifurcated into unrestricted and restricted portions. The final regula- tions clarify that the benefit for the un- restricted portion of the benefit is calcu- lated at the annuity starting date with re- spect to each optional form of benefit that does not satisfy the 50 percent/PBGC max- imum benefit guarantee amount limitation. In general, the unrestricted portion of the benefit with respect to an optional form of benefit is 50 percent of the amount payable under that optional form of benefit. Thus, if a participant elects a single-sum pay- ment of a participant’s entire benefit which is not permitted under section 436(d)(3), the bifurcation rule requires the plan to of- fertheparticipanthalfthatamountasasin- gle-sum payment (with the remainder be- ing payable as a life annuity or any other optional form available under the plan at that annuity starting date that does not in- clude a prohibited payment). However, for an optional form of ben- efit that is a prohibited payment on ac- count of a social security leveling feature or a refund of employee after-tax contribu- tions feature, the unrestricted portion of the benefit is that optional form of benefit ap- plied to only 50 percent of the total benefit. Thus, for a social security leveling option, the unrestricted portion is not equal to half the amount payable before the assumed social security commencement date, plus half the amount payable thereafter, but in- stead would be a result of applying the plan’s social security leveling option pro- vision to half of the participant’s total ben- efit. This may often result in the unre- stricted portion being a series of payments ending at the assumed social security com- mencement date (which, in combination with a life annuity for the restricted portion commencing at the same annuity starting date plus the participant’s anticipated so- cial security benefit, would provide level income to the participant to the extent per- mitted under section 436(d)(3)). In any event, the unrestricted portion of the benefit must be reduced to the extent necessary so that the present value (deter- mined in accordance with section 417(e)) of the unrestricted portion of that optional form of benefit does not exceed the PBGC maximum benefit guarantee amount. December 14, 20097832009–50 I.R.B. If the participant or beneficiary elects to bifurcate the benefit, the plan must pro- vide, with respect to the unrestricted por- tion, the optional form of benefit elected by the participant, treating the unrestricted portion of the benefit as if it were the participant’s or beneficiary’s entire benefit under the plan. The participant can elect to receive the remainder of his or her ben- efit in any optional form of benefit avail- able under the plan atthat annuity starting date that does not include a prohibited pay- ment. If a plan provides for an optional form of benefit that applies to only a por- tion of the participant’s benefit, that op- tional form of benefit must be available on a proportionate basis with respect to the unrestricted portion of the benefit. The rules of §1.417(e)–1 are applied separately to the separate optional forms for the unre- stricted and restricted portions of the ben- efits. Under the regulations, a plan is per- mitted to provide for separate elections with respect to the unrestricted and re- stricted portions of the benefit, without regard to whether the participant or bene- ficiary elects an optional form of benefit that includes a prohibited payment that is not permitted to be paid under the rules of section 436(d)(3). Like the proposed regulations, the final regulations permit a plan to offer optional forms of benefit that are solely available during a period during which benefits are restricted pursuant to section 436(d)(3). For example, during that period, a plan may offer an optional form of benefit (such as a single sum) that provides for the current payment of the unrestricted portion of the benefit, with a delayed commencement for the restricted portion of the benefit or for an imme- diate commencement of the restricted portion of the benefit in an annuity form with a right to commute to a single sum offered upon the enrolled actuary’s certi- fication that the plan’s AFTAP is at least 80 percent. As another example, a plan that offers a subsidized early retirement benefit or a single-sum payment based on the normal retirement benefit may offer an optional form of benefit that combines an unsubsidized single-sum payment for over 50 percent of the accrued benefit with a subsidized early retirement life annuity for the remainder of the accrued benefit, provided that the optional form satisfies the section 436(d)(3) 50 percent/PBGC maximum benefit guarantee limitation. Any such optional forms must also satisfy the applicable qualification requirements, including satisfaction of section 417(e) and, in the case of optional forms of benefit with different annuity starting dates, section 415 at the later annuity starting date for the restricted portion of the benefit. The IRS and the Treasury Department anticipate that plan sponsors will use one of several alternative approaches to pro- viding benefit election packages to partic- ipants in order to comply with the benefit restrictions of section 436(d). As part of any of these alternatives, as described in the preceding paragraph, the plan may pro- vide special optional forms that are avail- able only when the restrictions of section 436(d) apply. Oneapproachwouldbetoprovidea benefit election package that does not take into account the restrictions under section 436(d), regardless of whether a benefit restriction under section 436(d) applies at the time the package is furnished. In periods during which a restriction applies, the plan must permit the participant either to (1) choose another optional form of benefit that does not have a restriction, (2) defer commencement of the payments to a later annuity starting date, or (3) if the AFTAP is at least 60 percent but less than 80 percent, elect to bifurcate the benefit — that is, to receive the unrestricted portion in the optional form chosen and to make a separate election with respect to the remaining portion of the benefit (the restricted portion). Thus, if a participant elects a form of benefit that is not permitted pursuant to a restriction, then the participant must be informed which benefit options are currently available in order to enable the participant to make a new election among the available forms if the participant so chooses. This approach entails a two-step process. As an alternative to this approach, the plan may provide for a one-step process which eliminates the need to go back to the participant if the participant elects a form of benefit that is restricted. Under this one-step process, a participant who elects an optional form of benefit that could be subject to restrictions would also elect a backup distribution form which would ap- ply if restrictions are applicable as of the annuity starting date for the distribution. As part of the backup election, this one- step process would also provide the par- ticipant with the opportunity to defer com- mencement and, if the AFTAP is at least 60 percent but less than 80 percent, to bifurcate the benefit. A third alternative approach, which also eliminates the need to go back to the partic- ipant, anticipates the application of the sec- tion 436(d) restriction on prohibited pay- ments. Under this approach, with respect to an optional form of benefit that includes a prohibited payment that is not permit- ted to be paid and for which no additional information is needed to make that de- termination (such as information regard- ing a social security leveling optional form of benefit), rather than wait for the par- ticipant or beneficiary to elect such op- tional form, the plan is permitted to pro- vide for separate elections with respect to the restricted and unrestricted portions of that optional form of benefit. However, the alternative described in the preceding sentence is permitted to be applied only if the plan applies the rule to all the op- tional forms for which no additional in- formation from the participant or benefi- ciary is needed to make that determina- tion and the plan identifies the option that the bifurcation election replaces. Thus, if section 436(d)(3) applies to a plan dur- ing a period and the plan’s prohibited pay- ments include a single-sum payment, in- stallments for 10 years, and various life annuities with social security leveling fea- tures that depend on information from the participant regarding assumed social secu- rity commencement date and social secu- rity amount, then during this period the plan can offer 50% of the single-sum pay- ment and 50% of the 10-year installments, without having to offer half of each of the potential life annuities with social secu- rity leveling features. Thus, the package presented to a participant would generally present optional forms of benefit that sat- isfy the requirements of section 436(d) at the annuity starting date (but if the partic- ipant were to elect a life annuity with a social security leveling feature that is not permitted to be paid, then the plan would have to follow the two-step approach). If this third approach is used and the plan’s benefit restriction status with respect to the participant’s annuity starting date changes after the package is furnished, then up- dated information would be provided to 2009–50 I.R.B.784December 14, 2009 the participant that takes into account the plan’s new status. As part of the over- all methodology, a plan may provide spe- cial optional forms that are available only when the restrictions of section 436(d) ap- ply. Thus, the package presented to a par- ticipant would only present optional forms of benefit that satisfy the requirements of section 436(d) at the annuity starting date. A participant for whom a prohibited payment (or a series of prohibited pay- ments under a single optional form of ben- efit) is made in accordance with the 50 percent/PBGC maximum benefit guaran- tee amount limitation cannot receive any additional payment that would be a prohib- ited payment during any period of consec- utive plan years to which any of the limi- tations under section 436(d) apply. Bene- fits provided to a participant and any ben- eficiary of that participant are aggregated for purposes of determining whether the distribution complies with the limitations under section 436(d)(3). The final reg- ulations also reflect the rules of section 436(d)(3)(B)(ii), which describe how this limited distribution is allocated among the beneficiaries of a participant. The final regulations include two special rules for beneficiaries. First,while generally the annuity starting date for the payments to the participant is also the annuity starting date for payments to the beneficiary, a new annuity starting date occurs if the amount payable to the beneficiary can exceed the monthly amount that would have been paid to the participant had he or she not died (such as where a plan offers to pay the death benefit in a single sum). Second, if a beneficiary is not an individual, the prohibited payment amount is determined based on the monthly amount payable in installments over 20 years (instead of the monthly amount paid under a straight life annuity). 4.Exception for certain frozen plans. In accordance with section 436(d)(4), the limitations under section 436(d) do not apply to a plan for any plan year if the terms of the plan, as in effect for the period beginning on September 1, 2005, provide for no benefit accruals with respect to any participants. However, if such a plan pro- vides for any benefit accruals thereafter, this exception ceases to apply for the plan as of the date those accruals start. 5.Prohibited payment. In accordance with section 436(d)(5), the final regulations provide that the term prohibited paymentmeans any payment for a month that is in excess of the monthly amount paid under a single life annu- ity (plus any social security supplements described in the last sentence of section 411(a)(9)) to a participant or beneficiary whose annuity starting date occurs during any period that a limitation on prohibited payments is in effect, as well as any pay- ment for the purchase of an irrevocable commitment from an insurer to pay bene- fits. The final regulations also include in this definition any transfer of assets and liabilities to another plan maintained by the same employer (or by any member of the employer’s controlled group) that is made in order to avoid or terminate the application of section 436 benefit limita- tions. In addition, the Commissioner may provide for other amounts to be identified as prohibited payments in revenue rulings and procedures, notices, and other guid- ance published in the Internal Revenue Bulletin. Commenters raised several concerns regarding the definition of the termannu- ity starting dateas applied to various types of benefits restricted under section 436(d). The final regulations generally adopt the definition of annuity starting date set forth in §1.401(a)–20, Q&A–10(b), modified to cover retroactive annuity starting dates, as well as transactions that are restricted un- der section 436(d) even though they do not constitute distributions to any participant. Thus, the final regulations provide that, for purposes of applying the limitations on prohibited payments under section 436(d), the termannuity starting dateis defined as the first day of the first period for which an amount is payable as an annuity as described in section 417(f)(2)(A)(i) if the benefit is being paid in the form of an an- nuity. In the case of a benefit not payable in the form of an annuity, the annuity starting date is the annuity starting date for the qualified joint and survivor annuity that is payable under the plan at the same time as the benefit that is not payable as an annuity, and, in the case of an amount payable under a retroactive annuity start- ing date, the annuity starting date is the benefit commencement date. The effect of the change in the definition of annu- ity starting date will be to provide plan administrators with some additional time to adjust their administrative practices to take into account a newly issued certifica- tion of the plan’s AFTAP. The definition of annuity starting date also includes the date of the purchase of an irrevocable commitment from an issuer to pay benefits under the plan and the date of any transfer of assets and liabilities to another plan maintained by the same employer (or by any member of the employer’s controlled group) that is made in order to avoid or terminate the application of section 436 benefit limitations. The final regulations include rules to clarify how the limitations apply with re- spect to any prohibited payment that is in the form of a purchase of an irrevocable commitment from an insurer or a transfer of assets and liabilities. In the case of a purchase of insurance, the annuity start- ing date is the date of the purchase of the irrevocable commitment from the insurer and the present value (for purposes of the section 436(d)(3) limitation regarding the lesser of 50 percent of the present value of the benefit and the PBGC maximum benefit guarantee amount) is based on the cost to the plan (which is generally the insurance premium). Where a prohibited payment is in the form of a plan-to-plan transfer of assets and liabilities, the annuity starting date is the date of the transfer to the other qualified plan and the present value is based on the present value of the liabili- ties transferred (determined in accordance with section 414(l)). However, any such transfer would have to independently sat- isfy section 414(l), which generally would not be possible where only a portion of a participant’s or beneficiary’s accrued ben- efit is being transferred. The regulations do not address the change made by section 101(c)(2)(C) of WRERA ’08, under which the limitations of section 436 do not apply to distributions permitted without consent of the participant under section 411(a)(11) (that is, distributions where the total present value of the benefit is not in excess of $5,000). That change is expected to be addressed in future proposed regulations. Those proposed regulations are also expected to address issues regarding plan loans. December 14, 20097852009–50 I.R.B. E.Limitation on benefit accruals. In accordance with section 436(e), the final regulations require a plan to pro- vide that, in any case in which the plan’s AFTAP for a plan year is less than 60 percent, benefit accruals under the plan will cease as of the applicable section 436 measurement date. If a plan must cease benefit accruals under this limitation, then the plan is also not permitted to be amended in a manner that would increase the liabilities of the plan by reason of an increase in benefits or establishment of new benefits. This rule applies regardless of whether an amendment would otherwise be permissible under section 436(c)(3) (involving certain amendments to increase benefits under a formula not based on a participant’s compensation). This prohibition on additional benefit accruals no longer applies for a plan year if the plan sponsor makes the contribution specified in section 436(e)(2), as described in section VII.F of this preamble. The regulations do not reflect the provi- sions of section 203 of WRERA ’08 under which, for the first plan year beginning during the period beginning on October 1, 2008 and ending on September 30, 2009, the plan’s AFTAP for purposes of the benefit limitation under section 436(e) is equal to the larger of the AFTAP for the plan year and the AFTAP for the prior plan year. That change is expected to be addressed in future proposed regulations. F.Rules relating to techniques to avoid benefit limitations. The final regulations provide rules re- garding techniques that the plan sponsor may utilize to avoid or terminate bene- fit limitations under section 436 that are largely unchanged from the rules in the proposed regulations. For example, under the final regulations, an employer sponsor- ing a plan that would otherwise be subject to the limitations of section 436 can avoid the application of those limits by reducing the funding standard carryover balance and prefunding balance by an amount suf- ficient to avoid the limitations or, if the deadline for making contributions for the prior plan year has not passed, by making additional contributions for a prior plan year that are not added to the prefunding balance. Either of these techniques will have the effect of increasing the adjusted plan assets that form the numerator of the AFTAP calculation, which will increase the AFTAP. In addition, a plan sponsor could make the specific contributions described in section 436(b)(2), 436(c)(2), or 436(e)(2) or provide security to the plan as described in section 436(f)(1). These latter two techniques for avoiding or terminating the application of the benefit limitations of section 436 are described in §1.436–1(f). The regulations provide that the plan sponsor is permitted to make additional contributions that are specifically desig- nated at the time of the contribution as a contribution used to avoid the applica- tion of a limitation under section 436(b), 436(c), or 436(e). To address questions raised with respect to the proposed regula- tions, the final regulations provide general rules that apply to all contributions pur- suant to section 436(f) (referred to as sec- tion 436 contributions) and also separately state the rules with respect to the amount of contributions needed to avoid each type of benefit limitation. Section 436 contributions must be sep- arate from any minimum required contri- butions under section 430 and are disre- garded in determining the maximum addi- tion to the prefunding balance under sec- tion 430(f)(6) and §1.430(f)–1(b)(1)(i)(B). The designation of a contribution as a sec- tion 436 contribution must be made at the time the contribution is used to avoid or terminate the applicable benefit limitations and, except as specifically provided, can- not subsequently be recharacterized with respect to any plan year as a contribution to satisfy a minimum required contribu- tion obligation, or otherwise. Thus, if a plan sponsor makes a section 436 contri- bution for a plan year but does not make the minimum required contribution for the plan year, the plan will fail to satisfy the minimum funding requirements under sec- tion 430 for the plan year. The desig- nation must be made in accordance with the rules and procedures that otherwise apply to elections under the regulations (at §1.430(f)–1(f)) with respect to funding balances. The deductibility of a section 436 contribution is determined pursuant to the rules of section 404 (including the rules of section 404(a) and (o)). For this pur- pose, the section 436 contribution is con- sidered to be made for the plan year during which it is made. Any section 436 contribution made on a date other than the valuation date for the plan year must be adjusted with interest at the plan’s effective interest rate under sec- tion 430(h)(2)(A) for the plan year. If the plan’s effective interest rate for the plan year has not been determined at the time of the contribution, then this interest adjust- ment must be made using the highest rate of the three segment rates as applicable for the plan year under section 430(h)(2)(C). In such a case, if the effective interest rate for the year under section 430(h)(2)(A) is subsequently determined to be less than that highest rate, the excess is recharacter- ized as an employer contribution taken into account under section 430 for the current plan year. Any section 436 contribution must be paid before the unpredictable contingent event benefits are permitted to be paid, the plan amendment is permitted to go into ef- fect, or the benefit accruals are permitted toresume. Inaddition,anysection436 contribution with respect to a plan year must be paid during the plan year. Fur- thermore, no prefunding balance or fund- ing standard carryover balance under sec- tion 430(f) may be used as a section 436 contribution to avoid benefit limitations. In the case of a contribution to avoid or terminate the application of the limitation on benefits attributable to an unpredictable contingent event under section 436(b), in the event that the AFTAP for the plan year determined without taking into account the liability attributable to the unpredictable contingent event benefits is less than 60 percent, the amount of the contribution under section 436(b)(2) is equal to the amount of the increase in the funding target of the plan for the plan year if the benefits attributable to the unpredictable contingent event were included in the determination of the funding target. In the event that the AFTAP for the plan year determined without taking into account the liability attributable to the unpredictable contingent event benefits is 60 percent or more, but would be less than 60 percent taking the unpredictable contingent event benefits into account, the amount of the contribution under section 436(b)(2) is the amount that would be sufficient to result in an AFTAP for the plan year of 60 percent if the 2009–50 I.R.B.786December 14, 2009 benefits attributable to the unpredictable contingent event were included in the determination of the funding target and the contribution were included as part of the assets of the plan. In this latter case, the determination of the amount that would be sufficient to result in an AFTAP of 60 percent must take into account all liabilities for benefits attributable to prior unpredictable contingent event benefits that were permitted to be paid, prior plan amendments that were permitted to take effect, and restored accruals (and any associated section 436 contributions). In the case of a contribution to avoid or terminate the application of the limitation on benefits attributable to a plan amend- ment under section 436(c), in the event that the AFTAP for the plan year determined without taking into account the liability attributable to the plan amendment is less than 80 percent, the amount of the contribution under section 436(c)(2) is equal to the amount of the increase in the funding target of the plan for the plan year if the liabilities attributable to the amendment were included in the determination of the funding target. In the event that the AFTAP for the plan year determined without taking into account the liability attributable to the plan amendment is 80 percent or more, but would be less than 80 percent taking the amendment into account, the amount of the contribution under section 436(c)(2) is the amount that would be sufficient to result in an AFTAP for the plan year of 80 percent if the liabilities attributable to the plan amendment were included in the determination of the funding target and the contribution were included as part of the assets of the plan. In this latter case, the determination of the amount that would be sufficient to result in an AFTAP of 80 percent must take into account all liabilities for benefits attributable to prior unpredictable contingent event benefits that were permitted to be paid, prior plan amendments that were permitted to take effect, and restored benefit accruals (and any associated section 436 contributions). In the case of a contribution to avoid or terminate the application of the limi- tation on accruals under section 436(e), the amount of the contribution un- der section 436(e)(2) is equal to the amount sufficient to result in an AFTAP for the plan year of 60 percent if the contribution were included as part of the assets of the plan. For this purpose, the determination of the amount that would be sufficient to result in an AFTAP of 60 percent must take into account all liabilities for benefits attributable to prior unpredictable contingent event benefits that were permitted to be paid, prior plan amendments that were permitted to take effect, and restored benefit accruals (and any associated section 436 contributions). A plan sponsor is treated as making a section 436 contribution to bring the fund- ing level to the applicable threshold only after the plan’s enrolled actuary certifies an AFTAP for the plan year that takes into account the increased liability for the unpredictable contingent event benefits, the plan amendments, or accruals, and any associated section 436 contributions. Another technique for a plan sponsor to avoid the application of the benefit limita- tions of section 436 is for the plan sponsor to provide security. In such a case, the AFTAP for the plan year is determined by treating as an asset of the plan any security provided by a plan sponsor by the valuation date for the plan year in a form meeting certain specified requirements. However, this security is not taken into account as a plan asset for any other purpose, including section 430. The only security permitted to be provided by a plan sponsor for this purpose is (i) a bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of ERISA or (ii) cash, or United States obligations that mature in three years or less,heldinescrowbyabankorinsurance company. The regulations reflect section 436(f)(1)(C) and (D) in specifying when the security is to be contributed to the plan and when it may be released. If the security is turned over to the plan, then that amount is treated as an employer contribution when it is turned over to the plan. The final regulations provide that any such security turned over to the plan pursuant to the enforcement mechanism cannot be treated as a contribution to avoid or terminate the application of a section 436 benefit limitation under section 436(b)(2), 436(c)(2), or 436(e)(2). In response to commenter concerns, the final regulations permit security to be replaced, provided that the new security is in at least the same amount and satisfies certain other requirements. G.Presumed underfunding for purposes of benefit limitations. 1.General rules relating to operation of presumptions. Section 436(h) sets forth rules un- der which the limitations of section 436 are applied during the portion of a plan year before the enrolled actuary has cer- tified the plan’s AFTAP for the plan year. The regulations set forth rules for the application of the section 436 benefit limitations during the period the presumptions of section 436(h) apply to a plan, and describe the interaction of the application of those presumptions on plan operations with plan operations after the plan’s enrolled actuary has issued a certification of the plan’s AFTAP for the plan year. The rules in the final regulations have been revised from those in the proposed regulations to reflect comments. Under the final regulations, a plan must provide that, for any period during which a presumption under section 436(h) applies to the plan, the limitations applicable un- der section 436 are applied to the plan as if the AFTAP for the year were the presumed AFTAP determinedunder the applicable rule under section 436(h), in accordance with the rules of operation set forth in the regulations. For example, a plan’s prefunding balance and funding standard carryover balance must be reduced under section 436(f)(3) if the reduction would be sufficient to avoid the applicable limitation based on the presumed AFTAP. The final regulations provide rules for determining the amount of the reduction in balances that are similar to those under the proposed regulations. The final regulations use the pre- sumed AFTAP and the interim value of adjusted plan assets as of a date to calculate a presumed adjusted funding target as of that date. The presumed adjusted funding target is then compared to the interim value of adjusted plan assets in order to determine the amount of any deemed reduction in the funding standard carryover balance and prefunding balance under section 436(f)(3) that is made as of the first day of the plan year (and, in certain circumstances, that may be made later in the plan year). The interim value of adjusted plan as- sets is equal to the value of adjusted plan December 14, 20097872009–50 I.R.B. assets as of the first day of the plan year, determined without regard to future contri- butions and future elections with respect to the plan’s prefunding and funding standard carryover balances under section 430(f) (for example, elections to add to the pre- funding balance for the prior plan year, elections to use the prefunding and funding standard carryover balances to offset the minimum required contribution for a year, and elections (including deemed elections under section 436(f)(3)) to reduce the pre- funding and funding standard carryover balances for the current plan year). The presumed adjusted funding target is equal to the interim value of adjusted plan assets for the plan year divided by the presumed AFTAP. The final regulations provide that, if the presumed AFTAP for the plan year changes during the year, the rules regarding the deemed election to reduce funding balances must be reapplied based on the new presumed AFTAP. This will typically occur on the first day of the 4th month of a plan year, but could also happen at a different date if the enrolled actuary certifies the AFTAP for the prior plan year during the current plan year. In order to determine the amount of any reduction in prefunding balance and funding standard carryover balance that would apply in such a situation, a new presumed adjusted funding target must be established, which is then compared to the updated interim value of adjusted plan assets. For this purpose, the updated interim value of adjusted plan assets for the plan year is determined as the interim value of adjusted plan assets as of the first day of the plan year updated to take into account contributions for the prior plan year and section 430(f) elections with respect to the plan’s prefunding and funding standard carryover balances made before the date of the change in the presumed AFTAP, and the new presumed adjusted funding target is equal to the updated interim value of adjusted plan assets divided by the new presumed AFTAP. The reapplication of the rules regarding the deemed election under section 436(f)(3) may require an additional reduction in funding balances if the amount of the reduction in funding balances that is necessary to reach the applicable threshold to avoid the application of the limitation under section 436(d) or (e) is greater than the amount that was initially reduced. Prior reductions of funding balances continue to apply. Pursuant to section 436(d)(2), during any period in which the plan sponsor of a plan is a debtor in a case under title 11, United States Code, or any similar Federal or State law, no prohibited payment may be paid if the plan’s enrolled actuary has not yet certified the plan’s AFTAP for the plan year to be at least 100 percent. The presumption rules of section 436(h) do not apply for purposes of section 436(d)(2). The regulations also provide spe- cial rules that apply when the presumed AFTAP is deemed to be under 60 percent as a result of the application of section 436(h)(2). In such a case, the regulations provide that neither a reduction of the funding standard carryover balance or prefunding balance nor a section 436 contribution can beused to increase the presumed AFTAP to 60 percent. Accordingly, no prohibited payment can be made, no benefit accruals are permitted, and no plan amendment increasing benefitscan take effect during the period the plan is deemed to have an AFTAP of less than 60 percent. However, an unpredictable contingent event benefit is permitted to be paid if the plan sponsor makes the contribution described in section 436(b)(2)(B) (that is, a contribution equal to the increase in the funding target attributable to the unpredictable contingent event benefits). 2.Rules relating to unpredictable contingent event benefits and plan amendments. Under the regulations, for purposes of applying the limitations applicable to un- predictable contingent event benefits and plan amendments during the presumption period, the presumed adjusted funding tar- get must be adjusted to take into account the increase in the funding target attrib- utable to the unpredictable contingent event benefits or the plan amendment, as well as the increase in the funding target attributable to any unpredictable contin- gent event benefits that are permitted to be paid as a result of any unpredictable contingent event that occurred, or plan amendment that has taken effect, in the prior plan year to the extent not taken into account in the prior plan year adjusted funding target attainment percentage, and any other unpredictable contingent event benefits that are permitted to be paid as a result of any unpredictable contingent event that occurred, or plan amendment that has taken effect, in the current plan year to the extent not previously taken into account in the presumed adjusted funding target for the plan year. The final regulations use the terminclusive pre- sumed adjusted funding targetfor this value. The inclusive presumed adjusted funding target is used to calculate an inclu- sive presumed AFTAP by comparing it to the interim value of adjusted plan assets, updated to take into account contributions for the prior plan year, prior section 436 contributions for the current plan year, and section 430(f) elections with respect to the plan’s prefunding and funding standard carryover balances made before the date of the unpredictable contingent event or the date the plan amendment would take effect. During the presumption period, the rules relating to the deemed election of a collectively bargained plan to reduce the funding standard carryover balance and the prefunding balance must be applied based on the inclusive presumed adjusted funding target and the updated interim value of adjusted plan assets. Thus, if, based on the comparison of the updated interim value of adjusted plan assets and the inclusive presumed adjusted funding target, a plan amendment with respect to a collectively bargained plan can only take effect if the funding standard car- ryover balance and prefunding balance are reduced, then those balances must be reduced. A plan sponsor of a plan that is not a collectively bargained plan (and, thus, is not required to reduce the funding standard carryover balance and the pre- funding balance) is permitted to reduce those balances in order to increase the up- dated interim value of adjusted plan assets that is compared to the inclusive presumed adjusted funding target. Under the final regulations, if the ratio of the updated interim value of adjusted plan assets to the inclusive presumed adjusted funding target is less than the applicable threshold under section 436(b) or 436(c), then the plan is not permitted to provide any benefits attributable to the unpredictable contingent event, nor is the plan amendment permitted to take effect, unless the plan sponsor makes a 2009–50 I.R.B.788December 14, 2009 contribution that would allow payment of unpredictable contingent event benefits or would permit a plan amendment increas- ing benefit liabilities to take effect under section 436(b)(2) or 436(c)(2). However, if, after application of any reduction in the funding standard carryover balance or prefunding balance (whether mandatory or optional), the ratio of the interim value of adjusted plan assets to the inclusive pre- sumed adjusted funding target is greater than or equal to the applicable threshold under section 436(b) or 436(c), then the plan is not permitted to limit the payment of unpredictable contingent event bene- fits, nor is the plan permitted to restrict a plan amendment increasing benefit liabil- ities from becoming effective based on an expectation that the limitations under sec- tion 436(b) or 436(c) will apply following the enrolled actuary’s certification of the AFTAP for the plan year. 3.Updated determination of presumed AFTAP. If, in accordance with the rules of operation under the final regulations, un- predictable contingent event benefits are permitted to be paid, or a plan amendment takes effect, because the plan sponsor makes a contribution described in section 436(b)(2) or (c)(2), then the presumed adjusted funding target must be adjusted to reflect the increase in the funding target attributable to the unpredictable contin- gent event benefits or the plan amendment and the present value of the section 436 contribution is included in the updated interim value of adjusted plan assets. For example, if a plan amendment would have caused the ratio of the updated interim value of adjusted plan assets to the in- clusive presumed AFTAP to be less than 80 percent, then, after the contribution describedinsection436(c)(2)(B)ismade, thepresumedAFTAPwouldbe80percent. The adjustment to the presumed adjusted funding target is made on the date the contribution is made, and that date is a section 436 measurement date. Similar rules apply to a contribution described in section 436(e)(2). Thus, if benefit accruals are permitted to resume in a plan year because the plan sponsor makes the contribution described in sec- tion 436(e)(2), then the presumed AFTAP will be increased to 60 percent. In this case, the adjustment to the presumed adjusted funding target is made on the date the contribution is made, and that date is a section 436 measurement date. The regulations also provide that if a plan’s funding standard carryover bal- ance or prefunding balance is reduced as a result of applying the presumption rules, then the presumed AFTAP for the plan year is increased to reflect the higher interim value of adjusted plan assets resulting from the reduction in the funding standard carryover balance or prefunding balance. For example, if a reduction in the prefunding balance is made in an amount necessary to increase the presumed AFTAP to 60 percent, then the presumed AFTAP is changed to 60 percent. The date of the event that causes the reduction is a section 436 measurement date. 4.Periods for which no presumptions apply to the plan. Under the regulations, if no presump- tions under section 436(h) apply to a plan during a period and the plan’s enrolled actuary has not yet issued the certifica- tion of the plan’s actual AFTAP for the plan year, the plan is not permitted to limit the payment of prohibited payments under section 436(d) or the accrual of benefits under section 436(e) based on an expectation that those sections will apply to the plan once an actuarial certification is issued. However, the limitations on unpredictable contingent event benefits under section 436(b) and plan amendments increasing benefit liabilities under section 436(c) must be applied during that period by treating the preceding year’s certified AFTAP as if it were a presumed AFTAP and applying the rules for the presumption period as described in this preamble. Thus, an inclusive presumed adjusted funding target must be determined that takes into account prior events (including the unpredictable contingent event or plan amendment, any other unpredictable contingent event benefits that were permitted to be paid as a result of any unpredictable contingent event that occurred, and any other plan amendment that took effect, earlier during the plan year to the extent not taken into account in the certified AFTAP for the plan year, and any earlier section 436 contributions made for the plan year to the extent those contributions were not taken into account in the certified AFTAP). If after application of those rules the plan would be treated as having an AFTAP below the applicable threshold (taking into account the increase in the funding target attributable to the unpredictable contingent event benefits or the increase in liability attributable to the plan amendment), the unpredictable contingent event benefits are not permitted to be paid, and the plan amendment is not permitted to take effect, unless the plan sponsor makes a contribution that would allow payment of the unpredictable contingent event benefits or would permit the plan amendment to go into effect. In the case where the plan sponsor makes section 436 contributions to avoid the application of the applicable benefit limitations, to the extent those contributions would not be needed to permit the payment of the unpredictable contingent event benefits or for a plan amendment increasing benefits to go into effect based on a subsequent certification of the AFTAP for the current plan year that takes into account the increase in the funding target attributable to those unpredictable contingent event benefits or the increase in liability attributable to that plan amendment, the excess section 436 contributions are recharacterized as employer contributions and taken into account under section 430 for the current plan year. 5.Periods following certification of AFTAP. Under the final regulations, the rules of operation that apply during a period for which a section 436(h) presumption is in effect no longer apply for a plan year on and after the date the enrolled actuary for the plan issues a certification of the AFTAP of the plan for the current plan year, provided that the certification is issued before the first day of the 10th month of the plan year. For example, the plan must provide that section 436(d) applies for distributions with annuity starting dates on and after the date of that certification using the certified AFTAP of the plan for the plan year. Similarly, the plan must provide that any prohibition on accruals under section 436(e) as a result of December 14, 20097892009–50 I.R.B. the enrolled actuary’scertification that the AFTAP of the plan for the plan year is less than 60 percent is effective as of the date of the certification and that any prohibition on accruals ceases to be effective on the date the enrolled actuary issues a certification that the AFTAP of the plan for the plan year is at least 60 percent. In addition, in the case of a plan that has been issued a certification of the plan’s AFTAP for a plan year by the plan’s enrolled actuary, the plan sponsor must comply with the requirements of sections 436(b) and (c) for an unpredictable contingent event that occurs or a plan amendment that would take effect on or after the date of the enrolled actuary’s certification. Thus, the plan administrator must determine if the AFTAP is at or above the applicable threshold, taking into account the increase in the funding target that would be attributable to the unpredictable contingent event or plan amendment, any other unpredictable contingent event benefits that were permitted to be paid as a result of any unpredictable contingent event that occurred (and any other plan amendment that went into effect) earlier during the plan year to the extent not taken into account in the certified AFTAP for the plan year, and any earlier section 436 contributions made for the plan year to the extent those contributions were not taken into account in the certified AFTAP. After the AFTAP for a plan year is certified by the plan’s enrolled actuary, the deemed election to reduce funding balances must be reapplied based on the actual funding target for the year (provided the certification is issued before the first day of the 10th month of the plan year). This reapplication of the deemed election rules may require an additional reduction in funding balances if the amount of the reduction in funding balances that is necessary to reach the applicable threshold to avoid the application of the limitations under section 436(d) or (e) is greater than the amount that was reduced. If the amount of the reduction in funding balances that is necessary to reach the applicable threshold to avoid the application of the benefit limitation is less than the amount that was reduced, then the prior reduction continues to apply. Similarly, if the amount of the reduction in funding balances that is necessary to reach the applicable threshold to avoid the application of the corresponding benefit limitation exceeds the remaining amount of the funding balances, then the prior reduction continues to apply and no further reduction is made. The enrolled actuary’s certification of the AFTAP for the plan for the plan year does not affect unpredictable contingent event benefits that were permitted to be paid for events that occurred during the prior periods for which a presumption under section 436(h) applied. In addition, the enrolled actuary’s certification of the AFTAP for the plan for the plan year does not affect a plan amendment that increases the liability for benefits where the amendment was permitted to first take effect during the prior periods for which a presumption under section 436(h) applies. Similarly, the enrolled actuary’s certification of the AFTAP for the plan for the plan year does not affect prohibited payment distributions with annuity starting dates before the certification and does not require a cessation of accruals prior to the date of that certification. However, under the final regulations, if a plan does not pay benefits attributable to an unpredictable contingent event or plan amendment because of the application of a presumption under section 436(h) for a plan year, the plan must provide for benefits that were not previously paid (or accrued) if such benefits would be permit- ted under the rules of section 436 based on the certified actual AFTAP for that plan year, taking into account the increase in the funding target that would be attributable to the unpredictable contingent event benefits or increase in liability due to the plan amendment. The final regulations clarify that, for any plan year in which a plan is pro- viding benefits with respect to multiple unpredictable contingent events occurring within the plan year or plan amendments taking effect within the plan year, the sec- tion 436(b) restriction on unpredictable contingent event benefits and the section 436(c)restrictiononplanamendments are applied with respect to each unpre- dictable contingent event or amendment by treating the increase in the funding tar- get attributable to that event or amendment as if it included the increase in the fund- ing target attributable to any earlier event or amendment (and including any earlier section 436 contributions for the plan year as plan assets). As applied with respect to the limitation on plan amendments, this rule ensures that the limitation applies in a similar fashion regardless of whether a benefit increase is effectuated through a series of amendments or through a single amendment. In the absence of such a rule, the limitation on plan amendments could be avoided through a series of amend- ments each of which provides only a small portion of the aggregate increase. H.Determination of AFTAP and presumed AFTAP. 1.Determination of presumed AFTAP based on prior plan year’s certified AFTAP. The final regulations provide rules for the determination of the presumed AFTAP under section 436(h)(1) that are similar to the rules under the proposed regulations. Thus, if a limitation under section 436 appliedinthepriorplanyearbasedona certified AFTAP during that plan year, the presumed AFTAP as of the first day of the current plan year is equal to the AFTAP for the prior plan year. The final regulations modify the rule in the proposed regulations that would have permitted a certified AFTAP that is made on or after the first day of the 10th month of the prior plan year to be used as the basis for the presumed AFTAP in the current plan year (in lieu of using the deemed “under 60 percent” AFTAP that applied for the prior plan year in such a case). Under the final regulations, such a late prior plan year certification is permitted to be so used only if the certification took into account any unpredictable contingent event benefits that are permitted to be paid based on unpredictable contingent events that occurred and plan amendments that went into effect prior to that late certification (along with any associated section 436 contributions). In addition, the regulations provide rules for the application of the presump- tions if the plan actuary did not certify the AFTAP in the prior plan year, but that prior plan year ended before the first day of the 10 th month of the plan year (so that section 436(h)(2) did not apply in that prior plan year). In such a case, the presumed AFTAP that applied as of the end of the prior plan year is treated as a 2009–50 I.R.B.790December 14, 2009 certified AFTAP for that plan year which is used for purposes of the presumptions in the current year. 2.Change in presumed AFTAP on first day of the 4th month. The final regulations provide rules for the application of section 436(h)(3) that are similar to the proposed regulations. Some comments suggested that section 436(h)(3) applies on a limitation by lim- itation basis (with the result that a plan could have different presumed AFTAPs among the various limitations). However, the IRS and the Treasury Department believe that applying a single presumed AFTAP for all purposes reflects the statutory language of section 436(h)(3) and provides a consistent set of rules for applying the limitations during the period following the first day of the 4th month of the plan year. This interpretation is also essential for purposes of the rule under which benefits with respect to unpredictable contingent events that previously occurred during the plan year and plan amendments that previously took effect during the plan year are taken into account on a combined basis for purposes of applying the limitations with respect to subsequent events or amendments, such as a subsequent unpredictable contingent event. Under the final regulations, if the AFTAP for the prior plan year was at least 60 percent but less than 70 percent or was at least 80 percent but less than 90 percent, and the actuary has not certified the AFTAP for the current plan year before the first day of the 4th month of the current plan year, then the presumed AFTAP for the current plan year is 10 percentage points lower than the AFTAP for the prior plan year. As under the proposed regulations, this 10 percentage point reduction will also apply as of the date the actuary certifies the AFTAP for the prior plan year, even if that certification is on or after the first day of the 4th month of the current plan year. In either case, the date of the 10 percentage point reduction is a section 436 measurement date. The final regulations also provide that the 10 percentage point reduction applies in the first year that section 436 applies to the plan if the AFTAP for the prior plan year was at least 70 percent but less than 80 percent. This rule reflects an interpretation of section 436(h)(3)(A) (providing for a 10 percentage point reduction in the AFTAP if a limitation under section 436 would have applied in the prior plan year) under which the determination of whether a limitation under section 436 would have applied in the prior plan year is made by assuming that section 436 was effective in that prior plan year. 3.Change in presumed AFTAP on first day of 10 th month for plans with no current year certification. The final regulations reflect the rules of section 436(h)(2), under which a plan for which the actuary has not issued a cer- tification before the first day of the 10th month of the plan year is conclusively pre- sumedtohaveanAFTAPoflessthan 60 percent beginning on that date. These rules are unchanged from the proposed regulations. 4.Rules regarding certifications and range certifications. The proposed regulations would have provided that the enrolled actuary’s certification of the AFTAP for a plan year must be made in writing, must be provided to the plan administrator, and must certify the plan’s AFTAP for the plan year. The final regulations specify that the certification must also set forth the value of plan assets, the prefunding balance, the funding standard carryover balance, the value of the funding target used in the determination, the aggregate amount of annuity purchases included in the adjusted value of plan assets and the adjusted funding target, the unpredictable contingent event benefits permitted to be paid for unpredictable contingent events that occurred during the current plan year that were taken into account for the current plan year (including with any associated section 436 contribution), the plan amendments that went into effect in the current plan year that were taken into account for the current plan year (including with any associated section 436 contribution), and any other relevant factors. The actuarial assumptions and funding methods used in the calculation for the certification must be the actuarial assumptions and funding methods used fortheplanforpurposesofdetermining the minimum required contributions under section 430 for the plan year. Thus, if the actuary who determines the minimum required contributions for the plan year is not the same actuary who certified the AFTAP for the plan year, then the second actuary must either apply the actuarial assumptions and methods used by the first actuary or must issue a revised certification for the plan year. See section VII.H.5 of this preamble for a description of the consequences of a revised certification. Some commenters requested that an enrolled actuary be permitted to certify the AFTAP for a plan year based on a “roll forward” of prior year actuarial results with appropriate adjustments for subsequent changes. The final regulations do not provide for such an alternative to estimate the AFTAP because the AFTAP must be based on the funding target for the current plan year and section 436 does not provide any rules to address discrepancies between an estimated AFTAP and an actual AFTAP for a plan year. As an alternative to certifying a spe- cific number for the plan’s AFTAP, the proposed regulations would have provided that the enrolled actuary is permitted to certify during the first 9 months of a plan year that the plan’s AFTAP for that year is within a percentage “range” that is either (i) 60 percent or higher, but less than 80 percent, (ii) 80 percent or higher, or (iii) 100 percent or higher. The final regulations adopt this alternative and provide that such a “range” certification ends the application of the presumptions, but only if the enrolled actuary follows up with a certification of the specific AFTAP and that the certified specific AFTAP is within the range of theearlier certification. In addition, the final regulations permit a range certification of under 60 percent. The proposed regulations would have provided that the specific AFTAP must be certified before the first day of the 10th month of that year. In response to concerns raised by commenters, the final regulations provide that, if the plan’s enrolled actuary has issued a timely range certification for a plan year, then the specific AFTAP is permitted to be certified at any time prior to the end of the plan year. However, if the plan’s enrolled actuary has issued a range certification for the plan year but does not issue a certification of the specific AFTAP December 14, 20097912009–50 I.R.B. for the plan by the last day of that plan year, the AFTAP for the plan is retroactively deemed to be less than 60 percent as of the first day of the 10th month of the plan year. If this range certification alternative is followed, then the plan is treated as having a certified AFTAP at the smallest value within the applicable range. For example, if the enrolled actuary certified that the AFTAP was more than 60 percent but less than 80 percent, then the plan is treated as having an AFTAP of 60 percent for purposes of applying the limitations of section 436(b) until the date of the specific AFTAP certification. In such a case, if there is an unpredictable contingent event or a plan amendment is adopted that increases liability for benefits, unpredictable contingent event benefits cannot be paid and the plan amendment cannot take effect unless the plan sponsor makes a contribution described in section 436(b)(2) or 436(c)(2). If the plan sponsor makes a contribution under section 436(b)(2) or section 436(c)(2), the final regulations provide that the contribution is recharacterized asa regular employer contribution that is taken into account under section 430 for the current plan year to the extent it is determined that the contribution was not needed to avoid the application of the benefit limit, based on the subsequent calculation of the specific AFTAP. The final regulations specify that the enrolled actuary is not permitted to certify the AFTAP based on a value of assets that includes contributions receivable for the prior plan year that have not actually been made as of the date of the certification. However, this rule does not apply to certifications that are made for plan years beginning before January 1, 2009. Thus, for a certification with respect to 2008, the enrolled actuary is permitted to take in account contributions for 2007 that are reasonably expected but have not yet been made by the plan sponsor at the time of the certification. However, if the plan sponsor does not make those contributions, the enrolled actuary’s certification will be incorrect. 5.Change in certified AFTAP. If the enrolled actuary for the plan pro- vides a certification of the AFTAP for the plan year (including a range certification) and that certified percentage is superseded by a subsequent determination of the AFTAP for that plan year, that later percentage generally must be applied for the period beginning with the date of the first certification. The subsequent determination could be the correction of a prior incorrect certification (including a certification for a plan year beginning in 2008 which assumed an employer contribution that was not made) or it could be an update of a prior correct certification to take into account subsequent events, such as plan amendments, additional contributions, or elections under section 430(f). The implications of such a change depend on whether the change is a material change or an immaterial change. For this purpose, the regulations define a change of AFTAP as a material change if plan operations with respect to benefits that are addressed by section 436, taking into account any actual contributions and elections under section430(f)madebythe plan sponsor based on the prior certified percentage, would have been different based on the subsequent determination of the plan’s AFTAP for the plan year. A change in a plan’s AFTAP for a plan year can be a material change even if the only impact of the change occurs in the following plan year under the rules for determining the presumed AFTAP in that following year. The regulations specify that a change in an AFTAP that is not a material change as described in the preceding paragraph is an immaterial change. In addition, the regulations provide that if the difference between the AFTAP for a plan year and the later revised determination of that percentage is the result of certain specified actions, then the change in the AFTAP is deemed to be an immaterial change. The proposed regulations would have provided that the specified actions are additional contributions for the preceding year or a plan sponsor’s election to reduce the prefunding or funding standard carryover balance after the date of the certification. The final regulations add to this list, including adding a plan sponsor’s election to apply the prefunding balance or funding standard carryover balance to offset the prior plan year’s minimum required contribution, a change in funding method or actuarial assumptions (where such change required actual approval of the Commissioner, rather than deemed approval), and an unpredictable contingent event or plan amendment for which a section 436 contribution was made. The final regulations provide rules re- quiring a recertification of the AFTAP in certain situations. For example, if the plan would have a material change in the AFTAP as a result of one of the changes described in the prior paragraph, the change is deemed immaterial only if the actuary recertifies the AFTAP for the plan year as soon as practicable thereafter, taking into account the relevant event. Similarly, if the plan sponsor is making a section 436 contribution in the amount needed to bring the AFTAP up to a relevant threshold (60 or 80 percent), then the actuary must recertify the AFTAP as 60 or 80 percent. The regulations also provide that the plan administrator is permitted to request an updated certification of AFTAP in other situations, such as where the employer makes a section 436 contribution in the amount of the increase in the funding target attributableto the unpredictable contingent event benefits or the plan amendment. The regulations provide that a ma- terial change will result in the plan not satisfying the qualification rules. If the plan was operated in accordance with the prior certification of the AFTAP for the plan year, the plan will not have satisfied the requirements of section 401(a)(29) and section 436. In the case ofamaterialchangewheretheplan was operated in accordance with the subsequent certification of the AFTAP during the period of time the prior certification applied, then the plan will not have been operated in accordance with its terms. Furthermore, the regulations provide that the rules requiring application of a presumed AFTAP under section 436(h) continue to apply from and after the date of the prior certification until the date of the subsequent certification. The final regulations provide that, in the case of an immaterial change, the revised percentage applies prospectively. For this purpose, in the case of a change that would be a material change but for the rule deem- ingittobeanimmaterialchange,there- vised percentage must be applied begin- ning with the date of the event that gave rise to the need for theupdated certifica- tion. As under the proposed regulations, 2009–50 I.R.B.792December 14, 2009 an immaterial change does not change the inapplicability of the presumptions under section 436(h) for the plan year prior to the date of the subsequent certification. I.Determination of adjusted funding target attainment percentage. For purposes of section 436, thefund- ing targetmeans the funding target under section 430(d) or section 430(i), as appli- cable to the plan for a plan year, and the FTAP is determined under the same rules that apply under section 430(d). The AFTAP for any plan year is the fraction (expressed as a percentage), the numerator of which is the adjusted plan assets and the denominator of which is the adjusted funding target. The adjusted plan assets equals the value of plan assets, decreased by the plan’s funding standard carryover balance and prefunding balance and increased by the aggregate amount of purchases of annuities for participants and beneficiaries (other than participants who, atthetimeofthepurchase,werehighly compensated employees (as defined in section 414(q), which definition includes highly compensated former employees described in §1.414(q)–1T, Q&A–4)) which were made by the plan during the preceding 2 plan years, to the extent not included in plan assets under section 430. The final regulations provide that the adjusted funding target equals the funding target for the plan year (determined without regard to the at-risk rules under section 430(i)), increased by the same annuity purchases that were added to the assets in determining adjusted plan assets. If the FTAP for a plan year, deter- mined without regard to the subtraction of the funding standard carryover bal- ance and the prefunding balance from the value of plan assets in accordance with section 436(f), would be 100 percent or more, then, for purposes of section 436, the value of net plan assets used in the determination of the FTAP (and hence the AFTAP) is determined without regard to any subtraction of funding balances under section 430(f)(4). The final regulations reflect the transition rule of section 436(j)(3)(B) under which a lower percentage is substituted for 100 percent for purposes of the rule described in the preceding sentence. However, this transition is only available if the plan’s FTAP for each prior year is above the transition percentage. This latter requirement was unchanged by WRERA. The final regulations also provide rules for determining the AFTAP for the prior plan year in the case of the first plan year beginning in 2008. These rules are the same as under the proposed regulations, except that the proposed regulations would have allowed the special rules to apply to the first effective plan year (which could belaterthan2008inthecaseofaplan described in sections 104 through 106 of PPA ’06). Under the rules for determining the AFTAP for the plan year preceding the first plan year beginning in 2008, the FTAP for the preceding plan year is determined by substituting the current liability for the funding target. The transition rules for determining the value of plan assets are the same under section 436 as apply under section 430(d). Thus, the value of plan assets is determined under section 412(c)(2) as in effect for the 2007 plan year (except that the value of plan assets prior to subtraction of the plan’s funding standard account credit balance described below can neither be less than 90 percent of the fair market value of plan assets nor greater than 110 percent of the fair market value of plan assets on the valuation date for that plan year). If a plan has a funding standard account credit balance as of the valuation date for the 2007 plan year, that balance must be subtracted from the asset value described in this preamble as of that date (unless the value of plan assets is greater than or equal to 90 percent of the plan’s current liability determined under section 412(l)(7) (as in effect prior to PPA ’06) on the valuation date for the 2007 plan year). However, if the employer makes an election to reduce some or all of the funding standard carryover balance as of the first day of the first plan year beginning in 2008 in accordance with section 430(f)(5), then the present value (determined as of the valuation date for the prior plan year using the valuation interest rate for that prior year) of the amount so reduced is not treated as part of the funding standard account credit balance when that balance is subtracted from the value of net plan assets. In any case in which the plan’s enrolled actuary has not issued a certification of the AFTAP of the plan for the 2007 plan year using this rule, the AFTAP of the plan for the first plan year beginning in 2008 is presumed to be less than 60 percent until the AFTAP of the plan for the 2007 plan year has been certified or the AFTAP of the plan for the first plan year beginning in 2008 has been certified. This rule applies for purposes of sections 436(b) and 436(c) at the beginning of the first plan year beginning in 2008 and applies for purposes of sections 436(d) and 436(e) as of the first day of the 4th month of the first plan year beginning in 2008. The special rules permitting range certifications for plan years beginning after 2007 do not apply to the 2007 plan year. The final regulations differ from the proposed regulations in the transition rules that apply for the determination of a plan’s AFTAP for the pre-effective plan year in the case of a plan described in sections 104 through 106 of PPA ’06. In such a case, the AFTAP is determined for that plan year in the same manner as for a plan to which section 430 applies to determine the plan’s minimum required contribution, except that the value of plan assets that forms the FTAP numerator is determined without subtraction of the funding standard carryover balance or the credit balance under the funding standard account. 9 The regulations do not include any special rules authorized under section 436(k) (relating to the determination of the AFTAP for a plan that uses a valuation date other than the first day of the plan year). Those rules, based on the rules described in Notice 2008–21, will be included in future proposed regulations. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. 9 Section 436(m) provides for special rules to apply in determining a plan’s AFTAP for the preceding plan year onlyfor plan years beginning during 2008.Accordingly, the regulations limit the use of the special rule under which the plan’s FTAP is determined based on the plan’s current liability to the determination of the plan’s FTAP for the2007planyear,evenforaplan described in sections 104 through 106 of PPA ’06 for which section 430 does not apply for purposes of determining a plan’s minimum required contribution until a plan year after the 2008 plan year. December 14, 20097932009–50 I.R.B. J.Timeliness of certification of a plan’s AFTAP. A number of comments were received raising issues concerning potential de- lays in the completion and delivery of a certification of the plan’s AFTAP by the plan’s enrolled actuary. In particular, commenters asked whether there was any legal obligation to provide a certification, whether an actuary could intentionally delay providing the certification, and whether the plan administrator could direct the certification to be delayed (or delay requesting a certification where the plan’s actuary would not provide a certification until so requested by the plan administrator). These final regulations do not include any special rules relating to these comments, but these comments may be considered in connection with future proposed regulations. In addition, the Treasury Department and the IRS will be coordinating with the Department of Labor to consider the circumstances in which the power to delay issuance of a certification may result in fiduciary responsibilities in the administration of the plan, rather than being merely ministerial. Section 1.411(d)–4, Q&A–4(a) pro- vides generally that a plan that permits the employer, either directly or indirectly, through the exercise of discretion, to deny a participant a section 411(d)(6) protected benefit provided under the plan for which the participant is otherwise eligible vio- lates the requirements of section 411(d)(6). In addition, pursuant to that regulation, a plan that permits employer discretion to deny the availability of a section 411(d)(6) protected benefit violates the definitely de- terminable requirement of section 401(a). Section 1.411(d)–4, Q&A–4(b) provides an exception to this general rule for limited discretion with respect to the ministerial or mechanical administration of the plan. Section 1.411(d)–4, Q&A–6(b) provides that a plan may not limit the availability of section 411(d)(6) protected benefits per- mitted under the plan based on objective conditions that are within the employer’s discretion. As an example of such a provision, the regulation states that the availability of section 411(d)(6) protected benefits in a plan may not be conditioned on a determination with respect to the level of the plan’s funded status because the amount of the plan’s funding is within the employer’s discretion. Future proposed regulations are ex- pected to address the interaction of the rules of section 436 and the rules of §1.411(d)–4 that relate to employer dis- cretion. These future proposed regula- tions are expected to conform the rules of §1.411(d)–4, Q&A–6(b), regarding em- ployer discretion in plan funding to the requirements of section 436. These future proposed regulations are also expected to address the extent to which §1.411(d)–4, Q&A–4(b) (under which a plan may per- mit limited discretion with respect to ministerial acts) applies with respect to the certification of the plan’s AFTAP. Effective/Applicability Date The final regulations under section 430 apply to plan years beginning on or after January 1, 2010, regardless of whether sec- tion 430 applies to determine the minimum required contribution for the plan year. For plan years beginning before January 1, 2010,plansarepermittedtorelyonthese final regulations for purposes of satisfying the requirements of section 430. This re- liance applies section by section under the final regulations. Alternatively, for plan years beginning before January 1, 2010, plansarepermittedtorelyontheproposed regulations under section 430(d), (f), (g), (h)(2), and (i) (REG–139236–07, 72 FR 74215; REG–113891–07, 72 FR 50544) for purposes of applying the rules of section 430. Section436generallyappliestoplan years beginning on or after January 1, 2008. The applicability of section 436 for purposes of determining the minimum required contribution is delayed for cer- tain plans in accordance with sections 104 through 106 of PPA ’06. In the case of a collectively bargained plan that is main- tained pursuant to one or more collective bargaining agreements between employee representatives and one or more employ- ers ratified before January 1, 2008, section 436 does not apply to plan years beginning before the earlier of January 1, 2010, or the later of the date on which the last such collective bargaining agreement relating to the plan terminates 10 (determined with- out regard to any extension thereof agreed to after August 17, 2006), or the first day of the first plan year to which section 436 would otherwise apply. In the case of a plan with respect to which a collective bargaining agreement applies to some, but not all, of the plan participants, the plan is considered a collectively bargained plan if it is considered a collectively bargained plan under the rules that apply for pur- poses of section 436(f)(3)(C) described in section VII.A.7 of this preamble. The final regulations under section 436 apply to plan years beginning on or after January 1, 2010. For plan years beginning before January 1, 2010, plans are permitted to rely on the provisions set forth in these final regulations for purposes of satisfying the requirements of section 436. Alterna- tively, for plan years beginning before Jan- uary 1, 2010, plans are permitted to rely on the proposed regulations under section 436 (REG–113891–07, 72 FR 50544) for purposes of satisfying the requirements of section 436. Section 1107 of PPA ’06 and Code Section 411(d)(6) Under section 1107 of PPA ’06, a plan sponsor is permitted to delay adopting a plan amendment pursuant to the en- actment of section 436 (or pursuant to these regulations) until the last day of the first plan year beginning on or af- ter January 1, 2009. If section 1107 of PPA ’06 applies to an amendment of a plan, section 1107 provides that the plan does not fail to meet the requirements of section 411(d)(6) by reason of such amendment, except as otherwise provided by the Secretary of the Treasury. 11 For example, section 411(d)(6) relief would be available for plan amendments that would prohibit single sum or other op- tional forms of benefit that include pro- 10 As provided in section 113(b)(2) of PPA ’06, any plan amendment made pursuant to a collective bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by section 436 is not treated as a termination of the collective bargaining agreement. 11 Except to the extent permitted under section 411(d)(6) and §1.411(d)–3 or 1.411(d)–4, or under a statutory provision such as section 1107 of PPA ’06, section 411(d)(6) prohibits a plan amendment that decreases a participant’s accrued benefits or that has the effect of eliminating or reducing an early retirement benefit or retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before theamendment. However, an amendment that eliminates or decreases benefitsthat have not yet accrued does not violate section 411(d)(6), provided that the amendment is adopted and effective before the benefits accrue. 2009–50 I.R.B.794December 14, 2009 hibited payments if the plan’s AFTAP was less than 60 percent, in accordance with section 436(d) and §1.436–1(d) of these regulations. The IRS and the Treasury Department are reviewing whether sample plan amendments should be issued with respect to section 436 and the §1.436–1 regulations. Special Analyses It has been determined that this Trea- sury Decision is not asignificant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information imposed by these regulations will not have a significant economic impact on a sub- stantial number of small entities. The esti- mated burden imposed by the collection of information contained in these regulations is 1.5 hours per respondent. Moreover, most of this burden is attributable to the requirement for a qualified defined ben- efit plan’s enrolled actuary to provide a timely certification of the plan’s AFTAP for each plan year to avoid certain benefit restrictions, whichis imposed by section 436(h) of the Code. In addition, these regulations provide for several written elections to be made by the plan sponsor upon occasion; these written elections will require minimal time to prepare. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal authors of these regulations are Michael P. Brewer, 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. ***** Adoption of amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are 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(d)–1 is added to read as follows: §1.430(d)–1 Determination of target normal cost and funding target. (a)In general—(1)Overview.This section sets forth rules for determining a plan’s target normal cost and funding target under sections 430(b) and 430(d), including guidance relating to the rules regarding actuarial assumptions under sec- tions 430(h)(1), 430(h)(4), and 430(h)(5). Section 430 and this section apply to single employer defined benefit plans (including multiple employer plans as defined in sec- tion 413(c)) that are subject to section 412, but do not apply to multiemployer plans (as defined in section 414(f)). For further guidance on actuarial assumptions, see §1.430(h)(2)–1 (relating to interest rates) and §§1.430(h)(3)–1 and 1.430(h)(3)–2 (relating to mortality tables). See also §1.430(i)–1 for the determination of the funding target and the target normal cost for a plan that is in at-risk status. (2)Organization of regulation. Para- graph (b) of this section sets forth cer- tain definitions that apply for purposes of section 430. Paragraph (c) of this sec- tion provides rules regarding which bene- fits are taken into account in determining a plan’s target normal cost and funding tar- get. Paragraph (d) of this section sets forth the rules regarding the plan provisions that are taken into account in making these de- terminations, and paragraph (e) of this sec- tion provides rules on the plan population that is taken into account for this purpose. Paragraph (f) of this section provides rules relating to the actuarial assumptions and the plan’s funding method that are used to determine present values. Paragraph (g) of this section contains effective/applicability dates and transition rules. (3)Special rules for multiple employer plans. In the case of a multiple employer plan to which section 413(c)(4)(A) ap- plies, the rules of section 430 and this section are applied separately for each employer under the plan, as if each em- ployer maintained a separate plan. Thus, the plan’s funding target and target nor- mal cost are 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 sec- tion 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)Definitions—(1)Target normal cost—(i)In general. For a plan that is not in at-risk status under section 430(i) for a plan year, subject to the adjustments described in paragraph (b)(1)(iii) of this section, thetarget normal costof the plan for the plan year is the present value (de- termined as of the valuation date) of all benefits under the plan that accrue during, are earned during, or are otherwise allo- cated to service for the plan year under the applicable rules of this section, including paragraph (c)(1)(ii)(B), (C), or (D) of this section. See §1.430(i)–1(d) and (e)(2) for the determination of the target normal cost for a plan that is in at-risk status. (ii)Benefits allocated to a plan year. The benefits that accrue, are earned, or are otherwise allocated to service for the plan year are based on the actual benefits accrued, earned, or otherwise allocated to service for the plan year through the valu- ation date and benefits expected to accrue, be earned, or be otherwise allocated to ser- vice for the plan year for the period from the valuation date through the end of the plan year. The benefits that are allocated to the plan year under the rules of paragraph (c) of this section include any increase in benefits during the plan year that is attrib- utable to increases in compensation for the current plan year even if that increase in benefits is with respect to benefits attrib- utable to service performed in a preceding plan year. In addition, the benefits that are allocated to the plan year under the rules of paragraph (c) of this section include any increase in benefits during the plan year that arises on account of mandatory em- ployee contributions (within the meaning December 14, 20097952009–50 I.R.B. of §1.411(c)–1(c)(4))that are made during the plan year. (iii)Special adjustments—(A)In gen- eral. The target normal cost of the plan for the plan year (determined under para- graph (b)(1)(i) of thissection) is adjusted (not below zero) by adding the amount of plan-related expenses expected to be paid from plan assets during the plan year and subtracting the amount of mandatory em- ployee contributions (within the meaning of §1.411(c)–1(c)(4)) that are expected to be made during the plan year. (B)Plan-related expenses.[Reserved] (2)Funding target. For a plan that is not in at-risk status under section 430(i) for a plan year, the funding target of the plan for the plan year is the present value (deter- mined as of the valuation date) of all bene- fits under the plan that have been accrued, earned, or otherwise allocated to years of service prior to the first day of the plan year under the applicable rules of this section, including paragraph (c)(1)(ii)(B), (C), or (D) of this section. See §1.430(i)–1(c) and (e)(1) for the determination of the funding target for a plan that is in at-risk status. (3)Funding target attainment percent- age—(i)In general. Except as otherwise provided in this paragraph (b)(3), the fund- ing target attainment percentage of a plan for a plan year is a fraction (expressed as a percentage)— (A) The numerator of which is the value of plan assets for the plan year (determined under the rules of §1.430(g)–1) after sub- traction of the prefunding balance and the funding standard carryover balance under section 430(f)(4)(B) and §1.430(f)–1(c); and (B) The denominator of which is the funding target of the plan for the plan year (determined without regard to the at-risk rules of section 430(i) and §1.430(i)–1). (ii)Determination of funding target attainment percentage for plans with de- layed effective dates. If section 430 does not apply for purposes of determining the plan’s minimum required contribution for a plan year that begins on or after January 1, 2008 (as is the case for a plan described in section 104, 105, or 106 of the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780)), then the funding target attainment percentage is determined for that plan year in accor- dance with the rules of paragraph (b)(3)(i) of this section in the same manner as for a plan to which section 430 applies to determine the plan’s minimum required contribution, except that the value of plan assets that forms the numerator under paragraph (b)(3)(i)(A) of this section is determined without subtraction of the funding standard carryover balance or the credit balance under the funding standard account. (iii)Special rule for plans with zero funding target. If the funding target of the plan is equal to zero for a plan year, then the funding target attainment percentage under this paragraph (b)(3) is equal to 100 percent for the plan year. (4)Present value. The present value of a benefit (including a portion of a ben- efit) with respect to a participant that is taken into account under the rules of para- graph (c) of this section is determined as of the valuation date by multiplying the amount of that benefit by the probability that the benefit will be paid at a future date and then discounting the resulting prod- uct using the appropriate interest rate un- der §1.430(h)(2)–1. The probability that the benefit will be paid with respect to the participant at such future date is de- termined using the actuarial assumptions that satisfy the standards of paragraph (f) of this section as to the probability of fu- ture service, advancement in age, and other events (such as death, disability, termina- tion of employment, and selection of op- tional form of benefit) that affect whether the participant or beneficiary will be eligi- ble for the benefit and whether the benefit will be paid at that future date. (c)Benefits taken into account—(1)In general—(i)Benefits earned or accrued. The benefits taken into account in deter- mining the target normal cost and the fund- ing target under paragraph (b) of this sec- tion are all benefits earned or accrued un- der the plan that have not yet been paid as of the valuation date, including retire- ment-type and ancillary benefits (within the meaning of §1.411(d)–3(g)). The bene- fits taken into account are based on the par- ticipant’s or beneficiary’s status (such as active employee, vested or partially vested terminated employee, or disabled partici- pant) as of the valuation date, and those benefits are allocated to the funding target or the target normal cost under paragraph (c)(1)(ii) of this section. (ii)Allocation of benefits—(A)In gen- eral. To the extent that the amount of a participant’s benefit that is expected to be paid is a function of the accrued benefit, the allocation of the benefit for purposes of determining the funding target and the target normal cost is made using the rules of paragraph (c)(1)(ii)(B) of this section. To the extent that the amount of a partici- pant’s benefit that is expected to be paid is not a function of the accrued benefit, but is a function of the participant’s years of ser- vice (or is the excess of a function of the participant’s years of service over a func- tion of the participant’s accrued benefit), the allocation of the benefit for purposes of determining the funding target and the target normal cost is made using the rules of paragraph (c)(1)(ii)(C) of this section. To the extent that the amount of a partici- pant’s benefit that is expected to be paid is not allocated under the rules of paragraph (c)(1)(ii)(B) or (C) of this section, the al- location of the benefit for purposes of de- termining the funding target and the target normal cost is made using the rules of para- graph (c)(1)(ii)(D) of this section. (B)Benefits that are based on accrued benefits. If the allocation of the benefit for purposes of determining the funding target and the target normal cost is made under this paragraph (c)(1)(ii)(B), then the por- tion of a participant’s benefit that is taken into account in the funding target for a plan year is determined by applying the func- tion to the accrued benefit as of the first day of the plan year, and the portion of the benefit that is taken into account in deter- mining the target normal cost for the plan year is determined by applying that func- tion to the increase in the accrued benefit during the plan year. For example, a bene- fit that is assumed to be payable at a partic- ular early retirement age in the amount of 90 percent of the accrued benefit is taken into account in the funding target in the amount of 90 percent of the accrued bene- fit as of the beginning of the plan year, and that benefit is taken into account in the tar- get normal cost in the amount of 90 percent of the increase in the accrued benefit dur- ing the plan year. (C)Benefits that are based on service. If the allocation of the benefit for purposes of determining the funding target and the target normal cost is made under this para- graph (c)(1)(ii)(C), then the portion of a participant’s benefit that is taken into ac- count in determining the funding target for a plan year is determined by applying the 2009–50 I.R.B.796December 14, 2009 function to the participant’s years of ser- vice as of the first day of the plan year, and the portion of the benefit that is taken into account in determining the target nor- mal cost for the plan year is determined by applying that function to the increase in the participant’s years of service dur- ing the plan year. For example, if a plan provides a post-retirement death benefit of $500 per year of service, then the funding target is determined based on a death ben- efit of $500 multiplied by a participant’s years of service at the beginning of the year, and if the participant earns or is ex- pected to earn a full year of service dur- ing the plan year, the target normal cost is based on the additional $500 in death ben- efits attributable to that additional year of service. (D)Other benefits. If the allocation of the benefit for purposes of determining the funding target and the target normal cost is made under this paragraph (c)(1)(ii)(D), then the portion of a participant’s benefit that is taken into account in determining the funding target for a plan year is equal to the total benefit multiplied by the ratio of the participant’s years of service as of the first day of the plan year to the years of service the participant will have at the time of the event that causes the benefit to be payable (whether the benefit is ex- pected to be paid at the time of that decre- ment or at a future time), and the portion of the benefit that is taken into account in determining the target normal cost for the plan year is the increase in the proportion- ate benefit attributable to the increase in the participant’s years of service during the plan year. For example, if a plan provides a Social Security supplement for a partic- ipant who retires after 30 years of service that is equal to a participant’s Social Se- curity benefit, the funding target with re- spect to the benefit payable beginning at a particular age (which reflects the probabil- ity of retirement at that age) is determined based on the projectedSocial Security ben- efit payable at the particular age multiplied by a fraction, the numerator of which is the participant’s years of service as of the first day of the plan year and the denominator of which is the participant’s projected years of service at the particular age. In such a case, if the participant earns or is expected to earn a full year of service during the plan year, the target normal cost is determined based on the projectedSocial Security ben- efit payable at the particular age multiplied by a fraction, the numerator of which is one and the denominator of which is the par- ticipant’s projected years of service at the particular age. (iii)Application of section 436 limi- tations to funding target and target nor- mal cost determination—(A)Effect of lim- itation on unpredictable contingent event benefits. The determination of the fund- ing target and the target normal cost of a plan for a plan year must take into ac- count any limitation on unpredictable con- tingent event benefits under section 436(b) with respect to unpredictable contingent events which occurred before the valuation date, but must not take into account an- ticipated funding-based limitations on un- predictable contingent event benefits un- der section 436(b) with respect to unpre- dictable contingent events which are ex- pected to occur on or after the valuation date. (B)Effect of limitation on applicability of plan amendments. See paragraph (d) of this section for rules regarding the treat- ment of plan amendments that take effect during the plan year taking into account the restrictions under section 436(c). (C)Effect of limitation on prohibited payments. The determination of the fund- ing target and the target normal cost of a plan for a plan year must take into ac- count any limitation on prohibited pay- ments under section 436(d) with respect to any annuity starting date that was be- fore the valuation date, but must not take into account any limitation on prohibited payments under section 436(d) for any an- nuity starting date on or after the valua- tion date (however, the determination must take into account benefit distributions un- der plan provisions that allow new annuity starting dates with respect to distributions that were limited under section 436(d)). (D)Effect of limitation on benefit ac- cruals. Except as otherwise provided in this paragraph (c)(1)(iii)(D), the de- termination of the funding target of a plan for a plan year must take into ac- count any limitation on benefit accruals under section 436(e) applicable before the valuation date. However, if the plan terms provide for the automatic restora- tion of benefit accruals as permitted under §1.436–1(a)(4)(ii)(B), and the restoration of benefits as of the valuation date will not be treated as resulting from a plan amend- ment under the rules of §1.436–1(c)(3) (because the period of limitation as of the valuation date does not exceed 12 months and the adjusted funding target attainment percentage for the plan would not be less than 60 percent taking into account the restored benefit accruals), then the deter- mination of the funding target of a plan for a plan year must not take into account the limitation on benefit accruals under section 436(e) for that period. The de- termination of the target normal cost of a plan for a plan year must not take into account any limitation on benefit accruals under section 436(e). Thus, if an employer wishes to take a plan freeze into account in determining the target normal cost, the plan must be specifically amended to cease accruals. (iv)Effect of other limitations of ben- efits—(A)Liquidity shortfalls.Thedeter- mination of the funding target and the tar- get normal cost of a plan for a plan year must take into account any restrictions on payments under section 401(a)(32) on ac- count of a liquidity shortfall (as defined in section 430(j)(4)) for periods preced- ing the valuation date. The determina- tion of the funding target and the target normal cost must not take into account any restrictions on payments under section 401(a)(32) on account ofa liquidity short- fall or possible liquidity shortfall for any period on or after the valuation date. (B)High 25 limitation. The determi- nation of the funding target and the target normal cost of a plan for a plan year must take into account any restrictions on pay- ments under §1.401(a)(4)–5(b) to highly compensated employees to the extent that benefits were not paid or will not be paid because of a limitation that applied prior to the valuation date. If a benefit that was otherwise restricted was paid prior to the valuation date but with suitable security (such as an escrow account) provided to the plan in the event of a plan termina- tion, the benefit is treated as distributed for purposes of section 430 and this sec- tion. Accordingly, the funding target does not include any liability for the benefit and the plan assets do not include the se- curity. The determination of the fund- ingtargetandthetargetnormalcostofa plan for a plan year must not take into ac- count any restrictions on payments under §1.401(a)(4)–5(b) tohighly compensated employees that are anticipated with respect December 14, 20097972009–50 I.R.B. to annuity starting dates on or after the val- uation date on account of the funded status of the plan. (2)Benefits provided by insurance—(i) General rule. A plan generally is required to reflect in the plan’s funding target and target normal cost the liability for bene- fits that are funded through insurance con- tracts held by the plan, and to include the corresponding insurance contracts in plan assets. Paragraph (c)(2)(ii) of this sec- tion sets forth an alternative to this gen- eral approach. A plan’s treatment of ben- efits funded through insurance contracts pursuant to this paragraph (c)(2) is part of the plan’s funding method. Accordingly, that treatment can be changed only with the consent of the Commissioner. (ii)Separate funding of insured ben- efits. As an alternative to the treatment described in paragraph (c)(2)(i) of this section, in the case of benefits that are funded through insurance contracts, the liability for benefits provided under such contracts is permitted to be excluded from the plan’s funding target and target normal cost, provided that the corresponding in- surance contracts areexcluded from plan assets. This treatment is only available with respect to insurance purchased from an insurance company licensed under the lawsofaStateandonlytotheextent that a participant’s or beneficiary’s right to receive those benefits is an irrevoca- ble contractual right under the insurance contracts,basedonpremiumspaidtothe insurance company prior to the valuation date. For example, in the case of a retired participant receiving benefits from an an- nuity contract in pay status under which no premiums are required on or after the valuation date, the liability for benefits provided by the contract is permitted to be excluded from the plan’s funding target provided that the value of the contract is also excluded from the value of plan assets. Similarly, in the case of an ac- tive or deferred vested participant whose benefits are funded by a life insurance or annuity contract under which further premiums are required on or after the val- uation date, the liability for benefits, if any, that would be paid from the contract if no further premiums were to be paid (for example, if the contract were to go on reduced paid-up status) is permitted to be excluded from the plan’s funding target and target normal cost, provided that the value of the contract is excluded from the value of plan assets. By contrast, if the plan trustee can surrender a contract to the insurer for its cash value, then the par- ticipant’s or beneficiary’s right to receive those benefits is not an irrevocable con- tractual right and, therefore, the liability for benefits provided under the contract must be taken into account in determining the plan’s funding target and target normal cost and the contracts cannot be excluded from plan assets. (d)Plan provisions taken into ac- count—(1)General rule—(i)Plan provi- sions adopted by valuation date. Except as otherwise provided in this paragraph (d), a plan’s funding target and target normal cost for a plan year are determined based on plan provisions that are adopted no later than the valuation date for the plan year and that take effect on or before the last day of the plan year. For example, in the case of a plan amendment adopted on or before the valuation date for the plan year that has an effective date occurring in the current plan year, the plan amendment is taken into account in determining the funding target and the target normal cost for the current plan year if it is permitted to take effect under the rules of section 436(c) for the current plan year, but the amendment is not taken into account for the current plan year if it does not take effect until a future plan year. (ii)Plan provisions adopted after valu- ation date. If a plan administrator makes the election describedin section 412(d)(2) with respect to a plan amendment, then the plan amendment is treated as having been adopted on the first day of the plan year for purposes of this paragraph (d). Sec- tion 412(d)(2) applies to any plan amend- ment adopted no later than 2–1/2 months after the close of the plan year, includ- ing an amendment adopted during the plan year. Thus, if an amendment is adopted after the valuation date for a plan year (and no later than 2–1/2 months after the close of the plan year), but takes effect by the last day of the plan year, the amend- ment is taken into account in determining the plan’s funding target and target normal cost for the plan year if the plan adminis- trator makes the election described in sec- tion 412(d)(2) with respect to such amend- ment. (iii)Determinationofwhenanamend- ment takes effect. For purposes of this paragraph (d)(1), the determination of whether an amendment that increases ben- efits takes effect and when it takes effect is determined in accordance with the rules of section 436(c) and §1.436–1(c)(5). For purposes of this paragraph (d)(1), in the case of an amendment that decreases ben- efits, the amendment takes effect under a plan on the first date on which the benefits of any individual who is or could be a participant or beneficiary under the plan would be less than those benefits would be under the pre-amendment plan provisions if the individual were on that date to satisfy the applicable conditions for the benefits. In either case, the determination of when an amendment takes effect is unaffected by an election under section 412(d)(2). (2)Special rule for certain amendments increasing liabilities. In the case of a plan amendment that is not required to be taken into account under the rules of paragraph (d)(1) of this section because it is adopted after the valuation date for the plan year, the plan amendment must be taken into account in determining a plan’s funding target and target normal cost for the plan year if the plan amendment— (i) Takes effect by the last day of the plan year; (ii) Increases the liabilities of the plan by reason of increases in benefits, estab- lishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable; and (iii) Would not be permitted to take ef- fect under the rules of section 436(c) if those rules were applied— (A) By treating the increase in the target normal cost for the plan year attributable to the amendment (and all other amendments that must be taken into account solely be- cause of the application of the rules in this paragraph (d)(2)) as if the increase were an increase in the funding target for the plan year; and (B) By taking into account all unpre- dictable contingent event benefits permit- ted to be paid for unpredictable contin- gent events that occurred during the cur- rent plan year and all plan amendments that took effect in the current plan year (in- cluding all amendments to which this para- graph (d)(2) applies for the plan year). (3)Allocation of benefits attributable to plan amendments. If a plan amendment is taken into account for a plan year un- der the rules of this paragraph (d), then the 2009–50 I.R.B.798December 14, 2009 allocation of benefits that is used to de- termine the funding target and the target normal cost for that plan year is based on the plan as amended. Thus, if an amend- ment that is taken into account for a plan year increases a participant’s accrued ben- efit for service prior to the beginning of the plan year, then the present value of that in- crease is included in the funding target for the plan year. (e)Plan population taken into ac- count—(1)In general. Inmakingany determination of the funding target or tar- get normal cost under paragraph (b) of this section, the plan population is deter- mined as of the valuation date. The plan population must include three classes of individuals— (i) Participants currently employed in the service of the employer; (ii) Participants who are retired under the plan or who are otherwise no longer employed in the service of the employer; and (iii) All other individuals currently en- titled to benefits under the plan. (2)Assumption regarding rehiring of former employees—(i)Special exclusion for “rule of parity” cases. Certain indi- viduals may be excluded from the class of individuals described in paragraph (e)(1)(ii) of this section. The excludable individuals are those former employees who, prior to the valuation date for the plan year, have terminated service with the employer without vested benefits and whose service might be taken into account in future years because the “rule of parity” of section 411(a)(6)(D) does not permit that service to be disregarded. However, if the plan’s experience as to separated employees returning to service has been such that the exclusion described in this paragraph (e)(2) would be unreasonable, then no such exclusion is permitted. (ii)Application to partially vested par- ticipants. Whether former employees who are terminated with partially vested bene- fitsareassumedtoreturntoserviceisde- termined under the same rules that apply to former employees without vested benefits under paragraph (e)(2)(i) of this section. (3)Anticipated future participants.In making any determination of the funding target or target normal cost under para- graph (b) of this section, the actuarial as- sumptions and funding method used for the plan must not anticipate the affiliation with the plan of future participants not em- ployed in the service of the employer on the plan’s valuation date. However, any such determination may anticipate the af- filiation with the plan of current employees who have not yet satisfied the participation (age and service) requirements of the plan as of the valuation date. (f)Actuarial assumptions and fund- ing method used in determination of present value—(1)Selection of actuar- ial assumptions and funding method—(i) General rules. The determination of any present value or other computation un- der section 430 and this section must be made on the basis of actuarial assump- tions and a funding method. Except as otherwise specifically provided (for ex- ample, in §1.430(h)(2)–1(b)(6) or section 4006(a)(3)(E)(iv) of the Employee Re- tirement Income Security Act of 1974, as amended (ERISA)), the same actuarial assumptions and funding method must be used for all computations under sections 430 and 436. For example, the actuarial assumptions and the funding method used in making a certification of the adjusted funding target attainment percentage for aplanyearmustbethesameasthose disclosed on the actuarial report under section 6059 (Schedule SB, “Single-Em- ployer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Re- turn/ReportofEmployeeBenefitPlan”). (ii)Changes in actuarial assumptions and funding method. Actuarial assump- tions established for a plan year cannot subsequently be changed for that plan year unless the Commissioner determines that the assumptions that were used are un- reasonable. Similarly, a funding method established for a plan year cannot subse- quently be changed for that plan year un- less the Commissioner determines that the use of that funding method for that plan year is impermissible. (iii)Procedures for establishing actuar- ial assumptions and funding method.For purposes of this paragraph (f)(1), in the case of a plan for which an actuarial re- port under section 6059 (Schedule SB of Form 5500) is required to be filed for a plan year, actuarial assumptions and the funding method are established by the fil- ing of the actuarial report if it is filed no later than the due date (with extensions) for the report. In the case of a plan for which an actuarial report for a plan year is not required to be filed, actuarial assump- tions and the funding method are estab- lished by the delivery of the completed re- port to the employer if it is delivered no later than what would be the due date (with extensions) for filing the actuarial report were such a filing required. If the actuarial report is not filed or delivered by the ap- plicable date described in the two preced- ing sentences, then the same actuarial as- sumptions (such as the same interest rate and mortality table elections) and fund- ing method as were used for the preceding plan year apply for all computations under sections 430 and 436 for the current plan year, unless the Commissioner permits or requires other actuarial assumptions or an- other funding method permitted under sec- tion 430 to be used for the current plan year. (iv)Scope of funding method.Aplan’s funding method includes not only the over- all funding method used by the plan but also each specific method of computation used in applying the overall method. How- ever, the choice of which actuarial assump- tions are appropriate to the overall method or to the specific method of computation is not a part of the funding method. The assumed earnings rate used for purposes of determining the actuarial value of assets under section 430(g)(3)(B) is treated as an actuarial assumption, rather than as part of the funding method. (2)Interest and mortality rates. Section 430(h)(2) and §1.430(h)(2)–1 set forth the interest rates, and section 430(h)(3) and §§1.430(h)(3)–1 and 1.430(h)(3)–2 set forth the mortality tables, that must be used for purposes of determining any present value under this section. However, notwithstanding the requirement to use the mortality tables, in the case of a plan which has fewer than 100 participants and beneficiaries who are not in pay status, the actuarial assumptions may assume no pre-retirement mortality, but only if that assumption would be a reasonable assumption. (3)Other assumptions. In the case of actuarial assumptions other than those specified in sections 430(h)(2), 430(h)(3), and 430(i), each of those actuarial as- sumptions must be reasonable (taking into account the experience of the plan and reasonable expectations). In addition, the actuarial assumptions (other than those specified in sections 430(h)(2), 430(h)(3), December 14, 20097992009–50 I.R.B. and 430(i)) must, in combination, offer the plan’s enrolled actuary’s best estimate of anticipated experience under the plan based on information determined as of the valuation date. See paragraph (f)(4)(iii) of this section for special rules for determin- ing the present value of a single-sum and similar distributions. (4)Probability of benefit payments in single sum or other optional forms—(i)In general. This paragraph (f)(4) provides rules relating to the probability that bene- fit payments will be paid as single sums or other optional forms under a plan and the impact of that probability on the determi- nation of the present value of those benefit payments under section 430. (ii)General rules of application.Any determination of present value or any other computation under this section must take into account— (A) The probability that future bene- fit payments under the plan will be made in the form of any optional form of bene- fit provided under the plan (including sin- gle-sum distributions), determined on the basis of the plan’s experience and other related assumptions, in accordance with paragraph (f)(3) of this section; and (B) Any difference in the present value of future benefit payments that results from the use of actuarial assumptions in determining the amount of benefit pay- ments in any such optional form of benefit that are different from those prescribed by section 430(h). (iii)Single-sum and similar distribu- tions—(A)Distributions using section 417(e) assumptions. In the case of a distri- bution that is subject to section 417(e)(3) and that is determined using the applica- ble interest rates and applicable mortality table under section 417(e)(3), for purposes of applying paragraph (f)(4)(ii) of this section, the computation of the present value of that distribution is treated as hav- ing taken into account any difference in present value that results from the use of actuarial assumptions that are different fromthoseprescribedbysection430(h) (as required under paragraph (f)(4)(ii)(B) of this section) if and only if the present value of the distribution is determined in accordance with this paragraph (f)(4)(iii). (B)Substitution of annuity form.Ex- cept as otherwise provided in this para- graph (f)(4)(iii), the present value of a dis- tribution is determined in accordance with this paragraph (f)(4)(iii) if that present value is determined as the present value, using special actuarial assumptions, of the annuity (either the deferred or immediate annuity) which is used under the plan to determine the amount of the distribution. Under these special assumptions, for the period beginning with the expected annu- ity starting date for the distribution, the current applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date is substi- tuted for the mortality table under section 430(h)(3) that would otherwise be used. In addition, under these special assumptions, the valuation interest rates under section 430(h)(2) are used for purposes of dis- counting the projected annuity payments from their expected payment dates to the valuation date (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit). (C)Optional application of genera- tional mortality and phase-in of inter- est rates. In determining the present value of a distribution under this para- graph (f)(4)(iii), if a plan uses the generational mortality tables under §1.430(h)(3)–1(a)(4) or §1.430(h)(3)–2, the plan is permitted to use a 50–50 male-female blend of the annuitant mor- tality rates under the §1.430(h)(3)–1(a)(4) generational mortality tables in lieu of the applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date. Similarly, a plan is per- mitted to make adjustments to the interest rates in order to reflect differences be- tween the phase-in of the section 430(h)(2) segment rates under section 430(h)(2)(G) and the adjustments to the segment rates under section 417(e)(3)(D)(iii). (D)Distributions subject to section 417(e)(3) using other assumptions.Inthe case of a distribution that is subject to section 417(e)(3) but that is determined on a basis other than using the applicable interest rates and the applicable mortality table under section 417(e)(3), for purposes of applying paragraph (f)(4)(ii)(B) of this section, the computation of present value must take into account the extent to which the present value of the distribution is dif- ferent from the present value determined using the rules of paragraph (f)(4)(iii)(B) of this section, based on actuarial as- sumptions that satisfy the requirements of paragraph (f)(3) of this section. If the plan provides that the amount of the benefit is based on a comparison of the section 417(e)(3) benefit (that is, the benefit deter- mined using the applicable interest rates and the applicable mortality table under section 417(e)(3)) with another benefit determined using some other basis, then paragraph (f)(4)(ii)(B) of this section is ap- plied as of the valuation date by comparing the present value of the section 417(e)(3) benefit determined under the rules of para- graph (f)(4)(iii)(B) of this section with the present value of the other benefit. The rule of this paragraph (f)(4)(iii)(D) applies, for example, where a distribution that is subject to section 417(e)(3) is determined as the greater of the benefit determined using the applicable interest rates and the applicable mortality table under section 417(e)(3) and the benefit determined us- ing some other basis, or where the amount of a distribution that is subject to section 417(e)(3) is determined using an interest rate other than the applicable interest rates as required under section 415(b)(2)(E)(ii) (see §1.417(e)–1(d)(1)). (5)Distributions from applicable defined benefit plans under section 411(a)(13)(C)—(i)In general. In the case of an applicable defined benefit plan de- scribed in section 411(a)(13)(C), if the amount of a future distribution is based on an interest adjustment applied to the current accumulated benefit, then the amount of that distribution is determined by projecting the future interest credits or equivalent amount under the plan’s interest crediting rules using actuarial as- sumptions that satisfy the requirements of paragraph (f)(3) of this section. Thus, if a plan provides for a single-sum distribu- tion equal to the balance of a participant’s hypothetical account under a cash balance plan, then the amount of that future dis- tribution is equal to the projected account balance at the expected date of payment determined using actuarial assumptions that satisfy the requirements of paragraph (f)(3) of this section. (ii)Annuity distributions—(A)Gen- eral rule. In the case of an applicable defined benefit plan described in section 411(a)(13)(C), if the amount of an an- nuity distribution is based on either the balance of a hypothetical account main- 2009–50 I.R.B.800December 14, 2009 tained for a participant or the accumulated percentage of a participant’s final aver- age compensation, then the amount of that annuity distribution is calculated by converting the projected account balance (or accumulated percentage of final av- erage compensation), in accordance with paragraph (f)(5)(i) of this section, to an annuity by applying the plan’s annuity conversion provisions using the rules of this paragraph (f)(5)(ii). (B)Use of current annuity factors.Ex- cept as otherwise provided in paragraph (f)(5)(ii)(C) of this section, if the plan bases the conversion of the projected ac- count balance (or accumulated percentage of final average compensation) to an annu- ity using the applicable interest rates and applicable mortality table under section 417(e)(3), then the amount of the annuity distribution is determined by dividing the projected account balance (or accumulated percentage of final average compensation) by an annuity factor corresponding to the assumed form of payment using, for the period beginning with the annuity starting date, the current applicable mortality table under section 417(e)(3) that would apply to a distribution with an annuity starting date occurring on the valuation date (in lieu of the mortality table under section 430(h)(3) that would otherwise be used) and the valuation interest rates under sec- tion 430(h)(2) (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the annuity). (C)Optional application of genera- tional mortality and phase-in of segment rates. In determining the amount of an annuity distribution under paragraph (f)(5)(ii)(B) of this section, a plan is per- mitted to apply the options described in paragraph (f)(4)(iii)(C) of this section. (D)Distributions using assumptions other than assumptions under section 417(e)(3). In applying this paragraph (f)(5)(ii), in the case of a plan that deter- mines an annuity using a basis other than the applicable interest rates and applicable mortality table under section 417(e)(3), the amount of the annuity distribution must be based on actuarial assumptions that satisfy the requirements of paragraph (f)(3) of this section. (6)Unpredictable contingent event benefits. Any determination of present value or any other computation under this section must take into account, based on information as of the valuation date, the probability that future benefits (or increased benefits) will become payable under the plan due to the occurrence of an unpredictable contingent event (as described in §1.436–1(j)(9)). For this purpose, this probability with respect to an unpredictable contingent event may be assumedtobezeroifthereisnotmore than ade minimislikelihood that the un- predictable contingent event will occur. (7)Reasonable techniques permit- ted—(i)Determination of benefits to be paid during the plan year. Any reasonable technique can be used to determine the present value of the benefits expected to be paid during a plan year, based on the interest rates and mortality assumptions applicable for the plan year. For example, the present value of a monthly retirement annuity payable at the beginning of each month can be determined— (A) Using the standard actuarial ap- proximation that reflects 13/24ths of the discounted expected payments for the year as of the beginning of the year and 11/24ths of the discounted expected pay- ments for the year as of the end of the year; (B) By assuming a uniform distribution of death during the year; or (C) By assuming that the payment is made in the middle of the year. (ii)Determination of target normal cost. In the case of a participant for whom there is a less than 100 percent probability that the participant will terminate employ- ment during the plan year, for purposes of determining the benefits expected to ac- crue, be earned, or be otherwise allocated to service during the plan year which are used to determine the target normal cost, it is permissible to assume the participant will not terminate during the plan year, unless using this method of calculation would be unreasonable. (8)Approval of significant changes in actuarial assumptions for large plans—(i) In general. Except as otherwise provided in paragraph (f)(8)(iii) of this section, any actuarial assumptions used to determine the funding target of a plan for a plan year during which the plan is described in paragraph (f)(8)(ii) of this section can- not be changed from the actuarial assump- tions that were used for the preceding plan year without the approval of the Commis- sioner if the changes in assumptions result in a decrease in the plan’s funding shortfall (within the meaning of section 430(c)(4)) for the current plan year (disregarding the effect on the plan’s funding shortfall result- ing from changes in interest and mortality assumptions under sections 430(h)(2) and (h)(3)) that either exceeds $50,000,000, or exceeds $5,000,000 and is 5 percent or more of the funding target of the plan be- fore such change. (ii)Affected plans. A plan is described in this paragraph (f)(8)(ii) for a plan year if— (A) The plan is a defined benefit plan (other than a multiemployer plan) to which Title IV of ERISA applies; and (B) The aggregate unfunded vested benefits used to determine variable-rate premiums for the plan year (as deter- mined under section 4006(a)(3)(E)(iii) of ERISA) of the plan and all other plans maintained by the contributing sponsors (as defined in section 4001(a)(13) of ERISA) and members of such sponsors’ controlled groups (as defined in section 4001(a)(14) of ERISA) which are covered by Title IV of ERISA (disregarding mul- tiemployer plans and disregarding plans with no unfunded vested benefits) exceed $50,000,000. (iii)Automatic approval to resume use of previously used assumptions upon ex- iting at-risk status during phase-in.A plan that is not in at-risk status for the current plan year and that was in at-risk status for the prior plan year (but not for a period of 5 or more consecutive plan years) is granted automatic approval to use the actuarial assumptions that were applied before the plan entered at-risk status and that were used in combination with the re- quired at-risk assumptions during the pe- riod the plan was in at-risk status. (9)Examples. The following examples illustrate the rules of this section. Un- less otherwise indicated, these examples are based on the following assumptions: the normal retirement age is 65, the min- imum required contribution for the plan is determined under the rules of section 430 starting in 2008, the plan year is the cal- endar year, the valuation date is January 1, no plan-related expenses are paid or ex- pected to be paid from plan assets, and the plan does not provide for mandatory em- ployee contributions. The examples are as follows: December 14, 20098012009–50 I.R.B. Example 1. (i) Plan P provides an accrued benefit equal to 1.0% of a participant’s highest 3-year aver- age compensation for each year of service. Plan P provides that an early retirement benefit can be re- ceived at age 60 equal to the participant’s accrued benefit reduced by 0.5% per month for early com- mencement. On January 1, 2010, Participant A is age 60 and has 12 years of past service. Participant A’s compensation for the years 2007 through 2009 was $47,000, $50,000, and $52,000, respectively. Partici- pant A’s rate of compensation at December 31, 2009, is $54,000 and A’s rate of compensation for 2010 is assumed not to increase at any point during 2010. Decrements are applied at the beginning of the plan year. (ii) Participant A’s annual accrued benefit as of January 1, 2010, is $5,960 [0.01 x 12 x ($47,000 + $50,000 + $52,000) ÷ 3]. Participant A’s expected benefit accrual for 2010 is $800 [0.01 x 13 x ($50,000 + $52,000 + $54,000) ÷ 3 - $5,960], to the extent that Participant A is expected to continue in employment for the full 2010 plan year. (iii) Because the early retirement benefit is a func- tion of the participant’s accrued benefit, the allocation of the benefit for purposes of determining the target normal cost and funding target is made under para- graph (c)(1)(ii)(B) of this section. Accordingly, for Participant A, the early retirement benefit that is taken into account with respect to the decrement at age 60 when determining the 2010 funding target is $4,172 [$5,960 accrued benefit x (1 - 0.005 x 60 months)]. The expected accrual of the early retirement bene- fit during 2010 that is taken into account for Partici- pant A with respect to the decrement at age 60 when determining the 2010 target normal cost is zero, be- cause in this example the age–60 decrement would be applied as of January 1, 2010, before Participant A would earn any additional benefits. (But see para- graph (f)(7)(ii) of this section for an alternative ap- proach for determining the expected accrual with re- spect to the decrement at age 60.) (iv) The early retirement benefit for Participant A with respect to the decrement at age 61 that is taken into account in determining the funding target for the 2010 plan year is $4,529.60 [$5,960 accrued benefit x (1 - 0.005 x 48 months)]. The portion of the early retirement benefit that is taken into account for Par- ticipant A with respect to the decrement at age 61 that is taken into account in determining the target normal cost for the 2010 plan year is $608 [$800 expected annualaccrualx(1-0.005x48months)]. Example 2. (i) The facts are the same as inExam- ple 1. In addition, the plan offers a $500 temporary monthly supplement to participants who complete 15 years of service and retire from active employment after attaining age 60. The temporary supplement is payable until the participant turns age 62. In addi- tion, the supplement is limited so that it does not ex- ceed the participant’s Social Security benefit payable at age 62. On January 1, 2010, Participant B is age 55 and has 20 years of past service, and Participant C is age 60 and has 14 years of past service. For Partic- ipants B and C, the projected Social Security benefit is greater than $500 per month. (ii) Because the temporary supplement is not a function of the participant’s accrued benefit or ser- vice, the allocation of the benefit for purposes of determining the target normal cost and funding tar- get is made under paragraph (c)(1)(ii)(D) of this sec- tion. The portion of the annual temporary supplement for Participant B with respect to the early retirement decrement occurring at age60 that is taken into ac- count in determining the funding target for the 2010 plan year is $4,800 [($500 x 12 months) x 20 years of past service ÷ 25 years of service at assumed early retirement age]. The portion of the annual temporary supplement for Participant B with respect to the early retirement decrement occurring at age 61 that is taken into account in determining the funding target for the 2010 plan year is $4,615 [($500 x 12 months) x 20 years of past service ÷ 26 years of service at assumed early retirement age]. In each case, the allocable por- tion of the benefit is assumed to be payable until age 62 (or the participant’s death, if earlier). (iii) For Participant B, the portion of the annual temporary supplement with respect to the early retire- ment decrement occurringat age 60 that is taken into account in determining the target normal cost for the 2010 plan year is $240 [($500 x 12 months) x 1 year of service expected to be earned during the plan year ÷ 25 years of service at assumed early retirement age]. The portion of the annual temporary supplement with respect to the early retirement decrement occurring at age 61 that is taken into account in determining the target normal cost for the 2010 plan year is $230.77 [($500x12months)x1yearofserviceexpectedto be earned during the plan year ÷ 26 years of service at assumed early retirement age]. The present value of these amounts reflects a payment period beginning with the decrement at age 60 or 61, as applicable, un- til age 62 (or assumed death, if earlier). (iv) For Participant C, the portion of the annual temporary supplement with respect to the early retire- ment decrement occurring at age 61 (when the partic- ipant is first eligible for the benefit) that is taken into account in determining the funding target for the 2010 planyearis$5,600[($500x12months)x14yearsof past service ÷ 15 years of service at assumed early retirement age]. The present value of this amount re- flects a payment period beginning with the decrement at age 61 until age 62 (or death if earlier). Example 3. (i)ThefactsarethesameasinEx- ample 1. The plan also provides a single-sum death benefit (in addition to the qualified pre-retirement spouse’s benefit) equal to the greater of the partici- pant’s annual accrued benefit at the time of death, or $10,000. The benefit is limited as necessary to en- sure that the plan meets the incidental death benefit requirements of section 401(a). (ii) The determination of the portion of the death benefit that is taken into account in determining the target normal cost and funding target is made under paragraph (c)(1)(ii)(B) of this section to the extent that it is a function of the participant’s accrued benefit and under paragraph (c)(1)(ii)(D) of this section to the extent that it relates to the part of the death benefit that is not a function of the participant’s accrued benefit. (iii) The portion of the single-sum death benefit corresponding to the accrued benefit, or $5,960, is taken into account when determining the 2010 fund- ing target for Participant A. (iv) The excess of the death benefit over Partic- ipant A’s accrued benefit is $4,040 (that is, $10,000 - $5,960). Because this part of the death benefit is not a function of the participant’s accrued benefit nor is it a function of service, the determination of the corresponding portion of the death benefit taken into account in determining the target normal cost and funding target for 2010 is made under paragraph (c)(1)(ii)(D) of this section. For example, for Par- ticipant A, the portion of this benefit with respect to the death decrement occurring at age 64 that is taken into account for purposes of determining the funding target for the 2010 plan year is $3,030 ($4,040 x 12 years of past service ÷ 16 years of service at assumed age of death). (v) The total single-sum death benefit for Partic- ipant A with respect to the death decrement at age 64 that is taken into account in determining the fund- ing target for the 2010 plan year is $8,990 ($5,960 + $3,030). (vi) Similarly, the portion of the single-sum death benefit for Participant A that is taken into account in determining the target normal cost for the 2010 plan year is equal to the sum of the expected increase in the accrued benefit during 2010, and the expected change in the allocable portion of theexcess death benefit at- tributable to service during 2010 as determined in ac- cordance with paragraph (c)(1)(ii)(D) of this section. As described inExample 1, the expected increase in Participant A’s accrued benefit during 2010 is $800, to the extent that Participant A is expected to continue in employment for the full 2010 plan year. (vii) At the end of 2010, Participant A’s accrued benefit is expected to be $6,760 ($5,960 + $800). The excess portion of the single-sum death benefit to be allocated in accordance withparagraph (c)(1)(ii)(D) of this section is $3,240 ($10,000 - $6,760), and the allocable portion of the excess benefit for Participant A as of December 31, 2010, with respect to the death decrement at age 64, is $2,632.50 ($3,240 x 13 years of service as of December 31, 2010 ÷ 16 years of ser- vice at assumed age of death). The change in the allo- cable portion of Participant A’s excess death benefit due to an additional year of service, with respect to the death decrement at age 64, is a decrease of $397.50. Therefore, the target normal cost for the 2010 plan year attributable to Participant A, with respect to the death decrement at age 64, will reflect a single-sum death benefit of $402.50 ($800 expected increase in Participant A’s accrued benefit minus a $397.50 ex- pected decrease in the allocable portion of the death benefit in excess of the accrued benefit). Example 4. (i) The facts are the same as inExam- ple 3, except that the plan provides a single-sum death benefit equal to the greater of the present value of the qualified pre-retirement survivor annuity or 100 times the amount of the participant’s monthly retire- ment benefit with service projected to normal retire- ment age. The valuation is based on the assumption that all surviving spouses choose to receive their ben- efit in the form of a single sum. For Participant A, the value of the qualified pre-retirement survivor an- nuity is less than 100 times Participant A’s projected monthly retirement benefit. (ii) The allocation of the death benefit that is a function of Participant A’s accrued benefit is based on service and compensation to the first day of the plan year for purposes of determining the funding target, and the allocation of the death benefit that is a function of the increase in Participant A’s accrued benefit during the plan year for purposes of deter- mining the target normal cost is made in accordance with paragraph (c)(1)(ii)(B) of this section. As de- scribed inExample 1, Participant A’s accrued bene- fit based on service and compensation as of January 1, 2010, is $5,960, or $496.67 per month. Accord- 2009–50 I.R.B.802December 14, 2009 ingly, the portion of the single-sum death benefit cor- responding to the accrued benefit, or $49,667 (100 times $496.67), is taken into account when determin- ing the 2010 funding target for Participant A. (iii) In addition, the funding target and the target normal cost reflect a portion of Participant A’s death benefit in excess of the amount based on Participant A’s accrued benefit. Based on Participant A’s average compensation as of the first day of the plan year, Par- ticipant A’s accrued benefit with service projected to normal retirement is $8,443 [.01 x 17 years of service at age 65 x ($47,000 + $50,000 + $52,000) ÷ 3], or $703.61 per month. The corresponding death benefit is $70,361. (iv) The excess of the death benefit over Partic- ipant A’s accrued benefit as of January 1, 2010, is $20,694 (that is,$70,361 - $49,667). Because this part of the death benefit is not a function of Partici- pant A’s accrued benefit or service, the portion that is taken into account in determining the funding target is determined under paragraph (c)(1)(ii)(D) of this sec- tion. For Participant A, the portion of this benefit with respect to the death decrement occurring at age 64 that is taken into account when determining the fund- ing target for the 2010 plan year is $15,521 ($20,694 x 12 years of past service ÷16 years of service at as- sumed age of death). The total single-sum death ben- efit for Participant A withrespect to the death decre- ment at age 64 reflected in the funding target for the 2010 plan year is $65,188 ($49,667 + $15,521). (v) Similarly, the portion of the single-sum death benefit for Participant A that is taken into account when determining the target normal cost for 2010 is equal to the sum of the death benefit based on the expected increase in theaccrued benefit during 2010 and the expected change in the allocable portion of the excess death benefit attributable to service dur- ing 2010 as determined in accordance with paragraph (c)(1)(ii)(D) of this section. (vi) At the end of 2010, Participant A’s accrued benefit is expected to be $6,760 ($5,960 + $800), or $563.33 per month, and the associated death benefit is $56,333. The expected increase in the amount of the death benefit attributable to the increase in Partic- ipant A’s accrued benefit istherefore $6,666 ($56,333 - $49,667). (vii) Participant A’s projected accrued benefit at normal retirement based on average compensation as of the end of 2010 is $8,840 [.01 x 17 years of ser- vice at age 65 x ($50,000 + $52,000 + $54,000) ÷ 3], or $736.67 per month. The corresponding death benefit is $73,667. The excess portion of the sin- gle-sum death benefit to beallocated in accordance with paragraph (c)(1)(ii)(D) of this section is $17,334 ($73,667 - $56,333), and the allocable portion of the excess benefit for Participant A as of December 31, 2010, with respect to the death decrement at age 64, is $14,084 ($17,334 x 13 years of service as of Decem- ber 31, 2010 ÷ 16 years of service at assumed age of death). (viii) The change in the allocable portion of Par- ticipant A’s excess death benefit during 2010, with re- spect to the death decrement at age 64, is a decrease of $1,437 ($14,084 - $15,521). Therefore, the tar- get normal cost for the 2010 plan year attributable to Participant A, with respect to the death decrement at age 64, will reflect a single-sum death benefit of $5,229 ($6,666 expected increase in Participant A’s death benefit based on the expected increase in the ac- crued benefit, minus an expected decrease of $1,437 in the amount of the death benefit in excess of the amount attributable tothe accrued benefit). Example 5. (i) The facts are the same as inExam- ple 1. In addition, the plan provides a disability ben- efit to participants who become disabled after com- pleting 15 years of service. The disability benefit is payable at normal retirement age or an earlier date if elected by a participant.For purposes of calcu- lating the disability benefit, service continues to ac- crue until normal retirement age (unless recovery or commencement of retirement benefits occurs earlier). Further, compensation is deemed to continue at the same rate as when the disability began. (ii) Participant A will be eligible for the disability benefit at age 63 after completion of 15 years of ser- vice. Participant A’s annual disability benefit at nor- mal retirement age is $9,180 (that is, 1% of highest 3-year average compensation of $54,000 multiplied by 17 years of deemed service at normal retirement age). (iii) The portion of the disability benefit based on the participant’s accrued benefit as of the valuation date that is taken into account in determining the tar- get normal cost and funding target is determined in accordance with paragraph (c)(1)(ii)(B) of this sec- tion. Accordingly, the portion of the disability bene- fit corresponding to Participant A’s accrued benefit as of January 1, 2010, or $5,960, is taken into account when determining the 2010 funding target. (iv) The excess of Participant A’s disability ben- efit over the accrued benefit as of January 1, 2010, is $3,220 ($9,180 - $5,960). Because this portion of the disability benefit is not based on Participant A’s accrued benefit or service, the portion that is taken into account in determining the funding target is de- termined under paragraph (c)(1)(ii)(D) of this section. The portion of Participant A’s excess disability bene- fit with respect to the disability decrement occurring at age 63 that is taken into account when determining the 2010 funding target is $2,576 [$3,220 x (12 years of past service ÷ 15 years of service at assumed date of disability)]. The total disability benefit for Partic- ipant A, with respect to thedisability decrement oc- curring at age 63, that is taken into account in deter- mining the funding target for the 2010 plan year is $8,536 ($5,960 + $2,576). (v) The portion of Participant A’s disability bene- fit with respect to the disability decrement occurring at age 64 that is taken into account when determining the 2010 funding target is $8,375 [$5,960 + $3,220 x (12 years of past service ÷ 16 years of service at as- sumed date of disability)]. (vi) If in fact Participant A becomes disabled at age 63, the funding target will reflect the full dis- ability benefit to which Participant A will be entitled at normal retirement age, based on service projected to normal retirement age (17 years) and final aver- age compensation reflecting compensation projected to normal retirement age at the rate Participant A was earning at the time of disablement. Example 6. (i) The facts are the same as inExam- ple 5, except that the disability benefit is based on the accrued benefit calculated using service and compen- sation earned to the date of disability. (ii) Because the disability benefit is a function of the participant’s accrued benefit, the portion of Par- ticipant A’s disability benefit that is taken into ac- count when determining the funding target for the 2010 plan year is Participant A’s annual accrued ben- efit as of January 1, 2010, or $5,960, as determined inExample 1. This amount is taken into account for both the disability decrement occurring at age 63 and the disability decrement occurring at age 64. (iii) Similarly, the benefit accrual for Participant A with respect to the disability decrements occurring at age 63 and age 64 that is taken into account when determining the target normal cost for the 2010 plan year is equal to Participant A’s expected benefit ac- crual for 2010 determined inExample 1, or $800. Example 7. (i) Retiree D, a participant in Plan P, is a male age 72 and is receiving a $100 monthly straight life annuity. The 2009 actuarial valuation is performed using the segment rates applicable for September 2008 (determined without regard to the transition rule of section 430(h)(2)(G)), and the 2009 annuitant and nonannuitant (male and female) mortality tables (published in Notice 2008–85). See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and rev- enue procedures in the Internal Revenue Bulletin. (ii) The present value of Retiree D’s straight life annuity on the valuation date is $10,535.79. This is equal to the sum of: $5,029.99, which is the present value of payments expected to be made during the first 5 years, using the first segment interest rate of 5.07%; $5,322.26, which is the present value of pay- ments expected to be made during the next 15 years, using the second segment interest rate of 6.09%; and $183.54, which is the present value of payments ex- pected to be made after 20 years, using the third seg- ment interest rate of 6.56%. Example 8. (i) The facts are same as inExample 7. Plan P does not provide for early retirement benefits or single-sum distributions. The actuary assumes that no participants terminate employment prior to age 50 (other than by death), that there is a 5% probability of withdrawal at age 50, and that those participants who withdraw receive a deferred annuity starting at age 65. Participant E is a male age 46 on January 1, 2009, and has an annual accrued benefit of $23,000 beginning at age 65. (ii) Before taking into account the 5% probability of withdrawal, the funding target associated with Par- ticipant E’s assumed age 50 withdrawal benefit in the 2009 actuarial valuation is $68,396.75. This is equal to the sum of: $6,925.29, which is the present value of payments expected to be made during the year the participant turns age 65 (the 20 th year after the valu- ation date), using the secondsegment interest rate of 6.09%; and $61,471.46, which is the present value of payments expected to be made after the 20 th year, us- ing the third segment interest rate of 6.56%. (iii) Taking the 5% probability of withdrawal into account, the funding target for the 2009 plan year as- sociated with Participant E’s assumed age 50 with- drawal benefit is $3,419.84 ($68,396.75 x 5%). Example 9. (i) The facts are the same as inExam- ple 8, except the plan offers a single-sum distribution payable at normal retirement age (age 65) determined based on the applicable interest rates and the applica- ble mortality table under section 417(e)(3). The ac- tuary assumes that 70% of the participants will elect a single sum upon retirement and the remaining 30% will elect a straight life annuity. (ii) Before taking into account the 5% probability of withdrawal or the 70% probability of electing a sin- gle-sum payment, the portion of the 2009 funding tar- December 14, 20098032009–50 I.R.B. get that is attributable to Participant E’s assumed sin- gle-sum payment, deferred to age 65, is $70,052.30. This is calculated in the same manner as the present value of annuity payments, except that, for the pe- riod after the annuity starting date, the 2009 applica- ble mortality rates are substituted for the 2009 male annuitant mortality rates. This portion of the fund- ing target for the 2009 plan year is equal to the sum of: $6,929.00, which is the present value of annuity payments expected to be made between age 65 and 66 (during the 20 th year after the valuation date), us- ing the second segment interest rate of 6.09%; and $63,123.30, which is the present value of annuity payments expected to be made after the 20 th year fol- lowing the valuation date, using the third segment in- terest rate of 6.56%. These present value amounts re- flect the 2009 male nonannuitant mortality rates prior to the assumed commencement of benefits at age 65 and the 100% probability of retiring at age 65. (iii) Taking the 5% probability of withdrawal and the 70% probability of electing a single-sum payment into account, the portion of the 2009 funding tar- get attributable to Participant E’s assumed single-sum payment based on withdrawal at age 50 is $2,451.83 ($70,052.30 x 5% x 70%). After taking into account the 5% probability of withdrawal and the 30% prob- ability of electing a straight life annuity, the portion of the 2009 funding target that is attributable to Par- ticipant E’s assumed straight life annuity (based on assumed withdrawal at age50),deferredtoage65,is equal to 30% of the result obtained inExample 8. Example 10. (i) The facts are the same as inEx- ample 9, except the plan offers an immediate single sum upon withdrawal at age 50 determined based on the applicable interest rates and the applicable mor- tality table under section 417(e)(3). The actuary as- sumes that 70% of the participants will elect to re- ceive a single-sum distribution upon withdrawal. (ii) Before taking into account the 5% probability of withdrawal and the 70% probability of electing a single-sum payment, the portion of the funding target for the 2009 plan year that is attributable to Partici- pant E’s assumed single-sum payment based on with- drawal at age 50 is $68,908.39. This is calculated in the same manner as the present value of annuity payments, except that the 2009 applicable mortality rates are substituted for the 2009 male annuitant and nonannuitant mortality rates after the annuity starting date. This portion of the 2009 funding target is equal to the sum of $6,815.85, which is the present value of annuity payments expected to be made between age 65 and 66 (during the 20 th year after the valua- tion date), using the second segment interest rate of 6.09%, and $62,092.54, which is the present value of annuity payments expected to be made after the 20 th year following the valuation date, using the third segment interest rate of 6.56%. These present value amounts reflect the 2009 male nonannuitant mortal- ity rates prior to the assumed single-sum distribution age of 50. (iii) Applying the 5% probability of withdrawal at age 50 and the 70% probability of electing a single- sum payment, the portion of the funding target for the 2009 plan year that is attributable to Participant E’s assumed single-sum payment (based on withdrawal at age 50) is $2,411.79 ($68,908.39 x 5% x 70%). Example 11. (i) The facts are the same as in Example 8, except that the plan sponsor elects under section 430(h)(2)(D)(ii) to use the monthly corporate bond yield curve instead of segment rates. The en- rolled actuary assumes payments are made monthly throughout the year and uses the interest rate from the middle of the monthly corporate bond yield curve because this mid-year yield rate most closely matches the average timing of benefits paid. In accordance with §1.430(h)(2)–1(e)(4), the applicable monthly corporate bond yield curve is the yield curve derived from December 2008 rates. (ii) Before taking into account the 5% probabil- ity of withdrawal, the funding target associated with Participant E’s assumed age 50 withdrawal benefit in the 2009 actuarial valuation is $67,394.12. This re- flects the sum of each year’s expected payments, dis- counted at the yield rates described in paragraph (i) of thisExample 11, as shown below: Age Maturity Yield ratePresent value 6519.5 6.97% $5,897.88 66 20.5 6.90% 5,524.69 67 21.5 6.84% 5,164.63 68 and overVariesVaries 5 0,806.92 Total $67,394.12 (iii) Applying the 5% probability of withdrawal, th e portion of the funding target for the 2009 plan year attributable to Participant E’s assumed withdrawal at age 50 is $3,369.71 ($67,394.12 x 5%). Ex ample 12. (i) The facts are the same as inEx- ample 10, except that the plan determines the amount of the immediate single-sum distribution upon with- d rawal at age 50 based on the applicable interest rates under section 417(e)(3) or an interest rate of 6.25%, whichever produces the higher amount. The applica- b le mortality table under section 417(e)(3) is used for both calculations. (ii) Before taking into account the 5% probabil- i ty of withdrawal and the 70% probability of elect- ing a single-sum payment, the present value of Par- ticipant E’s single-sum distribution as of January 1, 2009, using an interest rate of 6.25%, based on with- drawal at age 50, is $77,391.88. This amount is de- termined by calculating the projected single-sum dis- tribution at age 50 using the applicable mortality rate under section 417(e)(3) and an interest rate of 6.25%, or $94,789.10, and discounting the result to the Jan- uary 1, 2009, valuation date using the first segment rate of 5.07% (because the single-sum distribution is assumed to be paid 4 years after the valuation date) and the male non-annuitant mortality rates for 2009. (iii) Before taking into account the 5% prob- ability of withdrawal and the 70% probability of electing a single-sum payment, the present value as of January 1, 2009, of Participant E’s age–50 single-sum distribution using the applicable interest ra tes and applicable mortality table under section 417(e)(3) is $68,908.39, as developed inExample 10. Corresponding to plan provisions, the present v alue reflected in the funding target is the larger of this amount or the present value of the amount based on a 6.25% interest rate, or $77,391.88. ( iv) Applying the 5% probability of withdrawal at age 50 and the 70% probability of electing a single- sum payment, the portion of the funding target for the 2 009 plan year that is attributable to Participant E’s assumed single-sum payment (based on withdrawal at age 50) is $2,708.72 ($77,391.88 x 5% x 70%). E xample 13. (i) Plan Q is a cash balance plan that permits an immediate payment of a single sum equal to the participant’s hypothetical account balance upon termination of employment. Plan Q’s terms provide that the hypothetical account is credited with interest at a market-related rate, based on a specified index. The January 1, 2009, actuarial valuation is performed using the 24-month average segment rates applicable for September 2008 (determined without regard to the transition rule of section 430(h)(2)(G)). Participant F is a male age 61 on January 1, 2009, and has a hy- pothetical account balance equal to $150,000 on that date. In the 2009 actuarial valuation, the enrolled ac- tuary assumes that the hypothetical account balances will increase with annual interest credits of 7% until the participant commences receiving his or her ben- efit, corresponding to the actuary’s best estimate of future interest rates credited under the terms of the pl an. The actuary also assumes that all participants will retire on the first day of the plan year in which they attain age 65 (that is, no participant will termi- n ate employment prior to age 65 other than by death), and that 100% of participants will elect a single sum upon retirement. ( ii) Participant F’s hypothetical account balance projected to January 1, 2013 (the plan year in which F attains age 65) is $196,619.40 based on the assumed a nnual interest crediting rate of 7%. The funding tar- get for the 2009 plan year attributable to Participant F’s benefit at age 65 is $158,525.81, which is cal- culated by discounting the projected hypothetical ac- count balance of $196,619.40 using the first segment rate of 5.07% and the male non-annuitant mortality rates. Example 14. (i) The facts are the same as inEx- ample 13, except that the actuary assumes that 10% of the participants will choose to collect their bene- fits in the form of a straight life annuity. The plan provides that the participant’s account balance at re- tirement is converted to an annuity using the applica- ble interest rates and applicable mortality table under section 417(e)(3). (ii) Participant F’s hypothetical account balance projected to January 1, 2013 (the plan year in which F attains age 65) is $196,619.40, as outlined inEx- ample 13. This amount is converted to an annuity payable commencing at age 65 by dividing the pro- 2009–50 I.R.B.804December 14, 2009 jected account balance by an annuity factor based on the applicable mortality table for 2009 under section 417(e)(3) (corresponding to the valuation date) and the interest rates used for the valuation. The result- ing annuity factor is 10.8321, reflecting one year of interest at the first segment rate (5.07%) correspond- ing to the first year of the expected annuity payments (the fifth year after the valuation date), 15 years of in- terest at the second segment rate (6.09%) and all re- maining years at the third segment rate (6.56%). The projected future annuity is therefore $196,619.40 di- vided by 10.8321, or $18,151.55 per year. (iii) Before taking into account the 10% proba- bility that the participant will elect to take the dis- tribution in the form of a lifetime annuity, the fund- ing target associated with the future annuity payout for Participant F is $149,120.41. This is equal to the sum of $14,242.79, which is the present value of the annuity payment expected to be made during the year the participant turns age 65 (the 5 th year af- ter the valuation date), using the first segment inter- est rate of 5.07%; $116,321.72, which is the present value of payments expected to be made during the 6 th through the 20 th years following the valuation date, using the second segment interest rate of 6.09%; and $18,555.90, which is the present value of payments expected to be made after the 20th year following the valuation date, using the third segment interest rate of 6.56%. (iv) Applying the 10% probability of electing a lifetime annuity, the portion of the 2009 funding tar- get attributable to Participant F’s assumed lifetime annuity payable at age 65 is $14,912.04. The portion of the 2009 funding target attributable to Participant F’s assumed single-sum payment is 90% of the result obtained inExample 13. Example 15. (i) Plan H provides a monthly benefit of $50 times years of service for all partic- ipants. Plan H has a funding target of $1,000,000 and an actuarial value of assets of $810,000 as of January 1, 2010. No annuity contracts have been purchased, and Plan H has no funding standard carryover balance or prefunding balance as of Jan- uary 1, 2010. The enrolled actuary certifies that the January 1, 2010, AFTAP is 81%. Effective July 1, 2010, Plan H is amended on June 14, 2010, to increase the plan’s monthly benefit to $55 for years of service earned on or after July 1, 2010. The present value of the increase in plan benefits during 2010 (reflecting benefit accruals attributable to the six months between July 1, 2010, and December 31, 2010) is $25,000. (ii) The amendment increases benefits for future service only, and so the funding target is unaffected. Since section 436(c) only restricts plan amendments that increase plan liabilities, the plan amendment can take effect. (iii) If the $25,000 present value of the increase in plan benefits during 2010 were included in Plan H’s funding target of $1,000,000, the total would be $1,025,000, and the AFTAP would be 79.02% (that is, $810,000 / $1,025,000). Since this is less than 80%, the amendment would not have been permitted to take effect if the 2010 increase were included in the funding target instead of target normal cost. (iv) Because the amendment was adopted after the January 1, 2010, valuation date, the plan sponsor would generally have the option of deciding whether to reflect this amendment in the January 1, 2010, val- uation or defer recognition of the amendment to the January 1, 2011, valuation. However, under para- graph (d)(2) of this section, because the plan amend- ment would not have been permitted to take effect un- der the provisions of section 436 if the increase in the target normal cost for the plan year had been taken into account in the funding target, the actuary must take into account the amendment in the January 1, 2010, valuation for purposes of section 430. Thus, the target normal cost for the plan year includes the $25,000 that results from the plan amendment. (g)Effective/applicability dates and transition rules—(1)Statutory effective date/applicability date—(i)In general. Section430generallyappliestoplanyears beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is delayedfor certain plans in accordance with sections 104 through 106 of PPA ’06. (ii)Applicability of special adjust- ments. The special adjustments of para- graph (b)(1)(iii) of this section (relating to adjustments to the target normal cost for plan-related expenses and mandatory employee contributions) apply to plan years beginning after December 31, 2008. In addition, a plan sponsor may elect to make the special adjustments of paragraph (b)(1)(iii) of this section for a plan year beginning in 2008. This election must take into account both adjustments described in paragraph (b)(1)(iii) of this section. This election is subject to the same rules that apply to an election to add an amount to the plan’s prefunding balance pursuant to §1.430(f)–1(f), and it must be made in the same manner as the election made under §1.430(f)–1(f). Thus, the election can be made no later than the last day for making the minimum required contribution for the plan year to which the election relates. (2)Effective date/applicability date of regulations. Thissectionappliestoplan years beginning on or after January 1, 2010, regardless of whether section 430 applies to determine the minimum required contribution for the plan year. For plan years beginning before January 1, 2010, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the requirements of section 430. (3)Approval for changes in funding method—(i)2008 plan year. Any changes in a plan’s funding method that are made for the first plan year beginning in 2008 that are not inconsistent with the require- ments of section 430 are treated as having been approved by the Commissioner and do not require the Commissioner’s spe- cific prior approval. (ii)Application of this section—(A) First plan year for which regulations are effective. Except as otherwise provided in paragraph (g)(3)(ii)(B) of this section, any change in a plan’s funding method for the first plan year that begins on or after January 1, 2010, is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior approval. (B)Optional earlier application of reg- ulations. For the first plan year that a plan applies all the provisions of this section, §§1.430(f)–1, 1.430(g)–1, 1.430(i)–1, and 1.436–1, any change in a plan’s fund- ing method for that plan year is treated as having been approved by the Com- missioner and does not require the Com- missioner’s specific prior approval. For example, if the change in funding method includes a change in the valuation soft- ware, the change in the valuation software is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior ap- proval. If that plan year begins before January 1, 2010, the automatic approval for a change in funding method under paragraph (g)(3)(ii)(A) of this section does not apply to the plan. (C)Special rule for changes in allo- cation. Any change in a plan’s funding method for a plan year earlier than the firstplanyearbeginningonorafterJan- uary 1, 2010, that is necessary to apply the rules of paragraph (c)(1)(ii) of this sec- tion is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior approval. (iii)First plan year for which section 430 applies to determine minimum fund- ing. For a plan for which the minimum re- quired contribution is not determined un- der section 430 for the first plan year that begins on or after January 1, 2008, pur- suant to sections 104 through 106 of PPA ’06, any change in a plan’s funding method for the first plan year to which section 430 applies to determine the plan’s minimum required contribution is treated as having been approved by the Commissioner and does not require the Commissioner’s spe- cific prior approval. December 14, 20098052009–50 I.R.B. (4)Approval for changes in actuarial assumptions. The Commissioner’s spe- cific prior approval is not required with re- spect to any actuarial assumptions that are adopted for the first plan year for which section 430 applies to determine the mini- mum required contribution for the plan and that are not inconsistent with the require- ments of section 430. (5)Transition rule for determining funding target attainment percentage for the 2007 plan year—(i)In general.For purposes of the first plan year beginning on or after January 1, 2008, the funding target attainment percentage for the plan’s prior plan year (the 2007 plan year) is determined as the fraction (expressed as a percentage), the numerator of which is the value of plan assets determined under paragraph (g)(5)(ii) of this section, and the denominator of which is the plan’s current liability determined pursuant to section 412(l)(7) (as in effect prior to amendment by PPA ’06) as of the valuation date for the 2007 plan year. (ii)Determination of value of plan as- sets—(A)In general. The value of plan assets for the 2007 plan year under this paragraph (g)(5)(ii)(A) is determined as the value of plan assets as described in paragraph (g)(5)(ii)(B) of this section, re- duced by the plan’s funding standard ac- count credit balance for the 2007 plan year as described in paragraph (g)(5)(iii)(A) of this section except to the extent provided in paragraph (g)(5)(iii)(B) of this section. (B)Value of plan assets.Thevalue of plan assets for the 2007 plan year un- der this paragraph (g)(5)(ii)(B) is deter- mined under section 412(c)(2) as in ef- fect for the 2007 plan year, except that the value of plan assets prior to subtracting the plan’s funding standard account credit bal- ance described in paragraph (g)(5)(iii)(A) of this section must be adjusted so that it is neither less than 90 percent of the fair market value of plan assets nor greater than 110 percent of the fair market value of plan assets on the valuation date for that plan year. If the value of plan assets prior to ad- justment under this paragraph (g)(5)(ii)(B) is less than 90 percent of the fair market value of plan assets on the valuation date, then the value of plan assets under this paragraph (g)(5)(ii)(B) is equal to 90 per- cent of the fair market value of plan assets. If the value of plan assets determined un- der this paragraph (g)(5)(ii)(B) is greater than 110 percent of the fair market value of plan assets on the valuation date, then the value of plan assets under this paragraph (g)(5)(ii)(B) is equal to 110 percent of the fair market value of plan assets. (iii)Subtraction of credit balance—(A) In general. If a plan has a funding standard account credit balance as of the valuation date for the 2007 plan year, then, except as described in paragraph (g)(5)(iii)(B) of this section, that balance is subtracted from the value of plan assets described in para- graph (g)(5)(ii)(B) of this section as of that valuation date to determine the value of plan assets for the 2007 plan year. How- ever, the value of plan assets is not reduced below zero. (B)Effect of funding standard carry- over balance reduction for the 2008 plan year. Notwithstanding the rules of para- graph (g)(5)(iii)(A) of this section, for the first plan year beginning in 2008, if the employer has made an election to reduce some or all of the funding standard car- ryover balance as of the first day of that year in accordance with §1.430(f)–1(e), then the present value (determined as of the valuation date for the 2007 plan year using the valuation interest rate for that 2007 plan year) of the amount so reduced is not treated as part of the funding stan- dard account credit balance when that bal- ance is subtracted from the value of plan assets pursuant to paragraph (g)(5)(iii)(A) of this section. Par. 3. Section 1.430(f)–1 is added to read as follows: §1.430(f)–1 Effect of prefunding balance and funding standard carryover balance. (a)In general—(1)Overview. This sec- tion provides rules relating to the appli- cation of prefunding and funding standard carryover balances under section 430(f). Section 430 and this section apply to sin- gle employer defined benefit plans (in- cluding multiple employer plans) that are subject to section 412, but do not apply to multiemployer plans (as defined in sec- tion 414(f)). Paragraph (b) of this sec- tion sets forth rules regarding a plan’s pre- funding balance and a plan sponsor’s elec- tion to maintain a funding standard carry- over balance. Paragraph (c) of this section provides rules under which those balances must be subtracted from plan assets. Para- graph (d) of this section describes a plan sponsor’s election to use those balances to offset the minimum required contribution. Paragraph (e) of this section describes a plan sponsor’s election to reduce those bal- ances (which will affect the determination of the value of plan assets for purposes of sections 430 and 436). Paragraph (f) of this section sets forthrules regarding elec- tions under this section. Paragraph (g) of this section contains examples. Paragraph (h) of this section contains effective/appli- cability 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 this section are applied sep- arately for each employer under the plan, as if each employer maintained a separate plan. Thus, each employer under such a multiple employer plan may have a sep- arate funding standard carryover balance and a prefunding balance for the plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not ap- ply (that is, a plan described in section 413(c)(4)(B) that has not made the elec- tion for section 413(c)(4)(A) to apply), the rules of this section are applied as if all par- ticipants in the plan were employed by a single employer. (b)Maintenance of balances—(1)Pre- funding balance—(i)In general.Aplan sponsor is permitted to elect to maintain a prefunding balance for a plan. A prefund- ing balance maintained for a plan consists of a beginning balance of zero, increased by the amount of excess contributions to the extent the employer elects to do so as described in paragraph (b)(1)(ii) of this section, and decreased to the extent pro- vided in paragraph (b)(1)(iii) of this sec- tion. The plan sponsor’s initial election to add to the prefunding balance under para- graph (b)(1)(ii) of this section constitutes an election to maintain a prefunding bal- ance. The prefunding balance is adjusted further for investment return and interest as provided in paragraphs (b)(3) and (b)(4) of this section. (ii)Increases—(A)In general.Ifthe plan sponsor of a plan elects to add to the plan’s prefunding balance, as of the first day of a plan year following the first effec- tive plan year for the plan, the prefunding balance is increased by the amount so elected by the plan sponsor for the plan year. The amount added to the prefunding balance cannot exceed the present value 2009–50 I.R.B.806December 14, 2009 of the excess contributions for the preced- ing plan year determined under paragraph (b)(1)(ii)(B) of this section, increased for interest in accordance with paragraph (b)(1)(iv)(A) of this section. (B)Present value of excess contribu- tion. The present value of the excess con- tribution for the preceding plan year is the excess, if any, of— (1) The present value (determined un- der the rules of paragraph (b)(1)(iv)(B) of this section) of the employer contribu- tions (other than contributions to avoid or terminate benefit limitations described in §1.436–1(f)(2)) to the plan for such pre- ceding plan year; over (2) The minimum required contribution for such preceding plan year. (C)Treatment of unpaid minimum re- quired contributions. For purposes of this paragraph (b)(1)(ii), a contribution made during a plan year to correct an unpaid minimum required contribution (within the meaning of section 4971(c)(4)) for a prior plan year is not treated as a contribu- tion for the current plan year. (iii)Decreases. As of the first day of each plan year, the prefunding balance of a plan is decreased (but not below zero) by the sum of— (A) Any amount of the prefunding bal- ance that was used under paragraph (d) of this section to offset the minimum required contribution of the plan for the preceding plan year; and (B) Any reduction in the prefunding balance under paragraph (e) of this section for the plan year. (iv)Adjustments for interest—(A)Ad- justment of excess contribution.The present value of the excess contribution for the preceding year (as determined un- der paragraph (b)(1)(ii)(B) of this section) is increased for interest accruing for the period between the valuation date for the preceding plan year and the first day of the current plan year. For this purpose, interest is determined by using the plan’s effective interest rate under section 430(h)(2)(A) for the preceding plan year, except to the extent provided in paragraph (b)(3)(iii) of this section. (B)Determination of present value. The present value of the contributions described in paragraph (b)(1)(ii)(B)(1)of this section is determined as of the valua- tion date for the preceding plan year, using the plan’s effective interest rate under sec- tion 430(h)(2)(A) for the preceding plan year. (2)Funding standard carryover bal- ance—(i)In general. A funding standard carryover balance isautomatically es- tablished for a plan that had a positive balance in the funding standard account under section 412(b) (as in effect prior to amendment by the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780)) as of the end of the pre-ef- fective plan year for the plan. The funding standard carryover balance as of the begin- ning of the first effective plan year for the plan is the positive balance in the funding standard account under section 412(b) (as in effect prior to amendment by PPA ’06) as of the end of the pre-effective plan year for the plan. After that date, the funding standard carryover balance is decreased to the extent provided in paragraph (b)(2)(ii) of this section and adjusted further for investment return and interest as provided in paragraphs (b)(3) and (b)(4) of this sec- tion. (ii)Decreases. As of the first day of each plan year, the funding standard car- ryover balance of a plan is decreased (but not below zero) by the sum of— (A) Any amount of the funding stan- dard carryover balance that was used un- der paragraph (d) of this section to offset the minimum required contribution of the plan for the preceding plan year; and (B) Any reduction in the funding stan- dard carryover balance under paragraph (e) of this section for the plan year. (3)Adjustments for investment experi- ence—(i)In general. A plan’s prefund- ing balance under paragraph (b)(1) of this section and a plan’s funding standard car- ryover balance under paragraph (b)(2) of this section as of the first day of a plan year must be adjusted to reflect the actual rate of return on plan assets for the preced- ing plan year. For this purpose, the actual rate of return on plan assets for the preced- ing plan year is determined on the basis of fair market value and must take into ac- count the amount and timing of all contri- butions, distributions, and other plan pay- ments made during that period. (ii)Ordering rules for adjustments.In general, the adjustment for actual rate of return on plan assets is applied to the bal- ance after any reduction of prefunding and funding standard carryover balances for that preceding plan year under paragraph (e) of this section and after subtracting amounts used to offset the minimum re- quired contribution for the preceding plan year pursuant to paragraph (d) of this sec- tion. However, see paragraph (d)(1)(ii)(D) of this section for a special ordering rule when adjusting for investment experience. (iii)Special rule for excess contri- butions attributable to use of funding balances. Notwithstanding paragraph (b)(1)(iv)(A) of this section, to the ex- tent that a contribution is included in the present value of excess contributions solely because the minimum required con- tribution has been offset under paragraph (d) of this section, the contribution is ad- justed for investment experience under the rules of this paragraph (b)(3). (4)Valuation date other than the first day of the plan year—(i)In general.Ifa plan’s valuation date is not the first day of the plan year, then, solely for purposes of applying paragraphs (c), (d), and (e) of this section, the plan’s prefunding and funding standard carryover balances (if any) determined under this paragraph (b) are increased from the first day of the plan year to the valuation date using the plan’s effective interest rate under section 430(h)(2)(A) for the plan year. (ii)Special rule for adjustments for in- vestment experience. In the case of a plan with a valuation date that is not the first day of the plan year, for purposes of applying the subtraction under paragraph (b)(3)(ii) of this section for amounts used to offset the minimum required contribution for the preceding plan year and the decreases un- der paragraphs (b)(1)(iii) and (b)(2)(ii) of this section, the amount of the prefunding balance or funding standard carryover bal- ance that is used to offset the minimum re- quired contribution under paragraph (d) of this section or reduced under paragraph (e) of this section is discounted from the val- uation date to the first day of the plan year using the effective interest rate under sec- tion 430(h)(2)(A) for the plan year. (5)Special rule for quarterly contribu- tions—(i)Quarterly contributions due on or after the valuation date. For purposes of applying a prefunding balance or fund- ing standard carryover balance to required installments described in section 430(j)(3) that are due on or after the valuation date for the plan year for which they are due, the respective balances are increased from the beginning of the year to the date of December 14, 20098072009–50 I.R.B. the election (using the plan’s effective in- terest rate for the plan year) to determine the amount available to offset the required quarterly installment. The amounts used to offset required quarterly installments are then discounted from that date to the first day of the plan year for purposes of the subtraction under paragraph (b)(3)(ii) of this section and the decreases under para- graphs (b)(1)(iii) and (b)(2)(ii) of this sec- tion, using the effective interest rate for the plan year. However, see paragraph (d)(1)(i)(B) of this section for a special rule regarding late quarterly installments when determining the amount that is used to off- set the minimum required contribution for the plan year. (ii)Quarterly contributions due before the valuation date. [Reserved.] (c)Effect of balances on the value of plan assets—(1)In general. In the case of any plan with a prefunding balance or a funding standard carryover balance, the amount of those balances is sub- tracted from the value of plan assets for purposes of sections 430 and 436, ex- cept as otherwise provided in paragraphs (c)(2), (c)(3), and (d)(3) of this section and §1.436–1(j)(1)(ii)(B). (2)Subtraction of balances in determin- ing new shortfall amortization base—(i) Prefunding balance. For purposes of de- termining whether a plan is exempt from the requirement to establish a new shortfall amortization base under section 430(c)(5), the amount of the prefunding balance is subtracted from the value of plan assets only if an election under paragraph (d) of this section to use the prefunding balance to offset the minimum required contribu- tion is made for the plan year. (ii)Funding standard carryover bal- ance. For purposes of determining whether a plan is exempt from the re- quirement to establish a new shortfall amortization base under section 430(c)(5), the funding standard carryover balance is not subtracted from the value of plan assets regardless of whether any portion of either the funding standard carryover balance or the prefunding balance is used to offset the minimum required contribu- tion for the plan year under paragraph (d) of this section. (3)Special rule for certain binding agreements with PBGC. If there is in effect for a plan year a binding written agree- ment with the Pension Benefit Guaranty Corporation (PBGC) which provides that all or a portion of the prefunding balance or funding standard carryover balance (or both balances) is not available to offset the minimum required contribution for a plan year, that specified amount is not subtracted from the value of plan assets for purposes of determining the funding short- fall under section 430(c)(4). For example, if a plan has no prefunding balance and a $20 million funding standard carryover balance, a PBGC agreement provides that $5 million of a plan’s funding standard carryover balance is unavailable to offset the minimum required contribution for a plan year, and the plan’s assets are $100 million, then the value of plan assets for purposes of determining the funding short- fall under section 430(c)(4) is reduced by $15 million ($20 million less $5 million) to $85 million. For purposes of this para- graph (c)(3), an agreement with the PBGC is taken into account with respect to a plan year only if the agreement was executed prior to the valuation date for the plan year. (d)Election to apply balances against minimum required contribution—(1)In general—(i)Amount of offset to minimum required contribution—(A)Effect of use of balances. Subject to the limitations provided in this paragraph (d), in the case of any plan year with respect to which the plan sponsor elects to use all or a portion of the prefunding balance or the funding standard carryover balance to offset the minimum required contribution for the plan year, the minimum required contri- bution for the plan year (determined after taking into account any waiver under sec- tion 412(c)) is offset as of the valuation date for the plan year by the amount so used. (B)Special rule for late quarterly contributions—(1)Quarterly contribu- tions due on or after the valuation date. Notwithstanding paragraph (d)(1)(i)(A) of this section, if the plan sponsor elects to use all or a portion of the prefunding balance or the funding standard carryover balance to satisfy a required installment under section 430(j)(3) that is due on or after the valuation date, the amount used to offset the minimum required contribu- tion for the plan year is the portion of the balance so used, discounted in accordance with the rules of paragraph (b)(5) of this section, unless the date of the election is after the due date of the required install- ment. If the election to use all or a portion of the prefunding balance or the fund- ing standard carryover balance to satisfy the required installments under section 430(j)(3) is made after the due date for the required installment, then the amount used to offset the minimum required contribu- tion for the plan year is the portion of the balance so used, discounted from the date of the election to the due date of the re- quired installment at the effective interest rate plus 5 percentage points, and then fur- ther discounted from the installment due date to the valuation date at the effective interest rate. For example, if a quarterly installment of $20,250 is due on April 15 for a calendar year plan with a valuation date on January 1 and an effective interest rate of 6 percent, and the installment is sat- isfied by an election to apply the funding standard carryover balance that is made on July 1 (2 1/2 months after the April 15 due date), then the amount used to offset the minimum required contribution under this paragraph (d)(1)(i) is $19,481 (that is, $20,250 ÷ 1.11 (2.5/12) ÷1.06 (3.5/12) ). However, the amount by which the fund- ing standard carryover balance is reduced under paragraph (b)(2)(ii) of this section is $19,669 (that is, $20,250 ÷ 1.06 (6/12) ). (2)Quarterly contributions due before the valuation date. [Reserved.] (ii)Maximum amount of available bal- ances and coordination of elections—(A) General requirement to follow chronology. In general, the amount of prefunding and funding standard carryover balances that may be used to offset the minimum re- quired contribution for a plan year must take into account any decrease in those balances which results from a prior elec- tion either to use the prefunding balance or funding standard carryover balance un- der section 430(f)(3) and this paragraph (d) or to reduce those balances under section 430(f)(5) and paragraph (e) of this section (including deemed elections under section 436(f)(3) and §1.436–1(a)(5)). For exam- ple, for a calendar plan year with a January 1 valuation date, a deemed election under section 436(f)(3) and §1.436–1(a)(5) on April 1, 2010 (the first day of the 4th month of the plan year) will reduce the avail- able prefunding balance or funding stan- dard carryover balance that can be used with respect to an election made after April 1, 2010. 2009–50 I.R.B.808December 14, 2009 (B)Exception to chronological rule. Notwithstanding the general rule of para- graph (d)(1)(ii)(A) of this section, all elections under section 430(f)(5) and para- graph (e) of this section to reduce the prefunding balance or funding standard carryover balance for the current plan year (including deemed elections under section 436(f)(3) and §1.436–1(a)(5)) are deemed to occur on the valuation date for the plan year and before any election under sec- tion 430(f)(3) and this paragraph (d) to offset the minimum required contribution for the current plan year. Accordingly, if an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for the plan year (including an election to satisfy the quarterly contribution re- quirement) has been made prior to the election to reduce the prefunding balance or funding standard carryover balance, then the amount available for use to offset the otherwise applicable minimum re- quired contribution for the plan year under this paragraph (d) will be retroactively reduced. However, an election to reduce a prefunding balance or funding standard carryover balance for a plan year does not affect a prior election to use a prefund- ing balance or funding standard carryover balance to offset a minimum required con- tribution for a prior plan year. (C)Investment experience. In addition to reflecting any decrease in the prefund- ing balance or the funding standard car- ryover balance which results from a prior election for the previous year either to use the prefunding balance or funding standard carryover balance under section 430(f)(3) and this paragraph (d) to offset the mini- mum required contribution for such prior plan year or to reduce those balances under section 430(f)(5) and paragraph (e) of this section (including deemed elections under section 436(f)(3) and §1.436–1(a)(5)), the prior plan year’s prefunding and funding standard carryover balances must be ad- justed under the rules of paragraph (b)(3) of this section for investment experience for that prior plan year before determining the amount of those balances available for such an election for the current plan year. (D)Special rule for current year elec- tions that are made before prior year elections. This paragraph (d)(1)(ii)(D) sets forth a special rule that applies if, for the current plan year, a plan sponsor makes an election under this paragraph (d)orparagraph(e)ofthissection(in- cluding a deemed election under section 436(f)(3) and §1.436–1(a)(5)), and then subsequently makes an election under this paragraph (d) to offset the minimum required contribution for the prior plan year. This special rule applies solely for purposes of determining the amount of prefunding and funding standard carry- over balances available for that subsequent election. Under this special rule, in lieu of decreasing the funding standard carry- over balance or prefunding balance as of the valuation date for the current year to take into account the current year election, the funding standard carryover balance or prefunding balance as of the valuation date for the prior plan year is decreased by the amount of the prior year equiv- alent of the current year election. The prior year equivalent of the current year election is determined by dividing the amount of the current year election (as of the first day of the current plan year) by a number equal to 1 plus the rate of investment return for the prior plan year determined under paragraph (b)(3) of this section. If this paragraph (d)(1)(ii)(D) applies for a plan year, then the funding standard carryover balance and prefund- ing balance are nonetheless adjusted in accordance with the rules of paragraph (b) of this section, after the application of the rules of this paragraph (d)(1)(ii)(D). Thus, the amount used to offset the minimum required contribution for the earlier plan year is subtracted from the prefunding balance or funding standard carryover balance as of the valuation date for that year prior to the adjustment for investment return under paragraph (b)(3) of this sec- tion for that plan year, and the amount by which the prefunding balance or funding standard carryover balance is decreased for the second year is based on the elec- tions made for the second year. (2)Requirement to use funding stan- dard carryover balance before prefunding balance. To the extent that a plan has a funding standard carryover balance greater than zero, no amount of the plan’s prefund- ing balance may be used to offset the mini- mum required contribution. Thus, a plan’s funding standard carryover balance must be exhausted before the plan’s prefunding balance may be applied under paragraph (d)(1) of this section to offset the minimum required contribution. (3)Limitation for underfunded plans—(i)In general. Anelectionto use the prefunding balance or funding standard carryover balance to offset the minimum required contribution under this paragraph (d) is not available for a plan year if the plan’s prior plan year funding ratio is less than 80 percent. For purposes of this paragraph (d)(3), except as other- wise provided in this paragraph (d)(3) or paragraph (h)(3) of this section, the plan’s prior plan year funding ratio is the fraction (expressed as a percentage)— (A) The numerator of which is the value of plan assets on the valuation date for the preceding plan year, reduced by the amount of any prefunding balance (but not the amount of any funding standard carry- over balance); and (B)Thedenominatorofwhichisthe funding target of the plan for the preceding plan year (determined without regard to the at-risk rules of section 430(i)(1)). (ii)Special rule for second year of a new plan with no past service. In the case of a new plan that was neither the result of a merger nor involved in a spinoff, if the prior plan year was the first year of the plan and the funding target for the prior plan year was zero, then the plan’s prior plan year funding ratio is deemed to be 80 percent for purposes of this paragraph (d)(3). (iii)Special rule for plans that are the result of a merger.[Reserved] (iv)Special rules for plans that are in- volved in a spinoff.[Reserved] (e)Election to reduce balances—(1) In general. A plan sponsor may make an election for a plan year to reduce any portion of a plan’s prefunding and funding standard carryoverbalances under this paragraph (e). If such an election is made, the amount of those balances that must be subtracted from the value of plan as- sets pursuant to paragraph (c)(1) of this section will be smaller and, accordingly, the value of plan assets taken into account for purposes of sections 430 and 436 will be larger. Thus, this election to reduce a plan’s prefunding and funding standard carryover balances is taken into account in the determination of the value of plan assets for the plan year and applies for all purposes under sections 430 and 436, including for purposes of determining the December 14, 20098092009–50 I.R.B. plan’s prior plan year funding ratio un- der paragraph (d)(3) of this section for the following plan year. See also section 436(f)(3) and §1.436–1(a)(5) for a rule under which the plan sponsor is deemed to make the election described in this para- graph (e). The rules of paragraph (d)(1)(ii) of this section also apply for purposes of determining the maximum amount of prefunding balance or funding standard carryover balance that is available for an election under this paragraph (e). (2)Requirement to reduce funding stan- dard carryover balance before prefund- ing balance. To the extent that a plan has a funding standard carryover balance greater than zero, no election under para- graph (e)(1) of this section is permitted to be made that reduces the plan’s prefund- ing balance. Thus, a plan must exhaust its funding standard carryover balance be- fore it is permitted to make an election un- der paragraph (e)(1) of this section with re- spect to its prefunding balance. (f)Elections—(1)Method of making elections—(i)In general. Any election un- der this section by the plan sponsor must be made by providing written notification of the election to the plan’s enrolled actu- ary and the plan administrator. The written notification must set forth the relevant de- tails of the election, including the specific dollar amount involved in the election (ex- cept as provided in paragraph (f)(1)(ii) of this section). Thus, except as provided in paragraph (f)(1)(ii) of this section, a condi- tional or formula-based election generally does not satisfy the requirements of this paragraph (f). (ii)Standing elections to increase or use balances. A plan sponsor may pro- vide a standing election in writing to the plan’s enrolled actuary to use the fund- ing standard carryover balance and the pre- funding balance to offset the minimum re- quired contribution for the plan year to the extent needed to avoid an unpaid mini- mum required contribution under section 4971(c)(4) taking into account any contri- butions that are or are not made. In addi- tion, a plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to add the maximum amount pos- sible each year to the prefunding balance. Any election made pursuant to a standing election under this paragraph (f)(1)(ii) is deemed to occur on the last day available to make the election for the plan year as provided under paragraph (f)(2)(i) of this section. Any standing election under this paragraph (f)(1)(ii) remains in effect for the plan with respect to the enrolled actu- ary named in the election, unless— (A) The standing election is revoked under the rules of paragraph (f)(3) of this section; or (B) The enrolled actuary who signs the actuarial report under section 6059 (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500,“Annual Return/Report of Employee Benefit Plan”)fortheplanfor the plan year is not the enrolled actuary named in the standing election. (2)Timing of elections—(i)General rule. Except as otherwise provided in paragraph (f)(2)(ii) or (iii) of this section, any election under this section with re- spect to a plan year must be made no later than the last date for making the minimum required contribution for the plan year as described in section 430(j)(1). For this purpose, an election to add to the prefund- ing balance relates to the plan year for which excess contributions were made. Forexample,anelectiontoaddtothe prefunding balance as of the first day of the plan year that begins on January 1, 2010 (in an amount not in excess of the present value of the excess contribution as of the valuation date in 2009, adjusted for interest under the rules of paragraph (b)(1)(ii) of this section), must be made no later than September 15, 2010, even though the election is reported on the 2010 Schedule SB of Form 5500, which is not due until 2011. Except for the standing elections covered by paragraph (f)(1)(ii) of this section, an election under this section may not be made prior to the first day of the plan year to which the election relates. (ii)Special rule for standing election revoked by a change in enrolled actuary. If there is a change inenrolled actuary for theplanyearwhichwouldresultinare- vocation of the standing election under the rule of paragraph (f)(1)(ii)(B) of this sec- tion, then the plan sponsor may reinstate the revoked standing election by providing a replacement to the new enrolled actuary by the due date of the Schedule SB of Form 5500. (iii)Election to reduce balances.Any election under paragraph (e) of this section to reduce the prefunding balance or fund- ing standard carryover balance for a plan year (for example, in order to avoid or ter- minate a benefit restriction under section 436) must be made by the end of the plan year to which the election relates. (iv)Earlier elections. This paragraph (f)(2) sets forth the latest date that an elec- tion can be made. A plan sponsor is per- mitted to make an earlier election, and in certain circumstances may need to make such an election in order to timely satisfy a quarterly contribution requirement under section 430(j)(3). (3)Irrevocability of elections—(i)In general. Except as otherwise provided in this paragraph (f)(3), a plan sponsor’s elec- tion under this section with respect to the plan’s prefunding balance or funding stan- dard carryover balance is irrevocable (and must be unconditional). A standing elec- tion by the plan sponsor may be revoked by providing written notification of the re- vocation to the plan’s enrolled actuary and the plan administrator on or before the date the corresponding election is deemed to occur pursuant to paragraph (f)(1)(ii) of this section. (ii)Exception for certain elections.An election to use the prefunding balance or funding standard carryover balance to off- set the minimum required contribution for a plan year (including an election to satisfy the quarterly contribution requirements for a plan year) is permitted to be revoked to the extent the amount the plan sponsor elected to use to offset the minimum con- tribution requirements (including an elec- tion used to satisfy the quarterly contribu- tion requirements) exceeds the minimum required contribution for a plan year (de- termined without regard to the election un- der paragraph (d) of this section) if and only if the election is revoked by provid- ing written notification of the revocation to the plan’s enrolled actuary and the plan administrator by the deadline set forth in paragraph (f)(3)(iii) of this section. If no such revocation is made, then, under para- graph (b) of this section, the funding stan- dard carryover balance or prefunding bal- ance is decreased by the entire amount that the plan sponsor elected to use to offset the minimum required contribution for a plan year (including an election to satisfy the quarterly contribution requirements for a plan year). (iii)Deadline for revoking election. The deadline for revoking the election described in paragraph (f)(3)(ii) of this 2009–50 I.R.B.810December 14, 2009 section is generally the end of the plan year. However, for plans with a valuation date other than the first day of the plan year, the deadline for the revocation is the deadline for contributions for the plan year as described in section 430(j)(1). In addition, for the first plan year beginning in 2008, the deadline for the revocation for all plans is deferred to the due date (including extensions) of the Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Ben- efit Plan.” (4)Plan sponsor—(i)In general.For purposes of the elections described in this section, except as otherwise provided in paragraph (f)(4)(ii) of this section, any ref- erence to the plan sponsor means the em- ployer or employers responsible for mak- ing contributions to or under the plan. (ii)Certain multiple employer plans. For purposes of the elections described in this section, in the case of plans that are multiple employer plans to which section 413(c)(4)(A) does notapply, any reference to the plan sponsor means the plan ad- ministrator within the meaning of section 414(g). (g)Examples. The following examples illustrate the rules of this section: Example 1. (i) Plan P is a defined benefit plan with a plan year that is the calendar year and a val- uation date of January 1. The funding standard car- ryover balance of Plan P is $25,000 and the prefund- ing balance is zero as of the beginning of the 2010 plan year. The sponsor of Plan P, Sponsor S, does not elect to use any portion of the balance to offset the minimum required contribution for 2010 pursuant to paragraph (d)(1) of this section, or to reduce any por- tion of the funding standard carryover balance prior to the determination of the value of plan assets for 2010, pursuant to paragraph (e)(1) of this section. The ac- tual rate of return on Plan P’s assets for 2010 is 2%. Plan P’s effective interest rate for 2010 is 6%. The minimum required contribution for Plan P under sec- tion 430 for 2010 is $100,000, and no quarterly in- stallments are required for Plan P for the 2010 plan year. As of January 1, 2010, the value of plan assets is $1,100,000 and the funding target is $1,000,000. Therefore, the prior plan year funding ratio for Plan P for 2010, as determined under paragraph (d)(3) of this section, is 110%. (ii) Sponsor S makes a contribution to Plan P of $150,000 on December 1, 2010, for the 2010 plan year and makes no other contributions for the 2010 plan year. Because this contribution was made on a date other than the valuation date for the 2010 plan year, the contribution must be adjusted to reflect interest that would otherwise have accrued between the valuation date and the date of the contribution, at the effective interest rate for the 2010 plan year. The amount of the contribution after adjustment is $142,198, determined as $150,000 discounted for 11 months of compound interest at an effective annual interest rate of 6%. (iii) The excess of employer contributions for 2010 over the minimum required contribution for 2010, as of the valuation date, is $42,198 ($142,198 less $100,000). Accordingly, the increase in Plan P’s prefunding balance asof January 1, 2011, cannot exceed $44,730 (which is the present value of the ex- cess contribution of $42,198 adjusted for 12 months of interest at an effective interest rate of 6%). (iv) Plan P’s funding standard carryover balance as of January 1, 2011, is $25,500 (which is the fund- ing standard carryover balance as of January 1, 2010, adjusted for investment experience during 2010 at a rate of 2%). Example 2. (i)ThefactsarethesameasinEx- ample 1, except that the contribution of $150,000 is made on February 1, 2011, for the 2010 plan year. (ii) The amount of the contribution after adjust- ment is $140,824, which is determined as $150,000 discounted for 13 months of interest at an effective interest rate of 6%. Accordingly, the increase in Plan P’s prefunding balance asof January 1, 2011, cannot exceed $43,273 (which is the present value of the ex- cess contribution of $40,824 adjusted for 12 months of interest at an effective interest rate of 6%). (iii) Plan P’s funding standard carryover balance as of January 1, 2011, is $25,500, as developed inEx- ample 1of this section. If Sponsor S elects to increase the prefunding balance as of January 1, 2011, by the present value of the excess contribution adjusted for interest, or $43,273, the total of the funding standard carryover balance and prefunding balance as of Jan- uary 1, 2011, is $68,773. Example 3. (i) The facts are the same as inExam- ple 1, except that Sponsor S contributes $90,539 to Plan P on February 1, 2011, for the 2010 plan year and makes no other contributions to Plan P for the 2010 plan year. In addition, on February 1, 2011, Sponsor S elects to use $15,000 of the funding standard carry- over balance to offset P’s minimum required contri- bution for 2010, pursuant to paragraph (d)(1) of this section. This is permitted because Plan P’s prior-year funding ratio determined under paragraph (d)(3) of this section is 110%, and is therefore not less than 80%. (ii) Because the contribution was made on a date other than the valuation date for the 2010 plan year, the contribution must be adjusted to reflect interest that would otherwise have accrued between the valuation date and the date of the contribution, at the effective interest rate for the 2010 plan year. The amount of the contribution after adjustment is $85,000, determined as $90,539 discounted for 13 months of compound interest at an effective interest rate of 6%. The adjusted contribution of $85,000 plus the $15,000 of the funding standard carryover balance used to offset the minimum required contri- bution equals the minimum required contribution for the 2010 plan year of $100,000. Therefore, no excess contributions are available to increase the prefunding balance, and the prefunding balance as of January 1, 2011, remains zero. (iii) The funding standard carryover balance as of January 1, 2011, is adjusted for investment experi- ence during the 2010 planyear, in accordance with paragraph (b)(3) of this section. The amount of the adjustment is $200, determined as the actual rate of return on plan assets for 2010 as applied to the 2010 funding standard carryover balance after reduction for the amount of that balance used under paragraph (d)(1) of this section (that is, $25,000 less $15,000, multiplied by the actual rate of return of 2%). (iv) The funding standard carryover balance, as of January 1, 2011, is $10,200, determined as the 2010 funding standard carryover balance less the amount used to offset the 2010 minimum required contribu- tion, adjusted for investment experience during the 2010 year ($25,000 less $15,000 plus $200). Example 4. (i) The facts are the same as inEx- ample 3, except that Sponsor S contributes $150,000 (instead of $90,539) to Plan P on February 1, 2011, for the 2010 plan year. (ii) Because the contribution was made on a date other than the valuation date for the 2010 plan year, the contribution must be adjusted to reflect interest that would otherwise have accrued between the valuation date and the date of the contribution, at the effective interest rate for the 2010 plan year. The amount of the contribution after adjustment is $140,824, determined as $150,000 discounted for 13 months of interest at an effective interest rate of 6%. (iii) Because Sponsor S elected to use $15,000 of the funding standard carryover balance to off- set the minimum required contribution for 2010 of $100,000, the cash contribution requirement for 2010, adjusted with interest to January 1, 2010, is $85,000. The adjusted contribution of $140,824 exceeds this amount by $55,824. Of this amount, $15,000 exceeds the minimum required contribution only because of Sponsor S’s election to use the fund- ing standard carryover balance to offset the minimum required contribution as provided in paragraph (d)(1) of this section. The remaining $40,824 ($140,824 minus $100,000) results from cash contributions made in excess of the minimum required contribu- tion before offset by the funding standard carryover balance. (iv) The portion of the excess contribution result- ing solely because the minimum required contribu- tion was offset by a portion of the funding standard carryover balance is adjusted for investment experi- ence during 2009, pursuant to paragraph (b)(3)(iii) of this section. Accordingly, this portion of the present value of the excess contribution adjusted for interest as of January 1, 2011, is $15,300 ($15,000 adjusted for investment experience during 2010 at a rate of 2%). (v) The excess contribution resulting from cash contributions in excess of the minimum required contribution before offset by the funding standard carryover balance is adjusted for interest at the ef- fective interest rate for 2010, pursuant to paragraph (b)(1)(iv)(A) of this section. Accordingly, this por- tion of the present value of the excess contribution adjusted for interest as of January 1, 2011, is $43,273 ($40,824 increased by the effective interest rate of 6%). The increase in Plan P’s prefunding balance as of January 1, 2011, cannot exceed the total present value of the excess contribution adjusted for interest of $58, 573 ($15,300 plus $43,273). (vi) The funding standard carryover balance as of January 1, 2011, is $10,200, determined as the 2010 funding standard carryover balance less the $15,000 used to offset the 2010 minimum required contribu- tion, adjusted for investment experience during the December 14, 20098112009–50 I.R.B. 2010 plan year as developed inExample 3($25,000 less $15,000 plus $200). (vii) Sponsor S elects to increase the prefund- ing balance by the maximum amount of the present value of the excess contribution adjusted for interest of $58,573, resulting in a total of the funding stan- dard carryover balance and the prefunding balance as of January 1, 2011, of $68,773, the same amount as that developed inExample 2. Example 5. (i) Plan Q is a defined benefit plan with a plan year that is the calendar year and a valu- ation date of July 1. The funding standard carryover balance of Plan Q is $50,000 as of January 1, 2010, the beginning of the 2010 plan year. The prefund- ing balance of Plan Q as of the beginning of the 2010 plan year is $0. The actual rate of return on Plan Q’s assets for 2010 is 10%. Plan Q’s effective interest rate for 2010 is 6.25%. The funding ratio for Plan Q for 2009 (the prior plan year funding ratio with re- spect to 2010, as determinedunder paragraph (d)(3) of this section) is 85%, which is not less than 80%. The minimum required contribution for Plan Q for 2010 is $200,000. Sponsor T makes a contribution to Plan Q of $190,000 on July 1, 2010, for the 2010 plan year, and makes no other contributions for the 2010 plan year. Sponsor T elects to use $10,000 of the funding standard carryover balance to offset Plan Q’s minimum required contribution in 2010. (ii) Pursuant to paragraph (b)(4) of this section, the funding standard carryover balance is increased to $51,539 as of July 1, 2010 (that is, an increase to reflect 6 months of interest at an effective interest rate of 6.25%) for the purpose of adjusting plan assets un- der paragraph (c) of this section, and for applying any election to use or reduce Plan Q’s funding standard carryover balance under paragraph (d) or (e) of this section. However, Sponsor T does not elect in 2010 to reduce any portion of the funding standard carry- over balance pursuant to paragraph (e) of this section. The funding standard carryover balance ($51,539) is subtracted from the value of plan assets, as of July 1, 2010, prior to the determination of the minimum funding contribution, and $51,539 is the maximum amount that may applied against the minimum re- quired contribution. (iii) The value of the funding standard carryover balance as of January 1, 2011, is determined by first discounting the amount used to offset the minimum required contribution for 2010 from July 1, 2010, to January 1, 2010, using the effective interest rate of 6.25%, and subtracting the discounted amount from the January 1, 2010, funding standard carryover bal- ance. The resulting amount is adjusted for investment experience to January 1, 2011, using a rate equal to theactualrateofreturnonplanassetsof10%dur- ing 2010. Thus, the $10,000 used to offset Plan Q’s minimum required contribution as of July 1, 2010, is discounted for 6 months of interest, at an effective interest rate of 6.25%, to obtain an amount of $9,701 as of January 1, 2010. The remaining funding stan- dard carryover balance as of January 1, 2010, solely for purposes of determining the adjustment for invest- ment experience during 2010, is $40,299 ($50,000 - $9,701), and the adjustment for investment experi- ence is $4,030 ($40,299 x 10%). The value of the funding standard carryover balance as of January 1, 2011, is $44,329 (that is, $50,000 - $9,701 + $4,030). Example 6. (i) The facts are the same as inExam- ple 5, except that Sponsor T contributes $200,000 on July 1, 2010, for the 2010 plan year. (ii) The cash contribution required for 2010, af- ter offsetting the minimum required contribution by $10,000 of the funding standard carryover balance in accordance with T’s election, is $190,000. The dif- ference, or $10,000, must be adjusted to January 1, 2011, to determine the maximum amount that can be added to the prefunding balance as of that date. (iii) The excess contribution is first adjusted to January 1, 2010, by discounting for 6 months of interest using the effective interest rate for 2010 of 6.25%. This results in an excess contribution of $9,701 ($10,000 ÷ 1.0625 0.5 ). Because this amount is an excess contribution solely because of Sponsor T’s election to offset the minimum required contri- bution for 2010 by a portion of the funding standard carryover balance, the amount is then adjusted for investment experience during 2010 at a rate of 10%, in accordance with paragraph (b)(3)(iii) of this sec- tion, for a present value of the excess contribution adjusted for interest of $10,671 ($9,701 x 1.10) as of January 1, 2011. Example 7. (i) The facts are the same as inExam- ple 4. Plan P’s effective interest rate for 2011 is 6.5%, and the rate of return on investments during 2011 is 7%. All required quarterly installments for the 2011 plan year were made by the applicable due dates. On February 1, 2012, Sponsor S elects to use $50,000 of Plan P’s prefunding and funding standard carryover balances to offset the minimum required contribution for the 2011 plan year. On April 15, 2012, Sponsor S elects to use Plan P’s prefunding and funding stan- dard carryover balances to offset the 2012 minimum required contribution by $20,000, in accordance with paragraph (d) of this section, in order to offset the re- quired quarterly installment then due. (ii) When adjusting Plan P’s prefunding and fund- ing standard carryover balances to reflect Sponsor S’s election to use them to offset the 2011 minimum required contribution, the remaining $10,200 in the funding standard carryover balance as of January 1, 2011, must be used before any portion of the pre- funding balance. The prefunding balance is reduced by the remaining $39,800 ($50,000 total election mi- nus $10,200 from the funding standard carryover bal- ance). (iii) The amount available for Sponsor S’s elec- tiontousePlanP’sprefundingandfundingstan- dard carryover balances to offset the 2012 minimum required contribution is determined by reducing the January 1, 2011, prefunding and funding standard carryover balances to reflect the election to use the prefunding and funding standard carryover balances to offset the 2011 minimum required contribution, and by adjusting the resulting amount to January 1, 2012, using the rate of investment return for Plan P during 2011. Accordingly, the available amount in Plan P’s funding standard carryover balance as of January 1, 2012, is zero. The available amount in Plan P’s prefunding balance as of January 1, 2012, is $20,087 ($58,573 minus $39,800, increased by 7%). Therefore, Sponsor S has $20,087 available to offset the minimum required contribution for the 2012 plan year. Example 8. (i)Thefactsarethesameasin Example 7, except that based on the enrolled actu- ary’s certification of the AFTAP on July 1, 2012, Sponsor S is deemed to elect to reduce the January 1, 2012, prefunding balance by $15,000 under section 436(f)(3). (ii) In accordance with paragraph (d)(1)(ii)(B) of this section, the deemed election to reduce the pre- funding balance is deemed to occur on the first day of the plan year, and before the date of any elec- tion to offset the minimum required contribution for the 2012 plan year. The deemed election does not affect Sponsor S’s election to offset the 2011 min- imum contribution because that election was made on February 1, 2012, before the date of the deemed election, July 1, 2012. (iii) As shown inExample 7, the available pre- funding balance as of January 1, 2012, after reflect- ing the February 1, 2012, election to offset the 2011 minimum required contribution but before reflecting the April 15, 2012, election to offset the 2012 min- imum required contribution, is $20,087. Adjusting this amount to reflect the deemed election to reduce the prefunding balance by $15,000 leaves a balance of $5,087 available to offset the minimum required contribution for 2012. (iv) The portion of the quarterly installment due April 15, 2012 that was not covered by the remain- ing $5,087 prefunding balance is considered unpaid retroactive to April 15, 2012. Example 9. (i) The facts are the same as inEx- ample 8, except that Sponsor S does not make the election to offset the 2011 minimum required contri- bution until August 1, 2012, and the deemed election as of July 1, 2012, reduces Plan P’s prefunding and funding standard carryover balances as of January 1, 2012, by $68,500. Sponsor S does not elect to use Plan P’s prefunding and funding standard carryover balances to offset the 2012 minimum contribution. (ii) In accordance with paragraph (d)(1)(ii)(A) of this section, the July 1, 2012, deemed election to re- duce Plan P’s prefunding and funding standard car- ryover balances must be taken into account before determining the amount available to offset the 2011 minimum required contribution because the election to offset the 2011 minimum required contribution was made after the date of the deemed election, July 1, 2012. (iii) Pursuant to paragraph (d)(1)(ii)(C) of this section, the January 1, 2011, prefunding and fund- ing standard carryover balances are adjusted to Jan- uary 1, 2012, using Plan P’s rate of investment return for 2011 of 7%. This results in an available fund- ing standard carryover balance of $10,914 ($10,200 x 1.07) and an available prefunding balance of $62,673 (58,573 x 1.07) as of January 1, 2012. (iv) Paragraph (d)(2) of this section requires that the funding standard carryover balance must be used before reducing Plan P’s prefunding balance. Ac- cordingly, the funding standard carryover balance is eliminated, and the prefunding balance is reduced by the remaining $57,586 ($68,500 - $10,914), re- sulting in an available prefunding balance of $5,087 ($62,673 - $57,586) as of January 1, 2012. (v) In accordance with paragraph (d)(1)(ii)(D) of this section, the remaining balance is adjusted to Jan- uary 1, 2011, to determine the amount available to offset the 2011 minimum required contribution. This adjustment is done by dividing the remaining bal- ance by 1 plus the rate of investment return for 2011. Accordingly, the amount available to offset the 2011 2009–50 I.R.B.812December 14, 2009 minimum required contribution is $4,754 ($5,087 ÷ 1.07). (vi) If the plan sponsor elects to use the $4,754 available balance to offset the 2011 minimum re- quired contribution, the funding standard carryover balance as of January 1, 2012 (prior to the deemed reduction under section 436(f)(3)) is $5,827 ($10,200 less $4,754, plus $381 for investment experience at a rate of 7%). The prefunding balance as of January 1, 2012 (prior to the deemed reduction under section 436(f)(3)) is $62,673 (that is, $58,573 x 1.07). The deemed election to reduce Plan P’s balance is first applied to eliminate the funding standard carryover balance, and the remaining $62,673 ($68,500 less $5,827) reduces the January 1, 2012, prefunding balance to zero. Example 10. (i) Plan V is a defined benefit plan with a plan year that is the calendar year and a valua- tion date of December 31. The valuation is based on the fair market value of plan assets, which amounts to $1,000,000 as of December 31, 2010, before any adjustments. As of January 1, 2010, Plan V’s fund- ing standard carryover balance is $0 and its prefund- ing balance is $125,000. Plan V’s effective interest rate for 2010 is 5.5%. The enrolled actuary’s cer- tification of AFTAP for 2010 on March 31, 2010, results in a deemed reduction of $15,000 in the plan’s prefunding balance as of January 1, 2010. Plan V’s sponsor elected to use the prefunding balance to offset any portion of the minimum required contribution for 2010 not covered by cash contributions. (ii) In accordancewith paragraph (b)(4)(i) of this section, the amount of theprefunding balance sub- tracted from plan assets is increased from the first day of the plan year to the valuation date using the effec- tive interest rate of 5.5% for 2009. Accordingly, the prefunding balance used for this purpose is $116,050 [($125,000 - $15,000 deemed reduction) x 1.055]. (iii) The fair market value of plan assets used for the December 31, 2010,valuation is $883,950 ($1,000,000 - $116,050). Example 11. (i) The facts are the same as inEx- ample 10. The minimum contribution for Plan V for the 2010 plan year is $45,000; no quarterly install- ments are required for Plan V for 2010. Plan V’s sponsor makes a contribution of $20,000 for the 2010 plan year on July 1, 2011. The actual rate of return on assets for Plan V during 2010 is 10%. (ii) The contribution of $20,000 is discounted to December 31, 2010, using the effective interest rate of 5.5% to determine the remaining balance of the 2010 minimum required contribution. Accordingly, the contribution is adjusted to $19,472 ($20,000 ÷ 1.055 0.5 ) as of December 31, 2010, and the balance of the minimum required contribution is $25,528 ($45,000 - $19,472). This balance will be covered by the plan sponsor’s election to use the prefunding bal- ance to offset any portion of the minimum required contribution not covered by cash contributions. (iii) Under section (b)(4)(ii) of this section, the amount used to offset the 2010 minimum required contribution for the purpose of adjusting the prefund- ing balance is discounted to January 1, 2010, using the effective interest rate for 2010. This amount is calculated as $24,197 ($25,528 ÷ 1.055). (iv) The prefunding balance as of January 1, 2011, is reduced by the deemed election of $15,000 and the discounted amount used to offset the 2010 minimum required contribution ($24,197), and adjusted for in- vestment experience for 2010 using the actual rate of return of 10%. Accordingly, the prefunding balance as of January 1, 2011 is $94,383 [($125,000 - $15,000 - $24,197) x 1.10]. Example 12. (i) The facts are the same as inEx- ample 11, except that the enrolled actuary’s certifica- tion of the AFTAP as of March 31, 2011, results in a deemed reduction of the prefunding balance as of January 1, 2011, of $75,000. (ii) Under paragraph (d)(1)(ii) of this section, the deemed reduction of the prefunding balance is ap- plied before the election to use the prefunding balance to offset the balance of the minimum required con- tribution for 2010. To determine the amount of the prefunding balance available to cover the remaining minimum required contribution for 2010, the deemed reduction is adjusted for investment experience to January 1, 2010, using the actual rate of return of 10% for 2010. Accordingly, the adjusted deemed re- duction is $68,182 ($75,000 ÷ 1.10) and the available prefunding balance as of January 1, 2010, is $41,818 ($125,000 - $15,000 adjusted deemed reduction for 2010 - $68,182 adjusted deemed reduction for 2011). (iii) This amount is then adjusted to December 31, 2010, using the effective interest rate of 5.5%. The amount of the prefunding balance available to offset the 2010 minimum required contribution as of De- cember 31, 2010, is $44,118 ($41,818 x 1.055). This amountislargerthantheelectionmadebyPlanV’s sponsor to offset the minimum required contribution for 2010 ($25,528) and so the election remains valid. (h)Effective/applicability date and transition rules—(1)Statutory effective date/applicability date. Section 430 gen- erally applies to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is de- layed for certain plans in accordance with sections 104 through 106 of PPA ’06. (2)Effective date/applicability date of regulations. Thissectionappliestoplan years beginning on or after January 1, 2010. For plan years beginning before January 1, 2010, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the requirements of section 430. (3)Special lookback rule for 2007 plan year’s funding ratio—(i)Plan assets.For purposes of determining a plan’s prior plan year funding ratio under paragraph (d)(3) of this section with respect to the first plan year beginning on or after January 1, 2008, the value of plan assets on the valuation date of the preceding plan year (the “2007 plan year”) is determined under section 412(c)(2) as in effect for the 2007 plan year, except that, for this purpose— (A)Ifthevalueofplanassetsisless than 90 percent of the fair market value of plan assets for the 2007 plan year on that date, such value is considered to be 90 percent of the fair market value; and (B) If the value of plan assets is greater than 110 percent of the fair market value of plan assets for the 2007 plan year on that date, such value is considered to be 110 percent of the fair market value. (ii)Funding target. For purposes of de- termining a plan’s prior plan year funding ratio under paragraph (d)(3) of this section with respect to the first plan year beginning on or after January 1, 2008, the funding tar- get of the plan for the preceding plan year is equal to the plan’s current liability un- der section 412(l)(7) (as in effect prior to amendment by PPA ’06) on the valuation date for the 2007 plan year. (iii)Special rules for new plans, merg- ers, and spinoffs. In the case of a plan de- scribed in paragraph (d)(3)(ii), (d)(3)(iii), or (d)(3)(iv) of this section, the plan’s prior plan year funding ratio with respect to the firstplanyearbeginningonorafterJan- uary 1, 2008 is determined using rules sim- ilar to the rules of paragraphs (d)(3)(ii), (d)(3)(iii), and (d)(3)(iv) of this section. (4)First effective plan year.Forpur- poses of this section, the termfirst effective plan yearmeans the first plan year begin- ning on or after the date section 430 applies for purposes of determining the minimum required contribution for the plan. (5)Pre-effective plan year. For pur- poses of this section, the termpre-effective plan yearmeans the plan year immediately preceding the first effective plan year. Par. 4. Section1.430(g)–1isaddedto read as follows: §1.430(g)–1 Valuation date and valuation of plan assets. (a)In general—(1)Overview. This sec- tion provides rules relating to a plan’s valu- ation date and the valuation of a plan’s as- sets for a plan year under section 430(g). Section 430 and this section apply to single employer defined benefit plans (including multiple employer plans as defined in sec- tion 413(c)) that are subject to the rules of section 412, but do not apply to multiem- ployer plans (as defined in section 414(f)). Paragraph (b) of this section describes val- uation date rules. Paragraph (c) of this section describes rules regarding the de- termination of the asset value for purposes of a plan’s actuarial valuation. Paragraph (d) of this section contains rules for taking December 14, 20098132009–50 I.R.B. employer contributions into account in the determination of the value of plan assets. Paragraph (e) of this section contains ex- amples. Paragraph (f) of this section sets forth effective/applicability dates and tran- sition 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 main- tained a separate plan. Thus, in such a case, the value of plan assets is determined separately for each employer under the plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in sec- tion 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)Valuation date—(1)In general.The determination of the funding target, target normal cost, and value of plan assets for a plan year is made as of the valuation date for that plan year. Except as otherwise pro- vided in paragraph (b)(2) of this section, the valuation date for any plan year is the first day of the plan year. (2)Exception for small plans—(i)In general. If, on each day during the pre- ceding plan year, a plan had 100 or fewer participants determined by applying the rules of §1.430(d)–1(e)(1) and (2) (in- cluding active and inactive participants and all other individuals entitled to future benefits), then the plan may designate any day during the plan year as its valuation date for that plan year and succeeding plan years. For purposes of this paragraph (b)(2)(i), all defined benefit plans (other than multiemployer plans as defined in section 414(f)) maintained by an employer are treated as one plan, but only partic- ipants with respect to that employer are taken into account. (ii)Employer determination.For purposes of this paragraph (b)(2), the employer includes all members of the employer’s controlled group determined pursuant to section 414(b), (c), (m), and (o) and includes any predecessor of the employer that, during the prior year, em- ployed any employees of the employer whoarecoveredbytheplan. (iii)Application of exception in first plan year. In the case of the first plan year of any plan, the exception for small plans under paragraph (b)(2)(i) of this section is applied by taking into account the number of participants that the plan is reasonably expected to have on each day during the first plan year. (iv)Valuation date is part of funding method. The selection of a plan’s valuation date is part of the plan’s funding method and, accordingly, may only be changed with the consent of the Commissioner. A change of a plan’s valuation date that is required by section 430 is treated as hav- ing been approved by the Commissioner and does not require the Commissioner’s prior specific approval. Thus, if a plan that ceases to be eligible for the small plan ex- ception under this paragraph (b)(2) for a plan year because the number of partici- pants exceeded 100 in the prior plan year, then the resulting change in the valuation date to the first day of the plan year is auto- matically approved by the Commissioner. (c)Determination of asset value—(1) In general—(i)General use of fair mar- ket value. Except as otherwise provided in this paragraph (c), the value of plan as- sets for purposes of section 430 is equal to the fair market value of plan assets on the valuation date. Prior year contributions made after the valuation date and current year contributions made before the valua- tion date are taken into account to the ex- tent provided in paragraph (d) of this sec- tion. (ii)Fair market value. The fair market value of an asset is determined as the price at which the asset would change hands be- tween a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowl- edge of relevant facts. Except as otherwise provided by the Commissioner, any guid- ance on the valuation of insurance con- tracts under Subchapter D of Chapter 1 the Internal Revenue Code applies for pur- poses of this paragraph (c)(1)(ii). (2)Averaging of fair market values—(i) In general. Subject to the plan asset cor- ridor rules of paragraph (c)(2)(iii) of this section, a plan is permitted to determine the value of plan assets on the valuation date as the average of the fair market value of assets on the valuation date and the ad- justed fair market value of assets deter- mined for one or more earlier determi- nation dates (adjusted using the method described in paragraph (c)(2)(ii) of this section). The method of determining the value of assets is part of the plan’s fund- ing method and, accordingly, may only be changed with the consent of the Commis- sioner. (ii)Adjusted fair market value—(A) Determination dates. The period of time between each determination date (treating the valuation date as a determination date) must be equal and that period of time can- not exceed 12 months. In addition, the earliest determination date with respect to a plan year cannot be earlier than the last day of the 25th month before the valuation date of the plan year (or a similar period in the case of a valuation date that is not the first day of a month). In a typical situa- tion, the earlier determination dates will be the two immediately preceding valuation dates. However, these rules also permit the use of more frequent determination dates. For example, monthly or quarterly determination dates may be used. (B)Adjustments for contributions and distributions. The adjusted fair market value of plan assets for a prior determina- tion date is the fair market value of plan assets on that date, increased for contri- butions included in the plan’s asset bal- ance on the valuation date that were not included in the plan’s asset balance on the earlier determination date, reduced for benefits and all other amounts paid from plan assets during the period beginning with the prior determination date and end- ing immediately before the valuation date, and adjusted for expected earnings as de- scribed in paragraph (c)(2)(ii)(D) of this section. For this purpose, the fair market value of assets as of a determination date includes any contribution for a plan year that ends with or prior to the determina- tion date that is receivable as of the de- termination date (but only if the contribu- tion is actually made within 81/2 months after the end of the applicable plan year). If the contribution that is receivable as of the determination date is for a plan year be- ginning on or after January 1, 2008, then only the present value as of the determi- nation date (determined using the effective interest rate under section 430(h)(2)(A) for the plan year for which the contribution is made) is included in the fair market value of assets. 2009–50 I.R.B.814December 14, 2009 (C)Treatment of spin-offs and plan-to-plan transfers. For purposes of determining the adjusted fair market value of plan assets, assets spun-off from a plan as a result of a spin-off described in §1.414(l)–1(b)(4) are treated as an amount paid from plan assets. Except as other- wise provided by the Commissioner, for purposes of determining the adjusted fair market value of plan assets, assets that are added to a plan as a result of a plan-to-plan transfer described in §1.414(l)–1(b)(3) are treated in the same manner as contribu- tions. (D)Adjustments for expected earnings. [Reserved] (E)Assumed rate of return.[Reserved] (F)Limitation on the assumed rate of return for periods within plan years for which the three segment rates were used. [Reserved] (G)Limitation on the assumed rate of return for periods within plan years for which the full yield curve was used.[Re- served] (iii)Restriction to 90–110 percent cor- ridor—(A)In general. This paragraph (c)(2)(iii) provides rules for applying the 90 to 110 percent corridor set forth in sec- tion 430(g)(3)(B)(iii). The rules for ac- counting for contribution receipts under paragraphs (d)(1) and (d)(2) of this section are applied prior to the application of the 90 to 110 percent corridor under this para- graph (c)(2)(iii). (B)Asset value less than 90 percent of fair market value. Ifthevalueofplanas- sets determined under paragraph (c)(2)(i) of this section is less than 90 percent of the fair market value of plan assets, then the value of plan assets under this paragraph (c)(2) is equal to 90 percent of the fair mar- ket value of plan assets. (C)Asset value greater than 110 per- cent of fair market value.Ifthevalue of plan assets determined under paragraph (c)(2)(i) of this section is greater than 110 percent of the fair market value of plan as- sets, then the value of plan assets under this paragraph (c)(2) is equal to 110 percent of the fair market value of plan assets. (3)Qualified transfers to health benefit accounts. In the case of a qualified transfer (as defined in section 420), any assets so transferred are not treated as plan assets for purposes of section 430 and this section. (d)Accounting for contribution re- ceipts—(1)Prior year contributions—(i) In general. For purposes of determining the value of plan assets under paragraph (c) of this section, if an employer makes a contribution to the plan after the valu- ation date for the current plan year and the contribution is for an earlier plan year, then the present value of the contribution determined as of that valuation date is taken into account as an asset of the plan as of the valuation date, but only if the contribution is made before the deadline for contributions as described in section 430(j)(1) for the plan year immediately preceding the current plan year. For this purpose, the present value is determined using the effective interest rate under sec- tion 430(h)(2)(A) for the plan year for which the contribution is made. (ii)Special rule for contributions for the 2007 plan year—(A)Timely contribu- tions. Notwithstanding paragraph (d)(1)(i) of this section, if the employer makes a contribution to the plan after the valuation date for the first plan year that begins on or after January 1, 2008, and the contribu- tion is for the immediately preceding plan year and is made by the deadline for con- tributions for that preceding plan year un- der section 412(c)(10) (as in effect before amendment by the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780)), then the contribution is taken into account as a plan asset under paragraph (d)(1)(i) of this section without applying any present value discount. (B)Late contributions. If a contribution is for the plan year that immediately pre- cedes the first plan year that beings on or after January 1, 2008, and is not described in paragraph (d)(1)(ii)(A) of this section, then the rules of paragraph (d)(1)(i) apply to the contribution except that the present value is determined using the valuation in- terest rate under section 412(c)(2) for that plan year. (iii)Ordering rules. For purposes of this paragraph (d)(1), the ordering rules of section 4971(c)(4)(B) apply for purposes of determining the plan year for which a contribution is made. (2)Current year contributions made be- fore valuation date. In the case of a plan with a valuation date that is not the first day of the plan year, for purposes of deter- mining the value of plan assets under para- graph (c) of this section, if an employer makes a contribution for a plan year be- fore that year’s valuation date, that con- tribution (and any interest on the contri- bution for the period between the contri- bution date and the valuation date, deter- mined using the effective interest rate un- der section 430(h)(2)(A) for the plan year) must be subtracted from plan assets in de- termining the value of plan assets as of the valuation date. If the result of this subtrac- tion is a number less than zero, the value of plan assets as of the valuation date is equal to zero. (e)Examples.[Reserved] (f)Effective/applicability dates and transition rules—(1)Statutory effective date/applicability date. Section 430 gen- erally applies to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is de- layed for certain plans in accordance with sections 104 through 106 of PPA’06. (2)Effective date/applicability date of regulations—(i)In general. This section applies to plan years beginning on or af- ter January 1, 2010, regardless of whether section 430 applies to determine the min- imum required contribution for the plan year. For plan years beginning before Jan- uary 1, 2010, plans are permitted to rely on theprovisionssetforthinthissectionfor purposes of satisfying the requirements of section 430. (ii) Permission to use averaging for 2008. For purposes of determining the actuarial value of assets for a plan year be- ginning during 2008 using the averaging rules of paragraph (c)(2) of this section, a plan is permitted to apply an assumed earnings rate of zero under paragraph (c)(2)(ii)(E) of this section (even if zero is not the actuary’s best estimate of the anticipated annual rate of return on plan assets). (3)Approval for changes in the valu- ation date and valuation method.Any change in a plan’s valuation date or asset valuation method that satisfies the rules of this section and is made for either the first plan year beginning in 2008, the first plan year beginning in 2009, or the first plan year beginning in 2010 is treated as having been approved by the Commissioner and does not require the Commissioner’s spe- cific prior approval. In addition, a change in a plan’s valuation date or asset valua- tion method for the first plan year to which section 430 applies to determine the plan’s minimum required contribution (even if December 14, 20098152009–50 I.R.B. that plan year begins after December 31, 2010) that satisfies the rules of this sec- tion is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior approval. Par. 5. Section 1.430(h)(2)–1 is added to read as follows: §1.430(h)(2)–1 Interest rates used to determine present value. (a)In general—(1)Overview. This sec- tion provides rules relating to the interest rates to be applied for a plan year under section 430(h)(2). Section 430(h)(2) and this section apply to single employer de- fined benefit plans (including multiple em- ployer 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 describes how the segment interest rates are used for a plan year. Paragraph (c) of this section describes those segment rates. Paragraph (d) of this section de- scribes the monthly corporate bond yield curve that is used to develop the segment rates. Paragraph (e) of this section de- scribes certain elections that are permitted to be made under this section. Paragraph (f) of this section describes other rules re- lated to interest rates. Paragraph (g) of this section contains examples. Paragraph (h) of this section contains effective/applica- bility 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) ap- plies, the rules of section 430 and this section are applied separately for each em- ployer under the plan as if each employer maintained a separate plan. Thus, each employer under such a multiple employer plan may make elections with respect to the interest rate rules under this section that are independent of the elections of other employers under the plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in section 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), the rules of section 430 and this section are applied as if all participants in the plan were employed by asingleemployer. (b)Interest rates for determining plan liabilities—(1)In general.Theinterest rates used in determining the present value of the benefits that are included in the tar- get normal cost and the funding target for the plan for a plan year are determined as set forth in this paragraph (b). (2)Benefits payable within 5 years—(i) Plans with valuation dates at the beginning of the plan year. If the valuation date is the first day of the plan year, in the case of benefits expected to be payable during the 5-year period beginning on the valua- tion date for the plan year, the interest rate used in determining the present value of the benefits that are included in the target normal cost and the funding target for the plan is the first segment rate with respect to the applicable month, as described in para- graph (c)(2)(i) of this section. (ii)Plans with valuation dates other than the first day of the plan year.[Re- served] (3)Benefits payable after 5 years and within 20 years. In the case of benefits expected to be payable during the 15-year period beginning after the end of the pe- riod described in paragraph (b)(2) of this section, the interest rate used in determin- ing the present value of the benefits that are included in the target normal cost and the funding target for the plan is the second segment rate with respect to the applicable month, as described in paragraph (c)(2)(ii) of this section. (4)Benefits payable after 20 years.In the case of benefits expected to be payable after the period described in paragraph (b)(3) of this section, the interest rate used in determining the present value of the benefits that are included in the target normal cost and the funding target for the plan is the third segment rate with respect to the applicable month, as described in paragraph (c)(2)(iii) of this section. (5)Applicable month. Except as oth- erwise provided in paragraph (e) of this section, the termapplicable monthfor purposes of this paragraph (b) means the month that includes the valuation date of the plan for the plan year. (6)Special rule for certain airlines—(i) In general. Pursuant to section 6615 of the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountabil- ity Appropriations Act, 2007, Public Law 110–28 (121 Stat. 112), for a plan spon- sor that makes the election described in section 402(a)(2) of the Pension Protec- tion Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780), the interest rate requiredtobeusedtodeterminetheplan’s funding target for each of the 10 years un- der that election is 8.25 percent (rather than the segment rates otherwise described in this paragraph (b) or the full yield curve as permitted under paragraph (e)(4) of this section). (ii)Special interest rate not applicable for other purposes. The special interest rate described in paragraph (b)(6)(i) of this section does not apply for other purposes such as the determination of the plan’s tar- get normal cost. (c)Segment rates—(1)Overview.This paragraph (c) sets forth rules for deter- mining the first, second, and third seg- ment rates for purposes of paragraph (b) of this section. The first, second, and third segment rates are set forth in rev- enue rulings, notices, or other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Revenue Bulletin. See para- graph (h)(4) of this section for a transition rule under which the definition of the seg- ment rates is modified for plan years be- ginning in 2008 and 2009. (2)Definition of segment rates—(i) First segment rate. For purposes of this section, except as otherwise provided un- der the transition rule of paragraph (h)(4) of this section, thefirst segment rateis, with respect to any month, the single rate of interest determined by the Commis- sioner on the basis of the average of the monthly corporate bond yield curves (de- scribed in paragraph (d) of this section) for the 24-month period ending with the month preceding that month, taking into account only the first 5 years of each of those yield curves. (ii)Second segment rate. For purposes of this section, except as otherwise pro- vided under the transition rule of para- graph (h)(4) of this section, thesecond seg- ment rateis, with respect to any month, thesinglerateofinterest determined by the Commissioner on the basis of the average of the monthly corporate bond yield curves (described in paragraph (d) of this section) for the 24-month period ending with the month preceding that month, taking into account only the portion of each of those yield curves corresponding to the 15-year period that follows the end of the 5-year 2009–50 I.R.B.816December 14, 2009 period described in paragraph (c)(2)(i) of this section. (iii)Third segment rate. For purposes of this section, except as otherwise pro- vided under the transition rule of para- graph (h)(4) of this section, thethird seg- ment rateis, with respect to any month, the single rate of interest determined by the Commissioner on the basis of the average of the monthly corporate bond yield curves (described in paragraph (d) of this section) for the 24-month period ending with the month preceding that month, taking into account only the portion of each of those yield curves corresponding to the 40-year period that follows the end of the 15-year period described in paragraph (c)(2)(ii) of this section. (d)Monthly corporate bond yield curve—(1)In general. For purposes of this section, themonthly corporate bond yield curveis, with respect to any month, a yield curve that is prescribed by the Com- missioner for that month based on yields for that month on investment grade corpo- rate bonds with varying maturities that are in the top three quality levels available. (2)Determination and publication of yield curve. A description of the method- ology for determining the monthly corpo- rate bond yield curve is provided in guid- ance issued by the Commissioner that is published in the Internal Revenue Bulletin. The yield curve for a month will be set forth in revenue rulings, notices, or other guidance published in the Internal Rev- enue Bulletin. See §601.601(d)(2) relat- ing to objectives and standards for publish- ing regulations, revenue rulings and rev- enue procedures in the Internal Revenue Bulletin. (e)Elections—(1)In general.This paragraph (e) describes elections for a plan year that a plan sponsor can make to use alternative interest rates under this section. Any election under this paragraph (e) must be made by providing written notification of the election to the plan’s enrolled ac- tuary. Any election in this paragraph (e) may be adopted for a plan year without ob- taining the consent of the Commissioner, but, once adopted, that election will apply for that plan year and all future plan years and may be changed only with the consent of the Commissioner. (2)Election for alternative applica- ble month. As an alternative to defining the applicable month as the month that includes the valuation date for the plan year, a plan sponsor that is using segment rates as provided under paragraph (b) of this section may elect to use one of the 4 months preceding that month as the appli- cable month. (3)Election not to apply transition rule. The plan sponsor may elect not to apply the transition rule in paragraph (h)(4) of this section. (4)Election to use full yield curve—(i) In general. For purposes of determining the plan’s funding target and target nor- mal cost, and for all other purposes un- der section 430 (including the determina- tion of shortfall amortization installments, waiver installments, and the present val- ues of those installments as described in paragraph (f)(2) of this section), the plan sponsor may elect to use interest rates un- der the monthly corporate bond yield curve described in paragraph (d) of this section for the month preceding the month that in- cludes the valuation date in lieu of the seg- ment rates determined under paragraph (c) of this section. In order to address the tim- ing of benefit payments during a year, rea- sonable approximations are permitted to be used to value benefit payments that are expected to be made during a plan year. (ii)Reasonable techniques permitted. In the case of a plan sponsor using the monthly corporate bond yield curve un- der this paragraph (e)(4), if with respect to a decrement the benefit is only expected to be paid for one-half of a year (because the decrement was assumed to occur in the middle of the year), the interest rate for that year can be determined as if the ben- efit were being paid for the entire year. See §1.430(d)–1(f)(7) for additional rea- sonable techniques that can be used in de- termining present value. (5)Plan sponsor. For purposes of the elections described in this section, any reference to the plan sponsor generally means the employer or employers respon- sible for making contributions to or under the plan. In the case of plans that are multiple employer plans to which section 413(c)(4)(A) does not apply, any reference to the plan sponsor means the plan ad- ministrator within the meaning of section 414(g). (f)Interest rates used for other pur- poses—(1)Effective interest rate—(i)In general. Except as otherwise provided in paragraph (f)(2) of this section, the effec- tive interest rate determined under section 430(h)(2)(A) for the plan year is the single interest rate that, if used to determine the present value of the benefits that are taken into account in determining the plan’s funding target for the plan year, would result in an amount equal to the plan’s funding target determined for the plan year under section 430(d) as described in §1.430(d)–1(b)(2) (without regard to cal- culations for plans in at-risk status under section 430(i)). (ii)Zero funding target. If, for the plan year, the plan’s funding target is equal to zero, then the effective interest rate deter- mined under section 430(h)(2)(A) for the plan year is the single interest rate that, if used to determine the present value of the benefits that are taken into account in de- termining the plan’s target normal cost for the plan year, would result in an amount equal to the plan’s target normal cost de- termined for the planyear under section 430(b) as described in §1.430(d)–1(b)(1) (without regard to calculations for plans in at-risk status under section 430(i)). (2)Interest rates used for determining shortfall amortization installments and waiver amortization installments.Thein- terest rates used to determine the amount of shortfall amortization installments and waiver amortization installments and the present value of those installments are determined based on the dates those in- stallments are assumed to be paid, using the same timing rulesthat apply in deter- mining target normal cost as described in paragraph (b) of this section. Thus, for a plan that uses the segment rates described in paragraph (c) of this section, the first segment rate applies to the installments assumed to be paid during the first 5 year period beginning on the valuation date for the plan year, and the second segment rate applies to the installments assumed to be paid during the subsequent 15-year period. For purposes of this paragraph (f)(2), the shortfall amortization install- ments for a plan year are assumed to be paid on the valuation date for that plan year. For example, for a plan that uses the segment rates described in paragraph (c) of this section, the shortfall amorti- zation installment for the fifth plan year following the current plan year (the sixth installment) is assumed to be paid on the valuation date for that year so that such December 14, 20098172009–50 I.R.B. shortfall amortization installment will be determined using the second segment rate. (g)Examples. The following examples illustrate the rules of this section: Example 1. (i) The January 1, 2009, valuation of Plan P is performed using the segment rates ap- plicable for September 2008 (determined without regard to the transition rule of section 430(h)(2)(G)), and the 2009 annuitant and nonannuitant (male and female) mortality tables as published in Notice 2008–85. See §601.601(d)(2) relating to objectives and standards for publishing regulations, revenue rulings and revenue procedures in the Internal Rev- enue Bulletin. Plan P provides for early retirement benefits as early as age 50, and offers a single-sum distribution payable immediately at retirement. The single-sum payment is equal to the present value of the participant’s accrued benefit, based on the applicable interest rates and the applicable mortality table under section 417(e)(3). Participant E is the only participant in the plan, and is a male age 46 as of January 1, 2009, with an annual accrued benefit of $23,000 payable beginning at age 65. The actuary assumes a 100% probability that Participant E will terminate at age 50 and will elect to receive his benefit in the form of a single-sum payment. (ii) Plan P’s funding target is $68,908 as of Jan- uary 1, 2009. This figure is based on the male nonan- nuitant rates for ages prior to age 50, the applicable mortality rates under section 417(e)(3) for ages 50 and later, and segment interest rates of 5.07% for the first 5 years after the valuation date, 6.09% for the next 15 years, and 6.56% for periods more than 20 years after the valuation date. (See §1.430(d)–1(f)(9), Example 10, for additional details.) (iii) The present value of Participant E’s benefits as of January 1, 2009, is $68,908 if a single interest rate of 6.52805% is substituted for the segment inter- est rates but all other assumptions remain the same. Thus (rounded), the effective interest rate for Plan P is 6.53% for 2009. Example 2. (i)ThefactsarethesameasforEx- ample 1, except that Plan P offers a single-sum distri- bution equal to the present value of the accrued bene- fit based on the applicable interest rates under section 417(e)(3) or an interest rate of 6.25%, whichever pro- duces the higher amount. The applicable mortality table under section 417(e)(3) is used for both calcu- lations. (ii) The present value of Participant E’s age–50 single-sum distribution as of January 1, 2009 (when Participant E is age 46) is $77,392. This amount is determined by calculating the projected single-sum distribution at age 50 using the applicable mortal- ity table under section 417(e)(3) and an interest rate of 6.25%, and discounting the result to January 1, 2009, using the first segment rate of 5.07% and male nonannuitant mortality rates for 2009. Because this amount is larger than the present value of Participant E’s single-sum payment based on the applicable in- terest rates under section 417(e)(3) (that is, $68,908), the funding target for Plan P is $77,392 as of January 1, 2009. (See §1.430(d)–1(f)(9),Example 12for ad- ditional details.) (iii) The effective interest rate is the single inter- est rate that will produce the same funding target if substituted for the segment interest rates keeping all other assumptions the same, including the fixed inter- est rate used by the plan to determine single-sum pay- ments. The only segment interest rate used to develop the funding target of $77,392 was the first segment rate of 5.07%. Therefore, considering only this cal- culation, the single interest rate that would produce the same funding target would be 5.07%. (iv) However, the effective interest rate must also reflect the fact that the single-sum payment under Plan P is equal to the greater of the present value of Participant E’s accrued benefit based on the fixed rate of 6.25% or the applicable interest rates under section 417(e)(3). If the single rate of 5.07% is substituted for the segment rates used to calculate the present value of the single-sum payment based on the applicable interest rates, the resulting funding target would be higher than $77,392. (v) Using a single interest rate of 6.0771%, the January 1, 2009, present value of Participant E’s single-sum payment based on the applicable interest rates is $77,392, and the present value of Participant E’s single sum payment based on the plan’s interest rate of 6.25% is $74,494. Plan P’s funding target is the larger of the two, or $77,392, which is the same as the funding target based on the segment interest rates used for the 2009 valuation. Therefore, Plan P’s effective interest rate for 2009 (rounded) is 6.08%. (h)Effective/applicability dates and transition rules—(1)Statutory effective date/applicability date. Section 430 gen- erally applies to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is de- layed for certain plans in accordance with sections 104 through 106 of PPA ’06. (2)Effective date/applicability date of regulations. Thissectionappliestoplan years beginning on or after January 1, 2010, regardless of whether section 430 applies to determine the minimum required contribution for the plan year. For plan years beginning before January 1, 2010, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the requirements of section 430. (3)Approval for changes in interest rate. Any change to an election under paragraph (e) of this section that is made for the first plan year beginning in 2009 or the first plan year beginning in 2010 is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior approval. (4)Transition rule—(i)In general. Notwithstanding the general rules for determination of segment rates under para- graph (c)(2) of this section, for plan years beginning in 2008 or 2009, the first, sec- ond, or third segment rate for a plan with respect to any month is equal to the sum of— (A) The product of that rate for that month determined without regard to this paragraph (h)(4), multiplied by the appli- cable percentage; and (B) The product of the weighted av- erage interest rate determined under the rules of paragraph (h)(4)(iii) of this sec- tion, multiplied by a percentage equal to 100 percent minus the applicable percent- age. (ii)Applicable percentage.Forpur- poses of this paragraph(h)(4), the applica- ble percentage is 33–1/3 percent for plan years beginning in 2008 and 66–2/3 per- cent for plan years beginning in 2009. (iii)Weighted average interest rate. The weighted average interest rate for purposes of paragraph (h)(4)(i)(B) of this section is the weighted average interest rate under section 412(b)(5)(B)(ii)(II) (as that provision was in effect for plan years beginning in 2007) as of— (A) The month which contains the first day of the plan year; (B) The month which contains the valu- ation date (if the applicable month is deter- mined under paragraph (b)(5) of this sec- tion); or (C) The applicable month (if the ap- plicable month is determined under para- graph (e)(2) of this section). (iv)New plans ineligible.Thetransi- tion rule of this paragraph (h)(4) does not apply if the first plan year of the plan be- gins on or after January 1, 2008. Par. 6. Section 1.430(i)–1 is added to read as follows: §1.430(i)–1 Special rules for plans in at-risk status. (a)In general—(1)Overview.This section provides special rules related to determining the funding target and mak- ing other computationsfor certain defined benefit plans that are in at-risk status for the plan year. Section 430(i) and this section apply to single employer defined benefit plans (including multiple employer plans) but do not apply to multiemployer plans (as defined in section 414(f)). Para- graph (b) of this section describes rules for determining whether a plan is in at-risk status for a plan year, including the deter- mination of a plan’s funding target attain- ment percentage and at-risk funding target attainment percentage. Paragraph (c) of this section describes the funding target 2009–50 I.R.B.818December 14, 2009 for a plan in at-risk status. Paragraph (d) of this section describes the target normal cost for a plan in at-risk status. Paragraph (e) of this section describes rules regard- ing how the funding target and the target normal cost are determined for a plan that has been in at-risk status for fewer than 5 consecutive plan years. Paragraph (f) of this section sets forth effective/applicabil- ity 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 main- tained a separate plan. For example, at-risk status is 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 sec- tion 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)Determination of at-risk status of a plan—(1)General rule. Except as other- wise provided in this section, a plan is in at-risk status for a plan year if— (i) The funding target attainment per- centage for the preceding plan year (deter- mined under paragraph (b)(3) of this sec- tion) is less than 80 percent; and (ii) The at-risk funding target attain- ment percentage for the preceding plan year (determined underparagraph (b)(4) of this section) is less than 70 percent. (2)Small plan exception. If, on each day during the preceding plan year, a plan had 500 or fewer participants (in- cluding both active and inactive partic- ipants), determined in accordance with the same rules that apply for purposes of §1.430(g)–1(b)(2)(ii), then the plan is not treated as being in at-risk status for the plan year. (3)Funding target attainment percent- age. For purposes of this section, except as otherwise provided in paragraph (b)(5) of this section, the funding target attainment percentage of a plan for a plan year is the funding target attainment percentage as de- fined in §1.430(d)–1(b)(3). (4)At-risk funding target attainment percentage. Except as otherwise provided in paragraph (b)(5) of this section, the at-risk funding target attainment percent- age of a plan for a plan year is a fraction (expressed as a percentage)— (i)Thenumeratorofwhichisthevalue of plan assets for the plan year after sub- traction of the prefunding balance and the funding standard carryover balance under section 430(f)(4)(B); and (ii) The denominator of which is the at-risk funding target of the plan for the plan year (determined under paragraph (c) of this section, but without regard to the loading factor imposed under paragraph (c)(2)(ii) of this section). (5)Special rules—(i)Special rule for new plans. Except as otherwise provided in paragraph (b)(5)(iii) of this section, in the case of a new plan that was neither the result of a merger nor involved in a spinoff, the funding target attainment percentage under paragraph (b)(3) of this section and the at-risk funding target attainment per- centage under paragraph (b)(4) of this sec- tion are equal to 100 percent for years be- fore the plan exists. (ii)Special rule for plans with zero funding target. Except as otherwise pro- vided in paragraph (b)(5)(iii) of this sec- tion, if the funding target of the plan is equal to zero for a plan year, then the funding target attainment percentage un- der paragraph (b)(3) of this section and the at-risk funding target attainment percent- age under paragraph (b)(4) of this section are equal to 100 percent for that plan year. (iii)Exception when plan has predeces- sor plan that was in at-risk status.[Re- served] (iv)Special rules for plans that are the result of a merger.[Reserved] (v)Special rules for plans that are in- volved in a spinoff.[Reserved] (6)Special rule for determining at-risk status of plans of specified automobile manufacturers. See section 430(i)(4)(C) for special rules for determining the at-risk status of plans of specified automobile and automobile parts manufacturers. (c)Funding target for plans in at-risk status—(1)In general. If the plan has been in at-risk status for 5 consecutive years, including the current plan year, then the funding target for the plan is the at-risk funding target determined under paragraph (c)(2) of this section. See paragraph (e) of this section for the determination of the funding target where the plan is in at-risk status for the plan year but was not in at-risk status for one or more of the 4 pre- ceding plan years. (2)At-risk funding target—(i)Use of modified actuarial assumptions. Except as otherwise provided in this paragraph (c)(2), the at-risk funding target of the plan under this paragraph (c)(2) for the plan year is equal to the present value of all ben- efits accrued or earned under the plan as of the beginning of the plan year, as deter- mined in accordance with §1.430(d)–1 but using the additional actuarial assumptions described in paragraph (c)(3) of this sec- tion. (ii)Funding target includes load .The at-risk funding target is increased by the sum of— (A) $700 multiplied by the number of participants in the plan (including active participants, inactive participants, and beneficiaries); plus (B) Four percent of the funding target (determined under §1.430(d)–1(b)(2) as if the plan was not in at-risk status) of the plan for the plan year. (iii)Minimum amount. Notwithstand- ing any otherwise applicable provisions of this section, the at-risk funding target of a plan for a plan year is not less than the plan’s funding target for the plan year de- termined without regard to this section. (3)Additional actuarial assump- tions—(i)In general. The actuarial as- sumptionsusedtodetermineaplan’s at-risk funding target for a plan year are the actuarial assumptions that are applied under section 430, with the modifications described in this paragraph (c)(3). (ii)Special retirement age assump- tion—(A)Participants eligible to retire and collect benefits within 11 years. Sub- ject to paragraph (c)(3)(ii)(B) of this sec- tion, if a participant would be eligible to commence an immediate distribution by the end of the 10th plan year after the cur- rent plan year (that is, the end of the 11th plan year beginning with the current plan year), that participant is assumed to com- mence an immediate distribution at the earliest retirement age under the plan, or, if later, at the end of the current plan year. The rule of this paragraph (c)(3)(ii)(A) does not affect the application of plan assumptions regarding an employee’s termination of employment prior to the employee’s earliest retirement age. (B)Participants otherwise assumed to retire immediately. The special retirement December 14, 20098192009–50 I.R.B. age assumption of paragraph (c)(3)(ii)(A) of this section does not apply to a partici- pant to the extent the participant is other- wise assumed to commence benefits dur- ing the current plan year under the actuar- ial assumptions for the plan. For example, if generally applicable retirement assump- tions would provide for a 25 percent prob- ability that a participant will commence benefits during the current plan year, the special retirement age assumption of para- graph (c)(3)(ii)(A) ofthis section requires the plan’s enrolled actuary to assume a 75 percent probability that the participant will commence benefits at the end of the plan year. (C)Definition of earliest retirement date. For purposes of this paragraph (c)(3)(ii), a plan’s earliest retirement date for an employee is the earliest date on which the employee can commence re- ceiving an immediate distribution of a fully vested benefit under the plan. See §1.401(a)–20, Q&A–17(b). (iii)Requirement to assume most valu- able benefit. All participants and bene- ficiaries who are assumed to retire on a particular date are assumed to elect the optional form of benefit available under the plan that would result in the highest present value of benefits commencing at that date. (iv)Reasonable techniques permitted. The plan’s actuary is permitted to use rea- sonable techniques in determining the ac- tuarial assumptions that are required to be used pursuant to this paragraph (c)(3). For example, the plan’s actuary is permitted to use reasonable assumptions in determining the optional form of benefit under the plan that would result in the highest present value of benefits for this purpose. (d)Target normal cost of plans in at-risk status—(1)General rule.Ifthe plan has been in at-risk status for 5 con- secutive years, including the current plan year, then the target normal cost for the plan is the at-risk target normal cost de- termined under paragraph (d)(2) of this section. See paragraph (e) of this section for the determination of the target normal cost where the plan is in at-risk status for the plan year but was not in at-risk status for one or more of the 4 preceding plan years. (2)At-risk target normal cost—(i)Use of modified actuarial assumptions—(A)In general. Except as otherwise provided in this paragraph (d)(2), the at-risk target nor- mal cost of a plan for the plan year is equal to the present value (determined as of the valuation date) of all benefits that accrue during, are earned during, or are otherwise allocated to service in the plan year, as de- termined in accordance with §1.430(d)–1 but using the additional actuarial assump- tions described in paragraph (c)(3) of this section. (B)Special adjustments.Thetarget normal cost of the plan for the plan year (determined under paragraph (d)(2)(i)(A) of this section) is adjusted (not below zero) by adding the amount of plan-related ex- penses expected to be paid from plan assets during the plan year and subtracting the amount of any mandatory employee con- tributions expected to be made during the plan year. (C)Plan-related expenses. For pur- poses of this paragraph (d)(2), plan-related expenses are determined using the rules of §1.430(d)–1(b)(1)(iii)(B). (ii)Loading factor. The at-risk target normal cost is increased by a loading fac- tor equal to 4 percent of the present value (determined as of the valuation date) of all benefits under the plan that accrue, are earned, or are otherwise allocated to ser- vice for the plan year under the applica- ble rules of §1.430(d)–1(c)(1)(ii)(B), (C), or (D), determined as if the plan were not in at-risk status. (iii)Minimum amount. The at-risk tar- get normal cost of a plan for a plan year is not less than the plan’s target normal cost determined without regard to section 430(i) and this section. (e)Transition between applicable fund- ing targets and applicable target normal costs—(1)Funding target. If a plan that is in at-risk status for the plan year has not been in at-risk status for one or more of the preceding 4 plan years, the plan’s funding target for the plan year is determined as the sum of— (i) The funding target determined with- out regard to section 430(i) and this sec- tion; plus (ii) The phase-in percentage for the plan year multiplied by the excess of— (A) The at-risk funding target deter- mined under paragraph (c)(2) of this sec- tion (determined taking into account para- graph (e)(4) of this section); over (B) The funding target determined without regard to section 430(i) and this section. (2)Target normal cost. If a plan that is in at-risk status for the plan year has not been in at-risk status for one or more of the preceding 4 plan years, the plan’s target normal cost for the plan year is determined as the sum of— (i) The target normal cost determined without regard to section 430(i) and this section; plus (ii) The phase-in percentage for the plan year multiplied by the excess of— (A) The at-risk target normal cost deter- mined under paragraph (d)(2) of this sec- tion (determined taking into account para- graph (e)(4) of this section); over (B) The target normal cost determined without regard to section 430(i) and this section. (3)Phase-in percentage. For purposes of this paragraph (e), the phase-in percent- age is 20 percent multiplied by the number of consecutive plan years that the plan has been in at-risk status (including the cur- rent plan year) and not taking into account years before the first effective plan year for aplan. (4)Transition funding target and tar- get normal cost determined without load. Notwithstanding paragraph (c)(2)(ii) of this section, if a plan has not been in at-risk status for 2 or more of the preceding 4 plan years (not taking into account years before the first effective plan year for a plan), then the plan’s at-risk funding tar- get that is used for purposes of paragraph (e)(1)(ii)(A) of this section (to calculate the plan’s funding target where the plan has been in at-risk status for fewer than 5 plan years) is determined without regard to the loading factor set forth in paragraph (c)(2)(ii) of this section. Similarly, if a plan has not been in at-risk status for 2 or more of the preceding 4 plan years (not taking into account years before the first effective plan year for a plan), then the plan’s at-risk target normal cost that is used for purposes of paragraph (e)(2)(ii)(A) of this section (to calculate the plan’s target normal cost where the plan has been in at-risk status for fewer than 5 plan years) is determined without regard to the loading factor set forth in paragraph (d)(2)(ii) of this section. (f)Effective/applicability dates and transition rules—(1)Statutory effective 2009–50 I.R.B.820December 14, 2009 date/applicability date—(i)General rule. Section430generallyappliestoplanyears beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is delayed for certain plans in accordance with sections 104 through 106 of the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780). (ii)Applicability of special adjustments to target normal cost. The special adjust- ments of paragraph (d)(2)(i)(B) of this sec- tion (relating to adjustments to the target normal cost for plan-related expenses and mandatory employee contributions) apply to plan years beginning after December 31, 2008. In addition, a plan sponsor may elect to make the special adjustments of para- graph (d)(2)(i)(B) of this section for plan years beginning in 2008. This election is made in the same manner and is subject to the same rules as an election to add an amount to the plan’s prefunding balance pursuant to §1.430(f)–1(f). Thus, the elec- tion can be made no later than the last day for making the minimum required contri- bution for the plan year to which the elec- tion relates. (2)Effective date/applicability date of regulations. Thissectionappliestoplan years beginning on or after January 1, 2010. For plan years beginning before January 1, 2010, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the re- quirements of section 430. (3)First effective plan year. For pur- poses of this section, the first effective plan year for a plan is the first plan year to which section 430 applies to the plan for purposes of determining the minimum re- quired contribution. (4)Transition rule for determining at-risk status. In the case of plan years beginning in 2008, 2009, and 2010, para- graph (b)(1)(i) of this section is applied by substituting the following percentages for “80 percent”— (i) 65 percent in the case of 2008; (ii) 70 percent in the case of 2009; and (iii) 75 percent in the case of 2010. Par. 7. Section 1.436–0 is added to read as follows: §1.436–0 Table of contents. This section contains a listing of the major headings of §1.436–1. §1.436–1 Limits on benefits and benefit accruals under single employer defined benefit plans. (a) General rules. (1) Qualification requirement. (2) Organization of the regulation. (3) Special rules for certain plans. (4) Treatment of plan as of close of pro- hibited or cessation period. (5) Deemed election to reduce funding balances. (b) Limitation on shutdown benefits and other unpredictable contingent event benefits. (1) In general. (2) Exemption if section 436 contribu- tion is made. (3) Rules of application. (4) Prior unpredictable contingent event. (c) Limitations on plan amendments in- creasing liability for benefits. (1) In general. (2) Exemption if section 436 contribu- tion is made. (3) Rules of application regarding pre- existing plan provisions. (4) Exceptions. (5) Rule for determining when an amendment takes effect. (6) Treatment of mergers, consolida- tions, and transfers of plan assets into a plan. [Reserved] (d) Limitations on prohibited payments. (1) AFTAP less than 60 percent. (2) Bankruptcy. (3) Limited payment if AFTAP at least 60 percent but less than 80 percent. (4) Exception for cessation of benefit accruals. (5) Right to delay commencement. (6) Plan alternative for special optional forms. (7) Exception for distributions permit- ted without consent of the participant un- der section 411(a)(11). (e) Limitation on benefit accruals for plans with severe funding shortfalls. (1) In general. (2) Exemption if section 436 contribu- tion is made. (3) Special rule under section 203 of the Worker, Retiree, and Employer Recovery Act of 2008. [Reserved] (f) Methods to avoid or terminate bene- fit limitations. (1) In general. (2) Current year contributions to avoid or terminate benefit limitations. (3) Security to increase adjusted fund- ing target attainment percentage. (4) Examples. (g) Rules of operation for periods prior to and after certification. (1) In general. (2) Periods prior to certification during which a presumption applies. (3) Periods prior to certification during which no presumption applies. (4) Modification of the presumed AFTAP. (5) Periods after certification of AFTAP. (6) Examples. (h) Presumed underfunding for pur- poses of benefit limitations. (1) Presumption of continued under- funding. (2) Presumption of underfunding begin- ning on first day of 4th month for certain underfunded plans. (3) Presumption of underfunding begin- ning on first day of 10th month. (4) Certification of AFTAP. (5) Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) of this section. (6) Examples of application of para- graph (h)(4) of this section. (i) [Reserved] (j) Definitions. (1) Adjusted funding target attainment percentage. (2) Annuity starting date. (3) First effective plan year. (4) Funding target. (5) Prior year adjusted funding target attainment percentage. (6) Prohibited payment. (7) Section 436 contributions. (8) Section 436 measurement date. (9) Unpredictable contingent event. (10) Examples. (k) Effective/applicability dates. (1) Statutory effective date. (2) Collectively bargained plan excep- tion. (3) Effective date/applicability date of regulations. December 14, 20098212009–50 I.R.B. Par. 8. Section 1.436–1 is added to read as follows: §1.436–1 Limits on benefits and benefit accruals under single employer defined benefit plans. (a)General rules—(1)Qualification re- quirement. Section 401(a)(29) provides that a defined benefit pension plan that is subject to section 412 and that is not a multiemployer plan (within the mean- ingofsection414(f))isaqualifiedplan only if it satisfies the requirements of sec- tion 436. This section provides rules re- lating to funding-based limitations on cer- tain benefits under section 436, and the requirements of section 436 are satisfied only if the plan meets the requirements of this section beginning with the plan’s first effective plan year. This section applies to single employer defined benefit plans (in- cluding multiple employer plans), but does not apply to multiemployer plans. (2)Organization of the regulation. Paragraph (b) of this section describes limitations on shutdown benefits and other unpredictable contingent event benefits. Paragraph (c) of this section describes lim- itations on plan amendments increasing liabilities. Paragraph (d) of this sec- tion describes limitations on prohibited payments. Paragraph (e) of this section describes limitations on benefit accruals. Paragraph (f) of this section provides rules relating to methods to avoid or terminate benefit limitations. Paragraph (g) of this section provides rules for the operation of the plan in relation to benefit limitations under section 436. Paragraph (h) of this section describes related presumptions regarding underfunding that apply for purposes of the benefit limitations under section 436 and requirements relating to certifications. Paragraph (j) of this section contains definitions. Paragraph (k) of this section contains effective/applicability date provisions. (3)Special rules for certain plans—(i) New plans. The limitations described in paragraphs (b), (c), and (e) of this section do not apply to a plan for the first 5 plan years of the plan. Except as otherwise pro- vided by the Commissioner in guidance of general applicability, plan years of the plan include the following (in addition to plan years during which the plan was main- tained by the employer or plan sponsor): (A) Plan years when the plan was main- tained by a predecessor employer within the meaning of §1.415(f)–1(c)(1). (B) Plan years of another defined benefit plan maintained by a predeces- sor employer within the meaning of §1.415(f)–1(c)(2) within the preceding five years if any participants in the plan participated in that other defined benefit plan (even if the plan maintained by the employer is not the plan that was main- tained by the predecessor employer). (C) Plan years of another defined bene- fit plan maintained by the employer within the preceding five years if any participants in the plan participated in that other de- fined benefit plan. (ii)Application of section 436 after ter- mination of a plan—(A)In general.Ex- cept as otherwise provided in paragraph (a)(3)(ii)(B) of this section, any section 436 limitations in effect immediately be- fore the termination of a plan do not cease to apply thereafter. (B)Exception for payments pursuant to plan termination. The limitations un- der section 436(d) and paragraph (d) of this section do not apply to prohibited pay- ments (within the meaning of paragraph (j)(6) of this section) that are made to carry out the termination of a plan in accordance with applicable law. For example, a plan sponsor’s purchase of an irrevocable com- mitment from an insurer to pay benefit li- abilities in connection with the standard termination of a plan in accordance with section 4041(b)(3) of the Employee Re- tirement Income Security Act of 1974, as amended (ERISA), and in accordance with 29 CFR §4041.28, does not violate section 436(d) or this section. (iii)Multiple employer plans.Inthe case of a multiple employer plan to which section 413(c)(4)(A) applies, this section applies separately with respect to each em- ployer under the plan, as if each employer maintained a separate plan. Thus, the ben- efit limitations under section 436 and this section could apply differently to partici- pants who are employees of different em- ployers under sucha 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 sec- tion 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), this section applies as if all participants in the plan were employed by a single em- ployer. (4)Treatmentofplanasofcloseof prohibited or cessation period—(i)Ap- plication to prohibited payments and accruals—(A)Resumption of prohibited payments. If a limitation on prohibited payments under paragraph (d) of this sec- tion applied to a plan as of a section 436 measurement date (as defined in para- graph (j)(8) of this section), but that limit no longer applies to the plan as of a later section 436 measurement date, then the limitation on prohibited payments under the plan does not apply to benefits with annuity starting dates (as defined in para- graph (j)(2) of this section) that are on or after that later section 436 measure- ment date. Any amendment to eliminate an optional form of benefit that contains a prohibited payment with respect to an annuitystartingdateduringaperiodin which the limitations of section 436(d) and paragraph (d) of this section do not apply to the plan is subject to the rules of section 411(d)(6). (B)Resumption of benefit accruals.Ifa limitation on benefit accruals under para- graph (e) of this section applied to a plan as of a section 436 measurement date, but that limit no longer applies to the plan as of a later section 436 measurement date, then that limitation does not apply to ben- efit accruals that are based on service on or after that later section 436 measurement date, except to the extent that the plan provides that benefit accruals will not re- sume when the limitation ceases to apply. The plan must comply with the rules re- lating to partial years of participation and the prohibition on double proration under Department of Labor regulation 29 CFR §2530.204–2(c) and (d). (ii)Restoration of options and missed benefit accruals—(A)Option to amend plan. A plan is permitted to be amended to provide participants who had an annuity starting date within a period during which a limitation under paragraph (d) of this section applied to the plan with the oppor- tunity to make a new election under which the form of benefit previously elected is modified, subject to applicable qualifi- cation requirements. A participant who makes such a new election is treated as having a new annuity starting date under sections 415 and 417. Similarly, a plan is permitted to be amended to provide that 2009–50 I.R.B.822December 14, 2009 any benefit accruals which were limited under the rules of paragraph (e) of this section are credited under the plan when the limitation no longer applies, subject to applicable qualification requirements. Anysuchplanamendmentwithrespectto a new annuity starting date or crediting of benefit accruals is subject to the require- ments of section 436(c) and paragraph (c) of this section. (B)Automatic plan provisions.Aplan is permitted to provide that participants who had an annuity starting date within a period during which a limitation under paragraph (d) of this section applied to the plan will be provided with the op- portunity to have a new annuity starting date (which would constitute a new an- nuity starting date under sections 415 and 417) under which the form of benefit pre- viously elected may be modified, subject to applicable qualification requirements, once the limitations of paragraph (d) of this section cease to apply. In addition, subject to the rules of paragraph (c)(3) of this section, a plan is permitted to provide for the automatic restoration of benefit ac- cruals that had been limited under section 436(e) as of the section 436 measurement date that the limitation ceases to apply. (iii)Shutdown and other unpredictable contingent event benefits. If unpredictable contingent event benefits with respect to an unpredictable contingent event that oc- curs during the plan year are not permitted to be paid after the occurrence of the event because of the limitations of section 436(b) and paragraph (b) of this section, but are permitted to be paid later in the plan year as a result of additional contributions un- der paragraph (f)(2) of this section or pur- suant to the enrolled actuary’s certification of the adjusted funding target attainment percentage for the plan year that meets the requirements of paragraph (g)(5)(ii)(B) of this section, then those unpredictable con- tingent event benefits must automatically become payable, retroactive to the period those benefits would have been payable under the terms of the plan (other than plan terms implementing the requirements of section 436(b)). If the benefits do not be- come payable during the plan year in ac- cordance with the preceding sentence, then the plan is treated as if it does not provide for those benefits. However, all or any por- tion of those benefits can be restored pur- suant to a plan amendment that meets the requirements of section 436(c) and para- graph (c) of this section and other appli- cable qualification requirements. (iv)Treatment of plan amendments that do not take effect. If a plan amendment does not take effect as of the effective date of the amendment because of the limita- tions of section 436(c) and paragraph (c) of this section, but is permitted to take effect later in the plan year as a result of addi- tional contributions under paragraph (f)(2) of this section or pursuant to the enrolled actuary’s certification of the adjusted fund- ing target attainment percentage for the plan year that meets the requirements of paragraph (g)(5)(ii)(C) of this section, then the plan amendment must automatically take effect as of the first day of the plan year (or, if later, the original effective date of the amendment). If the plan amendment cannot take effect during the plan year, then it must be treated as if it were never adopted, unless the plan amendment pro- vides otherwise. (v)Example. The following example il- lustratestherulesofthisparagraph(a)(4): Example. (i) Plan T is a non-collectively bar- gained defined benefit plan with a plan year that is the calendar year and a valuation date of January 1. As of January 1, 2011, Plan T does not have a funding standard carryover balance or a prefunding balance. Plan T’s sponsor is not in bankruptcy. Beginning January 1, 2011, Plan T is subject to the restriction on prohibited payments under paragraph (d)(3) of this section based on a presumed adjusted funding target attainment percentage (AFTAP) of 75%. (ii) U is a participant in Plan T. Participant U re- tires on February 1, 2011, and elects to receive ben- efits in the form of a single sum. Plan T may pay only a portion (generally, 50%) of the prohibited pay- ment. Accordingly, U elects in accordance with para- graph (d)(3)(ii) of this section to receive 50% of U’s benefit in a single sum (up to the 2011 PBGC max- imum benefit guarantee amount described in para- graph (d)(3)(iii)(C) of this section) and the remainder as an immediately commencing straight life annuity. (iii) On March 1, 2011, the enrolled actuary for the Plan certifies that the AFTAP for 2011 is 80%. Accordingly, beginning March 1, 2011, Plan T is no longer subject to the restriction under paragraph (d)(3) of this section. (iv) Effective March 1, 2011, Plan T is amended to provide that a participant whose benefits were restricted under paragraph (d)(3) of this section with respect to an annuity starting date between January 1, 2011, and February 28, 2011, may elect, within a specified period on or after March 1, 2011, a new annuity starting date and receive the remainder of his or her pension benefits in an accelerated form of payment. Plan T’s enrolled actuary determines that the AFTAP, taking into account the amendment, would still be 80%. The amendment is permitted to take effect because Plan T would have an AFTAP of 80% taking into account the amendment and is therefore neither subject to the restriction on plan amendments in paragraph (c) of this section nor the restrictions on prohibited payments under paragraphs (d)(1) and (d)(3) of this section. Accordingly, Participant U may elect, within the specified period and subject to otherwise applicable qualification rules, including spousal consent, to receive the remainder of U’s benefits in the form of a single sum on or after March 1, 2011. (5)Deemed election to reduce funding balances—(i)Limitations on accelerated benefit payments. If a benefit limitation under paragraph (d)(1) or (d)(3) of this sec- tion would (but for this paragraph (a)(5)) apply to a plan, theemployer is treated as having made an election under section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for the ad- justed funding target attainment percent- age to be at the applicable threshold (60 or 80 percent, as the case may be) in order for the benefit limitation not to apply to the plan. The determination of whether a ben- efit limitation under paragraph (d) of this sectionwouldapplytoaplanisbasedon whether the plan provides for an optional form of benefit that would be limited under section 436(d) and is not based on whether any participant elects payment of benefits in such a form. (ii)Other limitations for collectively bargained plans—(A)General rule.In the case of a collectively bargained plan to which a benefit limitation under para- graph (b), (c), or (e) of this section would (but for this paragraph (a)(5)) apply, the employer is treated as having made an election under section 430(f) to reduce the prefunding balance or funding stan- dard carryover balance by such amount as is necessary for the adjusted funding target attainment percentage to be at the applicable threshold (60 or 80 percent, as the case may be) in order for the benefit limitation not to apply to the plan, taking into account the adjustments described in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or (g)(5)(i)(B) of this section, whichever applies. (B)Collectively bargained plans.A plan is considered a collectively bar- gained plan for purposes of this paragraph (a)(5)(ii) if— (1) At least 50 percent of the employ- ees benefiting under the plan (within the meaning of §1.410(b)–3(a)) are members of collective bargainingunitsforwhichthe benefit levels under the plan are specified December 14, 20098232009–50 I.R.B. under a collective bargaining agreement; or (2) At least 25 percent of the partici- pants in the plan are members of collec- tive bargaining units for which the benefit levels under the plan are specified under a collective bargaining agreement. (iii)Exception for insufficient funding balances—(A)In general. Paragraphs (a)(5)(i) and (a)(5)(ii) of this section apply with respect to a benefit limitation for any plan year only if the application of those paragraphs would result in the cor- responding benefit limitation not applying for such plan year. Thus, if the plan’s prefunding and funding standard carry- over balances were reduced to zero and the resulting increase in plan assets taken into account would still not increase the plan’s adjusted funding target attainment percentage enough to reach the threshold percentage applicable to the benefit limi- tation, the deemed election to reduce those balances pursuant to paragraph (a)(5)(i) or (a)(5)(ii) of this section does not apply. (B)Presumed adjusted funding target attainment percentage less than 60 per- cent. During any period when a plan is pre- sumed to have an adjusted funding target attainment percentage of less than 60 per- cent as a result of paragraph (h)(3) of this section, the plan is treated as if the prefund- ing balance and the funding standard car- ryover balance are insufficient to increase the adjusted funding target attainment per- centage to the threshold percentage of 60 percent. Accordingly, the deemed election to reduce those balances pursuant to para- graphs (a)(5)(i) and (a)(5)(ii) of this sec- tion does not apply to the plan. (iv)Other rules—(A)Date of deemed election. If an election is deemed to be made pursuant to this paragraph (a)(5), then the plan sponsor is treated as having made that election on the date as of which the applicable benefit limitation would otherwise apply. (B)Coordination with section 436 con- tributions. The determination of whether one of the benefit limitations described in paragraph (a)(5)(ii)(A) of this section would otherwise apply is made without re- gard to any contribution described in para- graph (f)(2) of this section. Thus, the re- quirement to reduce the prefunding bal- ance or funding standard carryover bal- ance under paragraph (a)(5)(ii) of this sec- tion cannot be avoided through the use of a section 436 contribution. (C)Coordination with elections to off- set minimum required contribution.See §1.430(f)–1(d)(1)(ii) for rules on the coor- dination of elections to offset the minimum required contribution and the deemed elec- tion to reduce the prefunding and fund- ing standard carryover balances under this paragraph (a)(5). (v)Example. The following example il- lustratestherulesofthisparagraph(a)(5): Example. (i) Plan W is a collectively bargained, single employer defined benefit plan sponsored by Sponsor X, with a plan year that is the calendar year and a valuation date of January 1. (ii) The enrolled actuary for Plan W issues a cer- tification on March 1, 2010, that the 2010 AFTAP is 81%. Sponsor X adopts an amendment on March 25, 2010, to increase benefits under a formula based on participant compensation, with an effective date of May 1, 2010. (Because the formula is based on compensation, the exception in paragraph (c)(4)(i) of this section does not apply.) The plan’s enrolled actuary determines that the plan’s AFTAP for 2010 would be 75% if the benefits attributable to the plan amendment were taken into account in determining the funding target. (iii) Because the AFTAP would be below the 80% threshold if the benefits attributable to the plan amendment were taken into account in determining the funding target, Sponsor X is deemed pursuant to paragraph (a)(5)(ii) of this section to have made an election to reduce Plan W’s prefunding and funding standard carryover balances by the amount necessary for the AFTAP to reach the 80% threshold (reflecting the increase in funding target attributable to the plan amendment), provided that the amount of those balances is sufficient for this purpose. (iv) If the deemed election described in paragraph (iii) of this example occurs, the plan amendment takes effect on its effective date (May 1, 2010). See para- graph (f) of this section for other methods to avoid or terminate benefit limitations (where, for example, the amount necessary for a benefit limitation not to apply for a plan year exceeds the sum of the prefunding bal- ance and the funding standard carryover balance). (6)Notice requirements. See section 101(j) of ERISA for rules requiring the plan administrator of a single employer plan to provide a written notice to partic- ipants and beneficiaries within 30 days af- ter certain specified dates, which depend on whether the plan has become subject to a restriction described in the ERISA provi- sions that are parallel to Internal Revenue Code sections 436(b), 436(d), and 436(e) (ERISA sections 206(g)(1), 206(g)(3), and 206(g)(4), respectively). (b)Limitation on shutdown benefits and other unpredictable contingent event ben- efits—(1)In general. Except as otherwise provided in this paragraph (b), a plan sat- isfies section 436(b) and this paragraph (b) only if it provides that unpredictable con- tingent event benefits with respect to any unpredictable contingent events occurring during a plan year will not be paid if the adjusted funding target attainment percent- age for the plan year is— (i) Less than 60 percent; or (ii) 60 percent or more, but would be less than 60 percent if the adjusted fund- ing target attainment percentage were re- determined applying an actuarial assump- tion that the likelihood of occurrence of the unpredictable contingent event during the plan year is 100 percent. (2)Exemption if section 436 contribu- tion is made. The prohibition on payment of unpredictable contingent event bene- fits under paragraph (b)(1) of this section ceases to apply with respect to benefits at- tributable to an unpredictable contingent event occurring during the plan year upon payment by the plan sponsor of the contri- bution described in paragraph (f)(2)(iii) of this section with respect to that event. If the prior sentence applies with respect to an unpredictable contingent event, then all benefits with respect to the unpredictable contingent event must be paid, including benefits for periods prior to the contribu- tion. See paragraph (f) of this section for additional rules. (3)Rules of application—(i)Partici- pant-by-participant application.Thelim- itations of section 436(b) and this para- graph (b) apply on a participant-by-par- ticipant basis. Thus, whether payment or commencement of an unpredictable con- tingent event benefit under a plan is re- stricted with respect toa participant is de- termined based on whether the participant satisfies the plan’s eligibility requirements (other than the attainment of any age, per- formance of any service, receipt or deriva- tion of any compensation, or the occur- rence of death or disability) for such a ben- efit in a plan year in which the limitations of section 436(b) and this paragraph (b) ap- ply. (ii)Multiple contingencies. In the case of a plan that provides for a benefit that de- pends upon the occurrence of more than one unpredictable contingent event with respect to a participant, the unpredictable contingent event for purposes of section 436(b) and this paragraph (b) occurs upon the last to occur of those unpredictable contingent events. 2009–50 I.R.B.824December 14, 2009 (iii)Cessation of benefits. Cessation of a benefit under a plan upon the occur- rence of a specified event is not an un- predictable contingent event for purposes of section 436(b) and this paragraph (b). Thus, section 436(b) and this paragraph (b) do not prohibit provisions of a plan that provide for cessation, suspension, or re- duction of any benefits upon occurrence of any event. However, upon any sub- sequent recommencement of benefits (in- cluding any restoration of benefits), the rules of section 436 and this section will apply. (4)Prior unpredictable contingent event. Unpredictable contingent event benefits attributable to an unpredictable contingent event that occurred within a pe- riod during which no limitation under this paragraph (b) applied to the plan are not affected by the limitation described in this paragraph (b) as it applies in a subsequent period. For example, if a plant shutdown occurs in 2010 and theplan’s funded sta- tus is such that benefits contingent upon that plant shutdown are not subject to the limitation described in this paragraph (b) for that calendar plan year, this paragraph (b) does not apply to restrict payment of those benefits even if another plant shut- down occurs in 2012 that results in the restriction of benefits that are contingent upon that later plant shutdown under this paragraph (b) (where the plan’s adjusted funding target attainment percentage for 2012 would be less than 60 percent taking into account the liability attributable to those shutdown benefits). (c)Limitations on plan amendments increasing liability for benefits—(1)In general. Except as otherwise provided in this paragraph (c), a plan satisfies section 436(c) and this paragraph (c) only if the plan provides that no amendment to the plan that has the effect of increasing lia- bilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits be- come nonforfeitable will take effect in a plan year if the adjusted funding target attainment percentage for the plan year is— (i) Less than 80 percent; or (ii) 80 percent or more, but would be less than 80 percent if the benefits attrib- utable to the amendment were taken into account in determining the adjusted fund- ing target attainment percentage. (2)Exemption if section 436 contribu- tion is made—(i)General rule.Thelim- itations on plan amendments in paragraph (c)(1) of this section cease to apply with re- spect to an amendment upon payment by the plan sponsor of the contribution de- scribed in paragraph (f)(2)(iv) of this sec- tion, so that the amendment is permitted to take effect as of the later of the first day of the plan year or the effective date of the amendment. See paragraph (f) of this sec- tion for additional rules. (ii)Amendments that do not increase funding target. If the amount of the con- tribution described in paragraph (f)(2)(iv) of this section is $0 (because the amend- ment increases benefits solely for future periods), the amendment is permitted to take effect without regard to this paragraph (c). However, see §1.430(d)–1(d)(2) for a rule that requires such an amendment to be taken into account in determining the fund- ing target and the target normal cost in cer- tain situations. (3)Rules of application regarding pre- existing plan provisions. If a plan con- tains a provision that provides for the au- tomatic restoration of benefit accruals that were not permitted to accrue because of the application of section 436(e) and para- graph (e) of this section, the restoration of those accruals is generally treated as a plan amendment that is subject to section 436(c). However, such a provision is per- mitted to take effect without regard to the limits of section 436(c) and this paragraph (c) if— (i) The continuous period of the limita- tion is 12 months or less; and (ii) The plan’s enrolled actuary certifies that the adjusted funding target attainment percentage for the plan would not be less than 60 percent taking into account the re- stored benefit accruals for the prior plan year. (4)Exceptions—(i)Benefit increases based on compensation—(A)In general. In accordance with section 436(c)(3), sec- tion 436(c) and this paragraph (c) do not apply to any amendment that provides for an increase in benefits under a formula that is not based on a participant’s com- pensation, but only if the rate of increase in benefits does not exceed the contempo- raneous rate of increase in average wages of participants covered by the amendment. The determination of the rate of increase in average wages is made by taking into consideration the net increase in average wages from the period of time beginning with the effective date of the most re- cent benefit increase applicable to all of those participants who are covered by the current amendment and ending on the ef- fective date of the current amendment. (B)Application to participants who are not currently employed.Ifanamendment applies to both currently employed partic- ipants and other participants, all partici- pants to whom the amendment applies are included in determining the increase in av- erage wages of the participants covered by the amendment for purposes of this para- graph (c)(4)(i). For this purpose, partici- pants who are not employees at any time during the period from the effective date of the most recent earlier benefit increase applicable to all of the participants who are covered by the current amendment and ending on the effective date of the current amendment are treated as having no in- crease or decrease in wages for the period after severance from employment. (C)Separate amendments for differ- ent plan populations. In lieu of a single amendment that applies to both cur- rently employed participants and other participants as described in paragraph (c)(4)(i)(B) of this section, the employer can adopt multiple amendments — such as one that increases benefits for participants currently employed on the effective date of the current amendment and another one that increases benefits for other partici- pants. In that case, the two amendments are considered separately in determining the increase in average wages, and the ex- ception in this paragraph (c)(4)(i) applies separately to each amendment. Thus, the increase in benefits forcurrently employed participants takes effect if it satisfies the exception under this paragraph (c)(4), but the amendment increasing benefits for other participants who received no in- crease in wages from the employer during the period over which the increase in aver- age wages is separately subject to the rules of this paragraph (c) without regard to the rules of this paragraph (c)(4). (ii)Plan provisions providing for ac- celerated vesting. To the extent that any amendment provides for (or any pre-exist- ing plan provision results in) a mandatory increase in the vesting of benefits under December 14, 20098252009–50 I.R.B. theCodeorERISA(suchasvestingrate increases pursuant to statute, plan termi- nation amendments or partial terminations under section 411(d)(3), and vesting in- creases required by the rules for top-heavy plans under section 416), that amendment (or pre-existing plan provision) does not constitute an amendment that changes the rate at which benefits become nonfor- feitable for purposes of section 436(c) and this paragraph (c). However, this para- graph (c)(4)(ii) applies only to the extent the increase in vesting is necessary to enable the plan to continue to satisfy the requirements for qualified plans. (iii)Authority for additional exceptions. The Commissioner may, in guidance of general applicability, issue additional rules under which other amendments to a plan are not treated as amendments to which section 436(c) and this paragraph (c) ap- ply. See §601.601(d)(2) relating to objec- tives and standards for publishing regula- tions, revenue rulings and revenue proce- dures in the Internal Revenue Bulletin. (5)Rule for determining when an amendment takes effect. For purposes of section 436(c) and this paragraph (c), in the case of an amendment that increases benefits, the amendment takes effect un- der a plan on the first date on which any individual who is or could be a participant or beneficiary under the plan would obtain a legal right to the increased benefit if the individual were on that date to satisfy the applicable requirements for entitlement to the benefit (such as the attainment of any age, performance of any service, receipt or derivation of any compensation, or the oc- currence of death, disability, or severance from employment). (6)Treatment of mergers, consolida- tions, and transfers of plan assets into a plan.[Reserved] (d)Limitations on prohibited pay- ments—(1)AFTAP less than 60 percent. A plan satisfies the requirements of section 436(d)(1) and this paragraph (d)(1) only if the plan provides that, if the plan’s adjusted funding target attainment percentage for a plan year is less than 60 percent, a participant or beneficiary is not permitted to elect an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date on or after the applicable section 436 measurement date. (2)Bankruptcy. A plan satisfies the re- quirements of section 436(d)(2) and this paragraph (d)(2) only if the plan provides that a participant or beneficiary is not per- mitted to elect an optional form of bene- fit that includes a prohibited payment, and the plan will not pay any prohibited pay- ment, with an annuity starting date that oc- curs during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, except for payments made within a plan year with an annuity start- ing date that occurs on or after the date on which the enrolled actuary of the plan cer- tifies that the plan’s adjusted funding target attainment percentage for that plan year is not less than 100 percent. (3)Limited payment if AFTAP at least 60 percent but less than 80 percent—(i)In general. A plan satisfies the requirements of section 436(d)(3) and this paragraph (d)(3) only if the plan provides that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is 60 percent or more but is less than 80 percent, a participant or beneficiary is not permitted to elect the payment of an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date on or after the applicable section 436 measurement date, unless the present value, determined in accordance with section 417(e)(3), of the portion of the benefit that is being paid in a prohibited payment (which portion is determined under paragraph (d)(3)(iii)(B) of this section) does not exceed the lesser of— (A) 50 percent of the present value (determined in accordance with section 417(e)(3)) of the benefit payable in the optional form of benefit that includes the prohibited payment; or (B) 100 percent of the PBGC maxi- mum benefit guarantee amount described in paragraph (d)(3)(iii)(C) of this section. (ii)Bifurcation if optional form un- available—(A)Requirement to offer bifur- cation. If an optional form of benefit that is otherwise available under the terms of the plan is not available as of the annuity starting date because of the application of paragraph (d)(3)(i) of this section, then the plan must permit the participant or beneficiary to elect to— (1) Receive the unrestricted portion of that optional form of benefit (determined under the rules of paragraph (d)(3)(iii)(D) of this section) at that annuity starting date, determined by treating the unrestricted portion of the benefit as if it were the par- ticipant’s or beneficiary’s entire benefit under the plan; (2) Commence benefits with respect to the participant’s or beneficiary’s entire benefit under the plan in any other optional form of benefit available under the plan at the same annuity starting date that satisfies paragraph (d)(3)(i) of this section; or (3) Defer commencement of the pay- ments to the extent described in paragraph (d)(5) of this section. (B)Rules relating to bifurcation.Ifthe participant or beneficiary elects payment of the unrestricted portion of the benefit as described in paragraph (d)(3)(ii)(A)(1) of this section, then the plan must permit the participant or beneficiary to elect pay- ment of the remainder of the participant’s or beneficiary’s benefits under the plan in any optional form of benefit at that annuity starting date otherwise available under the plan that would not have included a pro- hibited payment if that optional form ap- plied to the entire benefit of the participant or beneficiary. The rules of §1.417(e)–1 are applied separately to the separate op- tional forms for the unrestricted portion of the benefit and the remainder of the bene- fit (the restricted portion). (C)Plan alternative that anticipates election of payment that includes a prohib- ited payment. With respect to an optional form of benefit that includes a prohibited payment and that is not permitted to be paid under paragraph (d)(3)(i) of this sec- tion, for which no additional information from the participant or beneficiary (such as information regarding a social secu- rity leveling optional form of benefit) is needed to make that determination, rather than wait for the participant or beneficiary to elect such optional form of benefit, a plan is permitted to provide for separate elections with respect to the restricted and unrestricted portions of that optional form of benefit. However, the rule in the pre- ceding sentence applies only if— (1) The plan applies the rule to all such optional forms; and (2) The plan identifies the option that the bifurcation election replaces. 2009–50 I.R.B.826December 14, 2009 (iii)Definitions applicable to limited payment option—(A)In general. The def- initions in this paragraph (d)(3)(iii) apply for purposes of this paragraph (d)(3). (B)Portion of benefit being paid in a prohibited payment. If a benefit is being paid in an optional form for which any of the payments is greater than the amount payable under a straight life annuity to the participant or beneficiary (plus any so- cial security supplements described in the last sentence of section 411(a)(9) payable to the participant or beneficiary) with the same annuity starting date, then the portion of the benefit that is being paid in a prohib- ited payment is the excess of each payment over the smallest payment during the par- ticipant’s lifetime under the optional form of benefit (treating a period after the an- nuity starting date and during the partici- pant’s lifetime in which no payments are made as a payment of zero). (C)PBGC maximum benefit guaran- tee amount. The PBGC maximum benefit guarantee amount described in this para- graph (d)(3)(iii)(C) is the present value (determined under guidance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assump- tions under section 417(e)) of the maxi- mum benefit guarantee with respect to a participant (based on the participant’s age or the beneficiary’s age at the annuity start- ing date) under section 4022 of ERISA for the year in which the annuity starting date occurs. (D)Unrestricted portion of the bene- fit—(1)General rule. Except as otherwise provided in this paragraph (d)(3)(iii)(D), the unrestricted portion of the benefit with respect to any optional form of benefit is 50 percent of the amount payable under the optional form of benefit. (2)Special rule for forms which include social security leveling or a refund of em- ployee contributions. For an optional form of benefit that is a prohibited payment on account of a social security leveling fea- ture (as defined in §1.411(d)–3(g)(16)) or a refund of employee contributions feature (as defined in §1.411(d)–3(g)(11)), the un- restricted portion of the benefit is the op- tional form of benefit that would apply if the participant’s or beneficiary’s accrued benefit were 50 percent smaller. (3)Limited to PBGC maximum benefit guarantee amount. After the application of the preceding rules of this paragraph (d)(3)(iii)(D), the unrestricted portion of the benefit with respect to the optional form of benefit is reduced, to the extent necessary, so that the present value (deter- mined in accordance with section 417(e)) of the unrestricted portion of that optional form of benefit does not exceed the PBGC maximum benefit guarantee amount (de- scribed in paragraph (d)(3)(iii)(C) of this section). (iv)Other rules—(A)Onetimeappli- cation. A plan satisfies the requirements of this paragraph (d)(3) only if the plan pro- vides that, in the case of a participant with respect to whom a prohibited payment (or series of prohibited payments under a sin- gle optional form of benefit) is made pur- suanttoparagraph(d)(3)(i)or(ii)ofthis section, no additional prohibited payment may be made with respect to that partici- pant during any period of consecutive plan years for which prohibited payments are limited under this paragraph (d). (B)Treatment of beneficiaries.For purposes of this paragraph (d)(3), bene- fits provided with respect to a participant and any beneficiary of the participant (in- cluding an alternate payee, as defined in section 414(p)(8)) are aggregated. If the only benefits paid under the plan with re- spect to the participant are death benefits payable to the beneficiary, then paragraph (d)(3)(iii)(B) of this section is applied by substituting the lifetime of the beneficiary for the lifetime of the participant. If the accrued benefit of a participant is allo- cated to such an alternate payee and one or more other persons, then the unrestricted amount under paragraph (d)(3)(iii)(D) of this section is allocated among such per- sons in the same manner as the accrued benefit is allocated, unless a qualified domestic relations order (as defined in section 414(p)(1)(A)) with respect to the participant or the alternate payee provides otherwise. See paragraphs (j)(2)(ii) and (j)(6)(ii) of this section for other special rules relating to beneficiaries. (C)Treatment of annuity purchases andplantransfers. This paragraph (d)(3)(iv)(C) applies for purposes of ap- plying paragraphs (d)(3)(i) and (iii)(D) of this section. In the case of a pro- hibited payment described in paragraph (j)(6)(i)(B) of this section (relating to pur- chase from an insurer), the present value of the portion of the benefit that is being paid in a prohibited payment is the cost to the plan of the irrevocable commitment and, in the case of a prohibited payment described in paragraph (j)(6)(i)(C) of this section (relating to certain plan transfers), the present value of the portion of the benefit that is being paid in a prohibited payment is the present value of the liabili- ties transferred (determined in accordance with section 414(l)). In addition, the present value of the accrued benefit is sub- stituted for the present value of the benefit payable in the optional form of benefit that includes the prohibited payment in paragraph (d)(3)(i)(A) of this section. (Further, see §1.411(d)–4, A–2(a)(3)(ii), for a rule under section 411(d)(6) that ap- plies to an optional form of benefit that includes a prohibited payment described in paragraph (j)(6)(i)(B) of this section.) (v)Examples. The following examples illustrate the rules of this paragraph (d)(3): Example 1. (i) Plan A has a plan year that is the calendaryear,andissubjecttotherestrictiononpro- hibited payments under paragraph (d)(3) of this sec- tion for the 2010 plan year. Participant P is not mar- ried, and retires at age 65 during 2010, while the re- striction under paragraph(d)(3)ofthissectionap- plies to Plan A. P’s accrued benefit is $10,000 per month, payable commencing at age 65 as a straight life annuity. Plan A provides for an optional sin- gle-sum payment (subject to the restrictions under section 436) equal to the present value of the par- ticipant’s accrued benefit using actuarial assumptions under section 417(e). P’s single-sum payment, deter- mined without regard to this paragraph (d), is calcu- lated to be $1,416,000, payable at age 65. (ii) The PBGC guaranteed monthly benefit for a straight life annuity payable at age 65 in 2010 (for purposes of this example) is assumed to be $4,500. The PBGC maximum benefit guarantee amount at age 65 is assumed to be $637,200 for 2010. (iii) Because Participant P retires during a period when the restriction in paragraph (d)(3) of this section applies to Plan A, only a portion of the benefit can be paid in the form of a single sum. P elects a single-sum payment. Because a single-sum payment is a prohib- ited payment, a determination must be made whether the payment can be paid under paragraph (d)(3)(i) of this section. In this case, because the present value of the portion of Participant P’s benefit that is being paid in a prohibited payment exceeds the lesser of 50% of the benefit or the PBGC maximum benefit guarantee amount, it cannot be paid under paragraph (d)(3)(i) of this section. Accordingly, the maximum single sum that P can receive is $637,200 (that is, the lesser of 50% of $1,416,000 or $637,200). (iv) Pursuant to paragraph (d)(3)(ii) of this sec- tion, Plan A must offer P the option to bifurcate the benefit into unrestricted and restricted portions. The unrestricted portion is a monthly straight life annu- ity of $4,500, which can be paid in a single sum of $637,200. If P elects to receive the unrestricted por- tion of the benefit in the form of a single sum, then, with respect to the $5,500 restricted portion, Plan A must permit P to elect any form of benefit that December 14, 20098272009–50 I.R.B. would otherwise be permitted with respect to the full $10,000 and that is not a prohibited payment. Alter- natively, Plan A may provide that P is permitted to elect to defer commencement of the restricted por- tion, subject to applicable qualification rules. Example 2. (i) The facts are the same as inExam- ple 1. In addition, Plan A provides an optional form of payment (subject to any benefit restrictions under section 436) that consists of a partial payment equal to the total return of employee contributions to the plan accumulated with interest, with an annuity payment for the remainder of the participant’s benefit. (ii) Participant Q is not married, and retires at age 65 during 2010, while Plan A is subject to the re- striction under paragraph (d)(3) of this section. Par- ticipant Q has an accrued benefit equal to a straight life annuity of $3,000 per month. Under the optional form described in paragraph (i) of thisExample 2,Q may elect a partial payment of $99,120 (represent- ing the return of employee contributions accumulated with interest), plus a straight life annuity of $2,300 per month. The present value of Participant Q’s ac- crued benefit, using actuarial assumptions under sec- tion 417(e), is $424,800. (iii) Because the present value of the portion of Q’s benefit that is being paid in a prohibited pay- ment ($99,120) does not exceed the lesser of 50% of the present value of benefits (50% of $424,800) or 100% of the PBGC maximum benefit guarantee amount ($637,200 at age 65 for 2010), the optional form described in paragraph (i) of thisExample 2is permitted to be paid under paragraph (d)(3)(i) of this section. Example 3. (i)ThefactsarethesameasinEx- ample 1. In addition, Plan A provides an optional form of payment under a social security leveling op- tion (subject to any benefit restrictions under section 436) that consists of an increased temporary bene- fit payable until age 62, with reduced payments be- ginning at age 62. The benefit is structured so that the combination of the participant’s pension bene- fit and Social Security benefit provides an approx- imately level income for the participant’s lifetime. The PBGC maximum benefit guarantee amount at age 55 is assumed to be $362,776 for 2010. (ii) Participant R retires at age 55 in 2010 and is eligible to receive a level lifetime annuity of $1,200 per month beginning immediately. Instead, Partic- ipant R elects to receive a benefit under the social security leveling optional form of payment. Partic- ipant R’s Social Securitybenefit payable at age 62 is projected, under the terms specified in Plan A, to be $1,500 per month. The Plan A adjustment factor for the social security leveling option using the mini- mum present value requirements of section 417(e)(3) is .590 at age 55. Therefore, Participant R’s benefit payable from age 55 to age 62 is $2,085 per month ($1,200 + .590 x $1,500), and the benefit payable for Participant’s lifetime, beginning after age 62, is $585 per month ($2,085 - $1,500). (iii) Because the optional form provides some payments which are greater than payments described in paragraph (j)(6)(i)(A) of this section ($1,200), the portion of the benefit that is being paid in a prohibited payment is $1,500 per month which is payable from age 55 to age 62. Using the applicable interest and mortality rates under section 417(e) as in effect for Plan A at the time the benefit commences, the present value of a temporary benefit of $1,500 per month ($2,085 - $585) payable from age 55 to age 62 is $106,417, and the present value of the entire benefit (a temporary benefit of $2,085 per month payable from age 55 to age 62 plus a deferred lifetime benefit of $585 commencing at age 62) is $207,468. (iv) Because $106,417 is more than 50% of $207,468 (and because 50% of Participant R’s benefit is less than $362,776, which is the PBGC maximum guaranteed benefit amount at age 55 for 2010), Par- ticipant R can only receive 50% of the benefit in the form of the social security leveling option. Pursuant to paragraph (d)(3)(ii) of this section, Plan A must offer Participant R the option to bifurcate the benefit into unrestricted and restricted portions. Participant R elects to receive the restricted portion of the early retirement benefit as a level lifetime annuity of $600 commencing at age 55. (v) Participant R elects to receive the unrestricted portion of the early retirement benefit in the social se- curity leveling form of payment. This portion of the benefit is determined under the social security lev- eling form of payment as if Participant R’s benefit was one-half of the early retirement benefit, or $600. However, using a monthly level lifetime benefit of $600 and a monthly social security benefit of $1,500, Participant R would have a negative benefit after age 62 ($600 + .590 x $1,500 is only $1,485; offsetting $1,500 at age 62 would produce a negative amount). Plan A provides that in this situation, the benefit un- der the social security leveling option is an actuarially equivalent monthly annuity payable until age 62, with zero payable thereafter. Using the actuarial equiva- lence factor of .590 at age 55, the plan administrator determines that the unrestricted portion of Participant R’s benefit is $1,463 per month, payable from age 55 to age 62 ($600 + .590 x $1,463 = $1,463 payable un- til age 62; $1,463 - $1,463 = zero payable after age 62). (vi) Combining the unrestricted and restricted portions of the benefit, Participant R will receive a total of $2,063 per month from age 55 to age 62 ($1,463 from the unrestricted portion of the benefit plus $600 from the restricted portion of the benefit), and$600permonthbeginning at age 62 (zero from the unrestricted portion of the benefit plus $600 from the restricted portion of the benefit). (4)Exception for cessation of benefit accruals. This paragraph (d) does not ap- ply to a plan for a plan year if the terms of the plan, as in effect for the period begin- ning on September 1, 2005, provided for no benefit accruals with respect to any par- ticipants. If a plan that is described in this paragraph (d)(4) provides for benefit ac- cruals during any time on or after Septem- ber 1, 2005 (treating benefit increases pur- suant to a plan amendment as benefit ac- cruals), this paragraph (d)(4) ceases to ap- plyfortheplanasofthedateanybene- fits accrue under the plan (or the date the amendment takes effect). For example, the exception in this paragraph (d)(4) does not apply to a plan after the plan increases ben- efits to take into account increases in the limitations under section 415(b) on or af- ter September 1, 2005. (5)Right to delay commencement.If a participant or beneficiary requests a dis- tribution in an optional form of benefit that includes a prohibited payment that is not permitted to be paid under para- graph (d)(1), (d)(2), or (d)(3) of this sec- tion, the participant retains the right to de- lay commencement of benefits in accor- dance with the terms of the plan and appli- cable qualification requirements (such as sections 411(a)(11) and 401(a)(9)). (6)Plan alternative for special op- tional forms. A plan is permitted to offer optional forms of benefit that are solely available during the period in which para- graph (d)(1), (d)(2), or (d)(3) of this sec- tion applies to limit prohibited payments under the plan. For example, a plan may permit participants or beneficiaries who commence benefits during the period in which paragraph (d)(1) of this section (or paragraph (d)(2) of this section) applies to limit prohibited payments under the plan to elect, within a specified period after the date on which that paragraph ceases to ap- ply to limit prohibited payments under the plan, to receive the remaining benefit in the form of a single-sum payment equal to the present value of the remaining benefit, but only to the extent then permitted under this paragraph (d). As another example, during a period when paragraph (d)(3) of this section applies to a plan, the plan may permit participants and beneficiaries to elect payment in an optional form of benefit that provides for the current pay- ment of the unrestricted portion of the benefit, with a delayed commencement for the restricted portion of the benefit (subject to other applicable qualification requirements, such as sections 411(a)(11) and 401(a)(9)), or may satisfy paragraph (d)(3)(i) of this section by permitting participants and beneficiaries to elect an optional form of benefit that combines an unsubsidized single-sum payment for over 50 percent of the accrued benefit with a subsidized early retirement life annuity for the remainder of the accrued benefit. Any such optional forms must satisfy this paragraph (d) and applicable qualification requirements, including satisfaction of section 417(e) and section 415 (at each annuity starting date). 2009–50 I.R.B.828December 14, 2009 (7)Exception for distributions permit- ted without consent of the participant un- der section 411(a)(11).[Reserved] (e)Limitation on benefit accruals for plans with severe funding shortfalls—(1) In general. Except as otherwise provided in this paragraph (e), a plan satisfies the re- quirements of section 436(e) and this para- graph (e) only if it provides that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is less than 60 percent, benefit accruals un- der the plan will cease as of the applicable section 436 measurement date. If a plan is required to cease benefit accruals un- der this paragraph (e), then the plan is not permitted to be amended in a manner that would increase the liabilities of the plan by reason of an increase in benefits or estab- lishment of new benefits. The preceding sentence applies regardless of whether an amendment would otherwise be permissi- ble under paragraph (c)(2) or (c)(3) of this section. (2)Exemption if section 436 contribu- tion is made. The prohibition on additional benefit accruals under a plan described in paragraph (e)(1) of this section ceases to apply with respect to a plan year, effective as of the first day of the plan year, upon payment by the plan sponsor of the contri- bution described in paragraph (f)(2)(v) of this section. See paragraph (f) of this sec- tion for additional rules. (3)Special rule under section 203 of the Worker, Retiree, and Employer Recovery Actof2008.[Reserved] (f)Methods to avoid or terminate ben- efit limitations—(1)In general. This para- graph(f)setsforthrulesrelatingtoem- ployer contributions and other methods to avoid or terminate the application of sec- tion 436 limitations under a plan for a plan year. In general, there are four methods a plan sponsor may utilize to avoid or termi- nate one or more of the benefit limitations under this section for a plan year. Two of these methods (where the plan spon- sor elects to reduce the prefunding bal- ance or funding standard carryover bal- ance and where the plan sponsor makes additional contributions under section 430 for the prior plan year within the time pe- riod provided by section 430(j)(1) that are not added to the prefunding balance) in- volve increasing the amount of plan assets which are taken into account in determin- ing the adjusted funding target attainment percentage. The other two methods (mak- ing a contribution that is specifically des- ignated as a current year contribution to avoid or terminate application of a bene- fit limitation under paragraph (b), (c), or (e) of this section, and providing security under section 436(f)(1)) are described in paragraphs (f)(2) and (f)(3) of this section, respectively. (2)Current year contributions to avoid or terminate benefit limitations—(i) General rules—(A)Amount of contribu- tion—(1)In general. This paragraph (f)(2) sets forth rules regarding contributions to avoid or terminate the application of section 436 limitations under a plan for a plan year that apply to unpredictable con- tingent event benefits, plan amendments that increase liabilities for benefits, and benefit accruals. (2)Interest adjustment. Any contribu- tion made by a plan sponsor pursuant to this paragraph (f)(2) on a date other than the valuation date for the plan year must be adjusted with interest at the plan’s effective interest rate under section 430(h)(2)(A) for the plan year. If the plan’s effective inter- est rate for the plan year has not been deter- mined at the time of the contribution, then this interest adjustment must be made us- ing the highest of the three segment rates as applicable for theplan year under sec- tion 430(h)(2)(C). In such a case, if the ef- fective interest rate for the plan year under section 430(h)(2)(A) is subsequently de- termined to be less than that highest rate, the excess is recharacterized as an em- ployer contributiontaken into account un- der section 430 for the current plan year. (B)Timing requirement for section 436 contributions. Any contribution described in this paragraph (f)(2) must be paid be- fore the unpredictable contingent event benefits are permitted to be paid, the plan amendment is permitted to take effect, or the benefit accruals are permitted to resume. In addition, any contribution de- scribed in this paragraph (f)(2) must be paid during the plan year. (C)Prefunding balance or funding standard carryover balance may not be used. No prefunding balance or funding standard carryover balance under section 430(f) may be used as a contribution de- scribed in this paragraph (f)(2). However, a plan sponsor is permitted to elect to reduce the funding standard carryover bal- ance or the prefunding balance in order to increase the adjusted funding target at- tainment percentage for a plan year. See paragraph (a)(5) of this section for a rule mandating such a reduction in certain sit- uations. (ii)Section 436 contributions sepa- rate from minimum required contribu- tions—(A)In general. The contributions described in this paragraph (f)(2) are con- tributions described in sections 436(b)(2), 436(c)(2), and 436(e)(2), and are separate from any minimum required contribu- tions under section 430. Thus, if a plan sponsor makes a contribution described in this paragraph (f)(2) for a plan year but does not make the minimum required contribution for the plan year, the plan fails to satisfy the minimum funding re- quirements under section 430 for the plan year. In addition, a contribution described in this paragraph (f)(2) is disregarded in determining the maximum addition to the prefunding balance under section 430(f)(6) and §1.430(f)–1(b)(1)(ii). (B)Designation requirement.Any contribution made by a plan sponsor pur- suant to this paragraph (f)(2) must be designated as such at the time the contri- bution is used to avoid or terminate the limitations under this paragraph (f)(2), including designation of the benefits or amendments to which the limits do not apply because of the contribution. Ex- cept as specifically provided in paragraph (f)(2)(i)(A)(2), (g) or (h) of this section, such a contribution cannot be subsequently recharacterized with respect to any plan year as a contribution to satisfy a mini- mum required contribution obligation, or otherwise. The designation must be made in accordance with the rules and proce- dures that otherwise apply to elections under §1.430(f)–1(f) with respect to the prefunding and funding standard carry- over balances. (C)Requirement to recertify AFTAP. If the plan’s enrolled actuary has already certified the adjusted funding target attainment percentage for the plan year, a plan sponsor is treated as making the contribution described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of this section for the plan year only after the plan’s enrolled actuary certifies an updated adjusted funding target attainment percentage for the plan year that takes into account the increased liability for the unpredictable contingent December 14, 20098292009–50 I.R.B. event benefits, the plan amendments, or restored accruals, and the associated section 436 contribution, under the rules of paragraph (h)(4)(v) of this section. See also paragraph (g)(4)(i) of this section for a requirement to modify the presumed adjusted funding target attainment percentage to take the liability for the unpredictable contingent event benefits or plan amendments, and the associated section 436 contribution, into account (if the contribution described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of this section is made before the plan’s enrolled actuary certifies the adjusted funding target attainment percentage for the plan year). (iii)Contribution for unpredictable contingent event benefits. In the case of a contribution to avoid or terminate the application of the limitation on benefits attributable to an unpredictable contingent event under section 436(b)— (A) In the event that the adjusted fund- ing target attainment percentage for the plan year determined without taking into account the liability attributable to the unpredictable contingent event benefits is less than 60 percent, the amount of the contribution under section 436(b)(2) is equal to the amount of the increase in the funding target of the plan for the plan year if the benefits attributable to the unpre- dictable contingent event were included in the determination of the funding target. (B) In the event that the adjusted fund- ing target attainment percentage for the plan year determined without taking into account the liability attributable to the unpredictable contingent event benefits is 60 percent or more, the amount of the contribution under section 436(b)(2) is the amount that would be sufficient to result in an adjusted funding target attainment per- centage for the plan year of 60 percent if the contribution (and any prior section 436 contributions made for the plan year) were included as part of the plan assets and the funding target were to take into account the adjustments described in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or (g)(5)(i)(B) of this section, whichever applies. (iv)Contribution for plan amendments increasing liability for benefits. In the case of a contribution to avoid or terminate the application of the limitation on benefits at- tributable to a plan amendment under sec- tion 436(c)— (A) In the event that the adjusted fund- ing target attainment percentage for the plan year determined without taking into account the liability attributable to the plan amendment is less than 80 percent, the amount of the contribution under section 436(c)(2) is equal to the amount of the in- crease in the funding target of the plan for the plan year if the liabilities attributable to the amendment were included in the deter- mination of the funding target. (B) In the event that the adjusted fund- ing target attainment percentage for the plan year determined without taking into account the liability attributable to the plan amendment is 80 percent or more, the amount of the contribution under sec- tion 436(c)(2) is the amount that would be sufficient to result in an adjusted funding target attainment percentage for the plan year of 80 percent if the contribution (and any prior section 436 contributions made for the plan year) were included as part of the plan assets and the funding target were to take into account the adjustments described in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or (g)(5)(i)(B) of this sec- tion, whichever applies. (v)Contribution required for continued benefit accruals. In the case of a contri- bution to avoid or terminate the applica- tion of the limitation on accruals under sec- tion 436(e), the amount of the contribu- tion under section 436(e)(2) is equal to the amount sufficient to result in an adjusted funding target attainment percentage for the plan year of 60 percent if the con- tribution (and any prior section 436 con- tributions made for the plan year) were included as part of the plan assets and the funding target were to take into ac- count the adjustments described in para- graph (g)(2)(iii)(A) or (g)(5)(i)(B) of this section, whichever applies. (3)Security to increase adjusted fund- ing target attainment percentage—(i)In general. For purposes of avoiding benefit limitations under section 436, a plan spon- sor may provide security in the form de- scribed in paragraph (f)(3)(ii) of this sec- tion. In such a case, the adjusted funding target attainment percentage for the plan year is determined by treating as an asset of the plan any security provided by a plan sponsor by the valuation date for the plan year in a form meeting the requirements of paragraph (f)(3)(ii) of this section. How- ever, this security is not taken into account as a plan asset for any other purpose, in- cluding section 430. (ii)Form of security. The forms of se- curity permitted under paragraph (f)(3)(i) of this section are limited to— (A) A bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of ERISA; or (B) Cash, or United States obligations which mature in 3 years or less, held in escrow by a bank or an insurance company. (iii)Enforcement. Any form of security provided under paragraph (f)(3)(i) of this section must provide— (A) That it will be paid to the plan upon the earliest of— (1) The plan termination date as defined insection4048ofERISA; (2) If there is a failure to make a payment of the minimum required contri- bution for any plan year beginning after the security is provided, the due date for the payment under section 430(j)(1) or 430(j)(3); or (3) If the plan’s adjusted funding target attainment percentage is less than 60 per- cent (without regard to any security pro- vided under this paragraph (f)(3)) for a consecutive period of 7 plan years, the val- uation date for the last plan year in the 7-year period; and (B) That the plan administrator must notify the surety, bank, or insurance company that issued or holds the secu- rity of any event described in paragraph (f)(3)(iii)(A) of this section within 10 days of its occurrence. (iv)Release of security.Theformofse- curity is permitted to provide that it will be released (and any amounts thereunder will be refunded to the plan sponsor to- gether with any interest accrued thereon) as provided in the agreement governing the security, but such release is not permitted until the plan’s enrolled actuary has cer- tified that the plan’s adjusted funding tar- get attainment percentage for a plan year is at least 90 percent (without regard to any security provided under this paragraph (f)(3)) or until replacement security has been provided in accordance with para- graph (f)(3)(vi) of this section. (v)Contribution of security to plan. Any security provided under this para- graph (f)(3) that is subsequently turned over to the plan (whether pursuant to the enforcement mechanism of paragraph (f)(3)(iii) of this section or after its release 2009–50 I.R.B.830December 14, 2009 under paragraph (f)(3)(iv) of this section) is treated as a contribution by the plan sponsor taken into account under section 430 when contributed and, if turned over pursuant to paragraph (f)(3)(iii) of this section, is not a contribution under para- graph (f)(2) of this section. (vi)Replacement security. If security has been provided to a plan pursuant to this paragraph (f)(3), the plan sponsor may pro- vide new security to the plan and subse- quently or simultaneously have the origi- nal security released, but only if— (A) The new security is in a form that satisfies the requirements of paragraph (f)(3)(ii) of this section; (B) The amount of the new security is no less than the amount of the original se- curity, determined at the time the original security is released; and (C) The period described in paragraph (f)(3)(iii)(A)(3) of this section with respect to the new security is the same as the pe- riod that applied under that paragraph to the original security. (4)Examples. The following examples illustrate the rules of this paragraph (f): Example 1. (i) Plan Z is a non-collectively bar- gained defined benefit plan with a plan year that is the calendar year and a valuation date of January 1. Plan Z’s sponsor is not in bankruptcy, and Plan Z did not purchase any annuities in 2009 or 2010. As of January 1, 2011, Plan Z does not have a funding stan- dard carryover balance or a prefunding balance, and is not in at-risk status. As of that date, Plan Z has plan assets (and adjusted plan assets) of $2,000,000 and a funding target (and an adjusted funding target) of $2,550,000. On March 1, 2011, the enrolled actuary for the plan certifies that the AFTAP as of January 1, 2011, is 78.43%. The effective interest rate for Plan Z for the 2011 plan year is 5.5%. (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase benefits.The enrolled actuary for the plan determines that the present value, as of Jan- uary 1, 2011, of the increase in the funding target due to the amendment is $400,000. Because the AFTAP prior to the plan amendment is less than 80%, Plan Z is subject to the restriction on plan amendments in paragraph (c) of this section, and the amendment cannot take effect unless the employer utilizes one of the methods described in paragraph (f) of this section to avoid benefit limitations. (iii) In order for the amendment to be permitted to take effect, the plan sponsor makes a contribution described in paragraph (f)(2) of this section. Because the AFTAP prior to the amendment was less than 80%, the provisions of paragraph (f)(2)(iv)(A) of this section apply. The amount of the contribution as of January 1, 2011, needed to avoid the restriction on plan amendments under paragraph (c) of this section is equal to the amount of the increase in funding target attributable to the amendment, or $400,000. Under the provisions of paragraph (f)(2)(iv)(A) of this section, this contribution is required even though, if the contribution were included as part of the plan assets and the liabilities attributable to the plan amendment were included in the funding target, the AFTAP would be 81.36% (that is, adjusted plan assets of $2,000,000 plus the contribution of $400,000 as of January 1, 2011; divided by the adjusted funding target of $2,550,000 increased to reflect the additional $400,000 in the funding target attributable to the plan amendment). (iv) However, because the contribution is not paid until May 1, 2011, the necessary contribution amount must be adjusted to reflect interest from the valua- tion date to the date of the contribution, at Plan Z’s effective interest rate for the 2011 plan year. The amount of the required contribution after adjustment is $407,203, determined as $400,000 increased for 4 months of compound interest at an effective annual interest rate of 5.5%. (v) A contribution of $407,203 is made on May 1, 2011, and is designated as a contribution under paragraph (f)(2) of this section with respect to the May 1, 2011, plan amendment. Accordingly, the contribution is not applied toward minimum funding requirements under section 430, and is not eligible for inclusion in the prefunding balance under §1.430(f)–1(b)(1). Since this contribution meets the requirements of paragraph (f)(2) of this section, the plan amendment takes effect in accordance with its terms. Example 2. (i)ThefactsarethesameasinEx- ample 1, except that the plan is in at-risk status un- der section 430(i). The funding target determined under section 430(i) is $2,600,000, and the funding target determined without regard to section 430(i) is $2,550,000. (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase benefits. The plan’s enrolled ac- tuary determines that the present value as of January 1, 2011 of the increase in the funding target due to the amendment (taking into account the at-risk sta- tus of the plan) is $440,000. Because the AFTAP prior to the plan amendment is 78.43% (determined taking into account the at-risk status of Plan Z), Plan Z is subject to the restriction on plan amendments in paragraph (c) of this section, and the amendment cannot take effect unless the employer utilizes one of the methods described in this paragraph (f) to avoid benefit limitations. (iii) In order for this amendment to be permitted to take effect, the plan sponsor makes a contribution described in paragraph (f)(2) of this section. Because the AFTAP prior to the amendment was less than 80%, the provisions of paragraph (f)(2)(iv)(A) of this section apply. The amount of the contribution as of January 1, 2011, needed to avoid the restriction on plan amendments under paragraph (c) of this section is equal to the amount of the increase in funding target attributable to the amendment, or $440,000. Under the provisions of paragraph (f)(2)(iv)(A) of this section, this contribution is required even though, if the contribution were included as part of the plan assets and the liability attributable to the plan amendment were included in the funding target, theAFTAPwouldexceed80%. (iv) However, because the contribution is not paid until May 1, 2011, the necessary contribution amount must be adjusted to reflect interest from the valua- tion date to the date of the contribution, at Plan Z’s effective interest rate for the 2011 plan year. The amount of the required contribution after adjustment is $447,923, determined as $440,000 increased for 4 months of compound interest at an effective annual interest rate of 5.5%. (v) A contribution of $447,923 is made on May 1, 2011, and is designated as a contribution under paragraph (f)(2) of this section with respect to the May 1, 2011, plan amendment. Accordingly, the contribution is not applied toward minimum funding requirements under section 430, and is not eligible for inclusion in the prefunding balance under §1.430(f)–1(b)(1). Since this contribution meets the requirements of paragraph (f)(2) of this section, the plan amendment takes effect in accordance with its terms. Example 3. (i) The facts are the same as inEx- ample 1, except that the enrolled actuary for the plan does not issue the certification of the 2011 AFTAP until September 1, 2011. Prior to October 1, 2010, the enrolled actuary had certified the 2010 AFTAP to be 82%. Other than this amendment, no other amendment or unpredictable contingent event has occurred that requires a recertification. As of May 1, 2011, the plan’s effective interest rate for the 2011 plan year has not yet been determined. The highest of the three segment rates applicable to the 2011 plan year under section 430(h)(2)(C) is 6%. (ii) Because the enrolled actuary has not certified the actual AFTAP as of January 1, 2011, and the amendment is scheduled to take effect after April 1, 2011, the rules of paragraph (h)(2)(iii) of this section apply. Accordingly, the AFTAP for 2011 (prior to reflecting the effect of the amendment) is presumed to be 10 percentage points lower than the 2010 AFTAP, or 72%. Because this presumed AFTAP is less than 80%, the restriction on plan amendments in paragraph (c) of this section applies, and the plan amendment cannot take effect. (iii) In order to allow the plan amendment to take effect, the plan sponsor decides to make a contribu- tion under paragraph (f)(2) of this section on May 1, 2011. Because the presumed AFTAP was less than 80% prior to reflecting the plan amendment, the rules of paragraph (f)(2)(iv)(A) of this section apply, and the amount of the contribution under section 436(c)(2) is the amount of the increase in the funding target for the year if the plan amendment were included in the determination of the funding target. Accordingly, an additional contribution of $400,000 is required as of January 1, 2011, to avoid the restriction on plan amendments under paragraph (c)ofthissection. (iv) However, since the contribution is not made until May 1, 2011, the amount of the required con- tribution must be adjusted to reflect interest from the valuation date to the date of the contribution. Since theeffectiveinterestratehas not yet been determined, the interest adjustment is based on the highest of the three segment rates applicable for the 2011 plan year under section 430(h)(2)(C), or 6%. The amount of the required contribution after adjustment is $407,845, determined as $400,000 increased for 4 months of compound interest at the highest segment interest rate for 2011, or 6%. (v) A contribution of $407,845 is made on May 1, 2011, and is designated as a contribution under paragraph (f)(2) of this section with respect to the May 1, 2011, plan amendment. Accordingly, the contribution is not applied toward minimum December 14, 20098312009–50 I.R.B. funding requirements under section 430, and is not eligible for inclusion in the prefunding balance under §1.430(f)–1(b)(1). Since this contribution meets the requirements of paragraph (f)(2) of this section, the plan amendment takes effect in accordance with its terms. (vi) After the plan’s effective interest rate for 2011 has been determined to be 5.5%, the amount of excess interest previously contributed is recharacterized as an employer contribution taken into account under section 430 for 2011 (because that rate for the year is less than 6%). (g)Rules of operation for periods prior to and after certification—(1)In general. Section 436(h) and paragraph (h) of this section set forth a series of presumptions that apply before the enrolled actuary for a plan issues a certification of the plan’s adjusted funding target attainment per- centage for the plan year. This paragraph (g) sets forth rules for the application of limitations under sections 436(b), 436(c), 436(d), and 436(e) prior to and during the period those presumptions apply to the plan, and describes the interaction of those presumptions with plan operations after the plan’s enrolled actuary has issued a certification of the plan’s adjusted funding target attainment percentage for the plan year. Paragraph (g)(2) of this section sets forth rules that apply to periods during which a presumption under section 436(h) and paragraph (h) of this section applies. Paragraph (g)(3) of this section sets forth rules that apply to periods during which no presumptions under section 436(h) and paragraph (h) of this section apply but which are prior to the enrolled actuary’s certification of the plan’s adjusted funding target attainment percentage for the plan year. Paragraph (g)(4) of this section sets forth rules for modifying the plan’s pre- sumed adjusted funding target attainment percentage in certain situations. Paragraph (g)(5) of this section sets forth rules that apply after the enrolled actuary’s certi- fication of the plan’s adjusted funding target attainment percentage for a plan year. Paragraph (g)(6) of this section sets forth examples illustrating the rules in this paragraph (g). (2)Periods prior to certification during which a presumption applies—(i)Plan must follow presumptions.Aplanmust provide that, for any period during which a presumption under section 436(h) and paragraph (h)(1), (2), or (3) of this section applies to the plan, the limitations appli- cable under section 436 and paragraphs (b), (c), (d), and (e) of this section are ap- plied to the plan as if the adjusted funding target attainment percentage for the year were the presumed adjusted funding target attainment percentage determined under the rules of section 436(h) and paragraph (h)(1), (2), or (3) of this section, as appli- cable, updated to take into account certain unpredictable contingent event benefits and plan amendments in accordance with section 436 and the rules of this paragraph (g). (ii)Determination of amount of reduc- tion in balances—(A)In general.Dur- ing the period described in this paragraph (g)(2), the rules of paragraph (a)(5) of this section (relating to the deemed election to reduce the funding standard carryover bal- ance and the prefunding balance) must be applied based on the presumed adjusted funding target attainment percentage. This paragraph (g)(2)(ii) provides rules for the determination of the reduction that applies as of the first day of the plan year, and, in certain circumstances, that applies later in the plan year. Paragraph (g)(2)(iii) of this section provides additional rules that ap- ply with respect to unpredictable contin- gent event benefits or plan amendments, which rules must be applied prior to the application of paragraph (g)(2)(iv) of this section relating to section 436 contribu- tions. The reapplication of the rules under this paragraph (g)(2) regarding the deemed election in paragraph (a)(5) of this sec- tion may require an additional reduction in the prefunding and funding standard car- ryover balances if the amount of the re- duction in those balances that is necessary to reach the applicable threshold to avoid the application of a section 436 limitation exceeds the amount thatwas initially re- duced. Prior reductions of the prefunding and funding standardcarryover balances continue to apply. (B)Reduction in balances at the first day of plan year—(1)Plans with a certified AFTAP for the prior plan year. If section 436(h)(1) and paragraph (h)(1) of this section apply to determine the presumed adjusted funding target attainment percentage as of the first day of the current plan year based on the plan’s enrolled actuary certification of the adjusted funding target attainment percentage for the prior plan year made during that prior plan year, then, in order to determine the amount of the reduction (if any) in the funding standard carryover balance and prefunding balance under this paragraph (g)(2)(ii), a presumed adjusted funding target must be established as of the first day of the plan year, and that amount is then compared to the interim value of adjusted plan assets as of that date. For this purpose, the interim value of adjusted plan assets is equal to the value of adjusted plan assets (within the meaning of paragraph (j)(1)(ii) of this section) as of the first day of the plan year, determined without regard to future contributions and future elections with respect to the plan’s prefunding and funding standard carryover balances under section 430(f) (for example, elections to add to the prefunding balance for the prior plan year, elections to use the prefunding and funding standard carryover balances to offset the minimum required contribution for a year, and elections (including deemed elections under paragraph (a)(5) of this section) to reduce the prefunding and funding standard carryover balances for the current plan year), and the presumed adjusted funding target is equal to the interim value of adjusted plan assets for the plan year divided by the presumed adjusted funding target attainment percentage. As provided in §1.430(f)–1(e)(1), the rules of §1.430(f)–1(d)(1)(ii) apply for purposes of determining the amount of the prefunding balance or the funding standard carryover balance that is available for reduction. (2)Plans with presumed AFTAP deemed under 60 percent. If paragraph (g)(2)(ii)(B)(1) of this section does not apply to the plan for a plan year and the last day of the plan year is on or after the first day of the 10 th month of the plan year, such that the presumed adjusted funding target attainment percentage for the prior plan year is conclusively presumed to be less than 60 percent under section 436(h)(2) and paragraph (h)(3) of this section, then no reduction in the funding standard carryover balance and prefunding balance is required under this paragraph (g)(2)(ii)(B). However, see paragraph (g)(2)(iv)(A) of this section for rules for determining the amount of a section 436 contribution that would permit unpredictable contingent event benefits to be paid in such a case. (3)Treatment of short plan years.If paragraph (g)(2)(ii)(B)(1)ofthissection does not apply to the plan for a plan year 2009–50 I.R.B.832December 14, 2009 but the last day of the plan year is be- fore the first day of the 10 th month of the plan year, such that section 436(h)(2) and paragraph (h)(3) of this section did not apply for that plan year, then paragraph (g)(2)(ii)(B)(1)ofthissectionmustbeap- plied as of the first day of the next plan year based on the presumed adjusted fund- ing target attainment percentage as of that last day of the prior short plan year. (C)Change in presumed AFTAP later in the plan year. If the presumed adjusted funding target attainment percentage for the plan year changes during the year, the rules regarding the deemed election to reduce the prefunding and funding standard carryover balances described in paragraph (a)(5) of this section must be reapplied based on the new presumed adjusted funding target attainment percentage. This will typically occur on the first day of the 4th month of a plan year, but could happen at a different date if the enrolled actuary certifies the adjusted funding target attainment percentage for the prior plan year during the current plan year. In order to determine the amount of any reduction in the prefunding and funding standard carryover balances that would apply in such a situation, a new presumed adjusted funding target must be established, which is then compared to the updated interim value of adjusted plan assets. For this purpose, the updated interim value of adjusted plan assets for the plan year is determined as the interim value of adjusted plan assets as of the first day of the plan year updated to take into account contributions for the prior plan year and section 430(f) elections with respect to the plan’s prefunding and funding standard carryover balances made before the date of the change in the presumed adjusted funding target attainment percentage, and the new presumed adjusted funding target is equal to the updated interim value of adjusted plan assets divided by the new presumed adjusted funding target attainment percentage. (D)Plans funded below the thresh- old. If, after application of paragraph (g)(2)(ii)(B) and (C) of this section, the presumed adjusted funding target attain- ment percentage under this paragraph (g)(2)(ii) is less than the 60 percent thresh- old under section 436(e), then no benefit accruals are permitted under the plan un- less the plan sponsor makes a section 436 contribution as provided in paragraph (g)(2)(iv)(A) of this section. See para- graph (g)(5)(ii) of this section for rules that apply on and after the date the enrolled actuary for the plan issues a certification of the adjusted funding target attainment percentage of the plan for the current plan year. (iii)Calculation of inclusive presumed AFTAP for application to unpredictable contingent event benefits and plan amendments—(A)Requirement to calculate inclusive presumed AFTAP. For purposes of applying the limitations under paragraphs (b) and (c) of this section during the period described in this paragraph (g)(2), an inclusive presumed adjusted funding target attainment percentage must be calculated. The inclusive presumed adjusted funding target attainment percentage is the ratio (expressed as a percentage) of the interim value of adjusted plan assets (updated to take into account contributions for the prior plan year, any prior section 436 contributions made for the plan year to the extent not previously taken into account in the interim value of adjusted plan assets for the plan year, and section 430(f) elections with respect to the plan’s prefunding and funding standard carryover balances made before the date of the unpredictable contingent event or the date the plan amendment would take effect) to the inclusive presumed adjusted funding target. The inclusive presumed adjusted funding target is calculated as the presumed adjusted funding target determined under paragraph (g)(2)(ii)(B) or (C) of this section, increased to take into account— (1) The unpredictable contingent event benefits or plan amendment; (2) Any unpredictable contingent event benefits that are permitted to be paid as a result of any unpredictable contingent event that occurred, or plan amendment that has taken effect, in the prior plan year to the extent not taken into account in the prior plan year adjusted funding target at- tainment percentage; and (3) Any other unpredictable contingent event benefits that are permitted to be paid as a result of any unpredictable contingent event that occurred, or plan amendment that has taken effect, in the current plan year to the extent not previously taken into account in the presumed adjusted funding target for the plan year. (B)Mandatory reduction for collec- tively bargained plans. During the period described in this paragraph (g)(2), the rules of paragraph (a)(5)(ii) of this section (relating to the deemed election to reduce the funding standard carryover balance and the prefunding balance) must be ap- plied by treating the inclusive presumed adjusted funding target attainment per- centage determined under this paragraph (g)(2)(iii) as if it were the adjusted funding target attainment percentage. (C)Optional reduction for plans that are not collectively bargained plans.A plan sponsor of a plan that is not a collec- tively bargained plan (and, thus, is not re- quired to reduce the funding standard car- ryover balance and the prefunding balance under the rules of paragraph (a)(5)(ii) of this section) is permitted to elect to reduce those balances in order to increase the up- dated interim value of adjusted plan assets that is used to determine the inclusive pre- sumed adjusted funding target attainment percentage under this paragraph (g)(2)(iii). (D)Plans funded below the thresh- old. If, after application of paragraph (g)(2)(iii)(B) and (C) of this section, the in- clusive presumed adjusted funding target attainment percentage determined under this paragraph (g)(2)(iii) is less than the applicable threshold under section 436(b) or 436(c), then the plan is not permitted to provide any benefits attributable to the unpredictable contingent event, nor is the plan amendment permitted to take effect, unless the plan sponsor makes a section 436 contribution as provided in paragraph (g)(2)(iv) of this section. See paragraph (g)(5)(ii) of this section for rules that apply on and after the date the enrolled actuary for the plan issues a certification of the adjusted funding target attainment per- centage of the plan for the current plan year. (E)Plans funded at or above the thresh- old. If, after application of paragraph (g)(2)(iii)(B) or (C) of this section, the inclusive presumed adjusted funding tar- get attainment percentage is greater than or equal to the applicable threshold under section 436(b) or 436(c), then the plan is not permitted to limit the payment of unpredictable contingent event benefits described in paragraph (b) of this section, nor is the plan permitted to restrict a plan December 14, 20098332009–50 I.R.B. amendment increasing benefit liabilities described in paragraph (c) of this section from taking effect, based on an expecta- tion that the limitations under paragraph (b) or (c) of this section will apply fol- lowing the enrolled actuary’s certification of the adjusted funding target attainment percentage for the plan year. (iv)Section 436 contributions—(A) Plans with presumed AFTAP below 60 percent—(1)Unpredictable contingent event benefits. If the presumed adjusted funding target attainment percentage for a plan is less than 60 percent, then unpredictable contingent event benefits are permitted to be paid as a result of an unpredictable contingent event occurring during the period described in this paragraph (g)(2) if the plan sponsor makes the section 436 contribution described in paragraph (f)(2)(iii)(A) of this section. (2)Plan amendments. If the presumed adjusted funding target attainment percent- age for a plan is less than 60 percent, then no plan amendment increasing plan liabil- ities is permitted to take effect during the period described in this paragraph (g)(2). See paragraph (e)(1) of this section. (3)Benefit accruals. If the presumed adjusted funding target attainment percent- age for a plan year of less than 60 per- cent is determined based on the plan’s en- rolled actuary certification of the adjusted funding target attainment percentage for the prior plan year made during that prior plan year (as opposed to being presumed to be less than 60 percent under the rules of section 436(h)(2) and paragraph (h)(3) of this section because the actuary has not certified the adjusted funding target attain- ment percentage for the prior plan year be- fore the first day of the 10th month of the prior plan year), then benefits are permit- ted to accrue if the plan sponsor makes a section 436 contribution in the amount necessary to bring the ratio of the updated interim value of adjusted plan assets to the presumed adjusted funding target up to 60 percent, as described in paragraph (f)(2)(v) of this section. (B)Plan amendments for plans with presumed AFTAP below 80 percent.If the presumed adjusted funding target attainment percentage for a plan is less than 80 percent, but is not less than 60 percent, then a plan amendment increasing plan liabilities is permitted to take effect during the period described in this paragraph (g)(2) if the plan sponsor makes a section 436 contribution described in paragraph (f)(2)(iv)(A) of this section. (C)Contributions required to reach threshold. If a plan is described in para- graph (g)(2)(iii)(D) of this section and neither paragraph (g)(2)(iv)(A) nor (B) of this section apply to the plan, then unpre- dictable contingent event benefits are per- mitted to be paid or the plan amendment is permitted to become effective during the period this paragraph (g)(2) applies to the plan only if the plan sponsor makes a section 436 contribution in the amount necessary to bring the ratio of the updated interim value of adjusted plan assets to the inclusive presumed adjusted funding target up to the applicable threshold un- der section 436(b) or (c), as described in paragraph (f)(2)(iii)(B) or (f)(2)(iv)(B) of this section. This paragraph (g)(2)(iv)(C) applies, for example, if an unpredictable contingent event occurs in the case of a plan with a presumed adjusted funding target attainment percentage of more than 60 percent where taking into account the unpredictable contingent event benefit in the inclusive presumed adjusted funding target would cause the ratio of the interim value of adjusted plan assets to the inclu- sive presumed adjusted funding target to be less than 60 percent. (v)Bankruptcy of plan sponsor.Pur- suant to section 436(d)(2), during any pe- riod in which the plan sponsor of a plan is a debtor in a case under title 11, United States Code, or any similar Federal or State law (as described in paragraph (d)(2) of this section), no prohibited payment within the meaning of paragraph (j)(6) of this sec- tion may be paid if the plan’s enrolled ac- tuary has not yet certified the plan’s ad- justed funding target attainment percent- age for the plan year to be at least 100 percent. Thus, the presumption rules of paragraph (h) of this section do not apply for purposes of section 436(d)(2) and this paragraph (g)(2)(v). (3)Periods prior to certification during which no presumption applies—(i)Pro- hibited payments and benefit accruals.If no presumptions under section 436(h) ap- ply to a plan during a period and the plan’s enrolled actuary has not yet issued the certification of the plan’s actual adjusted funding target attainment percentage for the plan year, the plan is not permitted to limit prohibited payments under para- graph (d) of this section or the accrual of benefits under paragraph (e) of this sec- tionbasedonanexpectationthatthose paragraphs will apply to the plan once an actuarial certification is issued. However, see paragraph (g)(2)(v) of this section for a restriction on prohibited payments during any period in which the plan sponsor of aplanisadebtorinacaseundertitle11, United States Code, or any similar Federal or State law. (ii)Unpredictable contingent event benefits and plan amendments increasing benefit liability—(A)In general.Ifno presumptions under section 436(h) apply to a plan during a period and the plan’s enrolled actuary has not yet issued a cer- tification of the plan’s adjusted funding target attainment percentage for the plan year, the limitations on unpredictable con- tingent event benefits under paragraph (b) of this section and plan amendments in- creasing benefit liabilities under paragraph (c) of this section must be applied during that period by following the rules of para- graphs (g)(2)(iii) of this section, based on the inclusive presumed adjusted fund- ing target determined using the prior plan year adjusted funding target attainment percentage. Thus, whether unpredictable contingent event benefits are permitted to be paid or a plan amendment is per- mitted to take effect during a plan year is determined by calculating the ratio of the interim value of adjusted plan assets to the inclusive presumed adjusted fund- ing target, where the inclusive presumed adjusted funding target is determined by dividing the interim value of adjusted plan assets by the prior plan year adjusted fund- ing target attainment percentage and then adding the adjustments described in para- graphs (g)(2)(iii)(A)(1), (2)and(3)ofthis section. If, after application of paragraphs (g)(2)(iii)(B) and (C) of this section, that ratio is less than the applicable thresh- old under section 436(b) or 436(c), then the plan is not permitted to provide any benefits attributable to the unpredictable contingent event, nor is the plan amend- ment permitted to take effect, unless the plan sponsor makes the contribution de- scribed in paragraph of (g)(2)(iv)(C) of this section. (B)Recharacterization of contribu- tions made to avoid benefit limitations. In any case where, pursuant to paragraph (g)(3)(ii)(A) of this section, the plan spon- 2009–50 I.R.B.834December 14, 2009 sor makes section 436 contributions to avoid the application of the applicable ben- efit limitation, to the extent those contri- butions would not be needed to permit the payment of the unpredictable contingent event benefits or for the plan amendment to go into effect based on a subsequent certification of the adjusted funding target attainment percentage for the current plan year that takes into account the increase in the liability attributable to the unpre- dictable contingent event benefits or plan amendment, the excess section 436 con- tributions are recharacterized as employer contributions taken into account under section 430 for the current plan year. (4)Modification of the presumed AFTAP—(i)Section 436 contributions.If, in accordance with the rules of paragraph (g)(2)(iv) of this section, unpredictable contingent event benefits are permitted to be paid, or a plan amendment takes effect, during the plan year because the plan sponsor makes a contribution described in paragraph (f)(2)(iii)(B) or (f)(2)(iv)(B) of this section, then the presumed adjusted funding target must be adjusted to reflect any increase in the funding target attributable to the unpredictable contingent event benefits or the plan amendment and the interim value of plan assets must be increased by the present value of the contribution. Similarly, if benefit accruals are permitted to resume in a plan year because the plan sponsor makes the contribution described in paragraph (f)(2)(v) of this section, then the presumed adjusted funding target must be adjusted to reflect any increase in the funding target attributable to the benefit accruals for the prior plan year and the interim value of adjusted plan assets must be increased by the present value of the contribution. The adjustment to the presumed adjusted funding target is made as of the date of the contribution, and that date is a section 436 measurement date. (ii)Modification of the presumed AFTAP for reduction in balances.Ifa plan’s funding standard carryover balance or prefunding balance is reduced under the rules of paragraph (g)(2) or (g)(3) of this section, then the presumed adjusted funding target attainment percentage for the plan year is increased to reflect the higher interim value of adjusted plan assets resulting from the reduction in the funding standard carryover balance or prefunding balance. The date of the event that causes the reduction is a section 436 measurement date. (5)Periods after certification of AFTAP—(i)Plan must follow certified AFTAP—(A)In general.Therulesof paragraphs (g)(2) and (g)(3) of this section no longer apply for a plan year on and after the date the enrolled actuary for the plan issues a certification of the adjusted funding target attainment percentage of the plan for the current plan year, provided that the certification is issued before the first day of the 10th month of the plan year. For example, the plan must provide that the limitations on prohibited payments apply for distributions with annuity starting dates on and after the date of that certification using the certified adjusted funding target attainment percentage of the plan for the plan year. Similarly, the plan must provide that any prohibition on accruals under paragraph (e) of this section as a result of the enrolled actuary’s certification that the adjusted funding target attainment percentage of the plan for the plan year is less than 60 percent is effective as of the date of the certification and that any prohibition on accruals ceases to be effective on the date the enrolled actuary issues a certification that the adjusted funding target attainment percentage of the plan for the plan year is at least 60 percent. (B)Unpredictable contingent events andplanamendments. In the case of a plan that has been issued a certification of the plan’s adjusted funding target at- tainment percentage for a plan year by the plan’s enrolled actuary, the plan sponsor must comply with the requirements of paragraphs (b) and (c) of this section for an unpredictable contingent event that occurs or a plan amendment that takes effect on or after the date of the enrolled actuary’s certification. Thus, theplan administrator must determine if the adjusted funding target attainment percentage would be at or above the applicable threshold if it were modified to take into account— (1) The unpredictable contingent event or plan amendment; (2) Any other unpredictable contingent event benefits that were permitted to be paid as a result of any unpredictable con- tingent event that occurred, and any other plan amendment that took effect, earlier during the plan year to the extent not taken into account in the certified adjusted fund- ing target attainment percentage for the plan year; and (3) Any earlier section 436 contribu- tions made for the plan year to the extent those contributions were not taken into ac- count in the certified adjusted funding tar- get attainment percentage. (C)Application of rule for deemed elec- tion to reduce funding balances.Afterthe adjusted funding target attainment percent- age for a plan year is certified by the plan’s enrolled actuary, the deemed election to re- duce the prefunding and funding standard carryover balances under paragraph (a)(5) of this section must be reapplied based on the actual funding target for the year (pro- vided the certification is issued before the first day of the 10th month of the plan year). The reapplication of the rules under this paragraph (g)(5) regarding the deemed election in paragraph (a)(5) of this sec- tion may require an additional reduction in the prefunding and funding standard carry- over balances if the amount of the reduc- tion in the prefunding and funding stan- dard carryover balances that is necessary to reach the applicablethreshold to avoid the application of a section 436 limitation exceeds the amount that was initially re- duced. Prior reductions of the prefunding and funding standard carryover balances continue to apply. (ii)Applicability to prior periods—(A) In general. Except as otherwise provided in this paragraph (g)(5)(ii), the enrolled ac- tuary’s certification of the adjusted fund- ing target attainment percentage for the plan for the plan year does not affect prior periods. For example, the certification does not affect the application of the lim- itation under paragraph (d) of this section for distributions with annuity starting dates before the certification or the application of the limitation under paragraph (e) of this section prior to the date of that certi- fication. See paragraph (a)(4) of this sec- tion for rules relating to the period of time after benefits cease to be limited. Ex- cept as otherwise provided in this para- graph (g)(5)(ii), the enrolled actuary’s cer- tification of the adjusted funding target at- tainment percentage for the plan for the plan year does not affect the application of the limitation under paragraph (b) or (c) of this section to unpredictable contingent event benefits, or a plan amendment that increases the liability for benefits, where December 14, 20098352009–50 I.R.B. the unpredictable contingent event occurs or the amendment takes effect during the periods to which paragraphs (g)(2) and (g)(3) of this section apply. (B)Special rule for unpredictable con- tingent event benefits. If a plan does not pay benefits attributable to an unpre- dictable contingentevent because of the application of paragraph (g)(2)(iii)(D) or (g)(3)(ii)(A) of this section, then the plan must pay the benefits attributable to that event that were not previously paid if such benefits would be permitted under the rules of section 436 based on a certified adjusted funding target attainment per- centage for the plan year that takes into account the increase in the funding target that would be attributable to those unpre- dictable contingent event benefits. (C)Special rule for plan amendments that increase liability. If a plan amend- ment does not take effect because of the application of paragraph (g)(2)(iii)(D) or (g)(3)(ii)(A) of this section, the plan amendment must go into effect if it would be permitted under the rules of section 436 based on a certified actual adjusted funding target attainment percentage for the plan year that takes into account the increase in the funding target attributable to the plan amendment, unless the plan amendment provides otherwise. (D)Ordering rule for multiple unpre- dictable contingent events or plan amend- ments.[Reserved] (6)Examples. The following exam- ples illustrate the rules of this paragraph (g). Unless otherwise indicated, these ex- amples are based on the following facts: each plan has a plan year that is the calen- dar year and a valuation date of January 1; section 436 applies to the plan beginning in 2008; the plan has no funding standard carryover balance; the plan sponsor is not in bankruptcy; no annuity purchases have been made from the plan; and the plan of- fers a lump sum form of payment. No plan is in at-risk status for the years discussed in the examples. The examples read as fol- lows: Example 1. (i) The plan’s certified AFTAP as of January 1, 2010, is 75%. As of January 1, 2011, Plan A has assets of $3,300,000 and a prefunding balance of $300,000. Beginning on January 1, 2011, Plan A’s AFTAP for 2011 is presumed to be 75%, under the rules of paragraph (h) of this section and based on the certified AFTAP for 2010. (ii) Based on Plan A’s presumed AFTAP of 75%, Plan A would continue to be subject to the restriction on prohibited payments in paragraph (d)(3) of this section as of January 1, 2011. However, under the provisions of paragraph (a)(5) of this section, if the prefunding balance is large enough, Plan A’s sponsor is deemed to elect to reduce the prefunding balance to the extent needed to avoid this restriction. (iii) The amount needed to avoid the restriction in paragraph (d)(3) of this section is determined by com- paring the presumed adjusted funding target for Plan A with the interim value of adjusted plan assets as of the valuation date. The interim value of adjusted plan assets for Plan A is $3,000,000 (that is, the asset value of $3,300,000 reduced by the prefunding balance of $300,000). The presumed adjusted funding target for Plan A is the interim value of the adjusted plan assets divided by the presumed AFTAP, or $4,000,000 (that is, $3,000,000 divided by 75%). (iv) In order to avoid the restriction on prohibited payments in paragraph (d)(3) of this section, Plan A’s presumed AFTAP must be increased to 80%. This requires an increase in Plan A’s adjusted plan assets of $200,000 (that is, 80% of the presumed adjusted funding target of $4,000,000, minus the interim value of the adjusted plan assets of $3,000,000). Plan A’s prefunding balance as of January 1, 2011, is reduced by $200,000 under the deemed election provisions of paragraph (a)(5) of this section. Accordingly, Plan A’s prefunding balance is $100,000 (that is, $300,000 minus $200,000) and the interim value of adjusted plan assets is increased to $3,200,000 (that is, $3,300,000 minus the reduced prefunding balance of $100,000). Pursuant to paragraph (g)(4)(ii) of this section, the presumed adjusted funding target attainment percentage for Plan A is redetermined as 80% and Plan A must pay the full amount of the accelerated benefit distributions elected by participants with an annuity starting date of January 1, 2011, or later. Example 2. (i)Thefactsarethesameasin Example 1. As of April 1, 2011, the enrolled actu- ary for Plan A has not certified the 2011 AFTAP. Therefore, beginning April 1, 2011, Plan A’s AFTAP is presumed to be reduced by 10 percentage points to 70%, in accordance with paragraph (h)(2) of this section. Under the provisions of paragraph (g)(2)(ii)(B) of this section, the deemed election to reduce the prefunding and funding standard carryover balances described in paragraph (a)(5) of this section must be reapplied based on the new presumed AFTAP. (ii) In accordance with paragraph (g)(2)(ii)(C) of this section, a new presumed adjusted funding tar- get must be determined based on the new presumed AFTAP and must be compared to an updated interim value of adjusted plan assets. The new presumed adjusted funding target is $3,200,000 divided by the new presumed AFTAP of 70%, or $4,571,429. (iii) In order to avoid the restriction on prohibited payments in paragraph (d)(3) of this section, Plan A’s presumed AFTAP must be increased to 80%. This requires an additional increase in Plan A’s adjusted plan assets of $457,143 (that is, 80% of the new presumed adjusted funding target of $4,571,429, minus the updated interim value of the adjusted plan assets of $3,200,000 reflecting the deemed reduction in Plan A’s prefunding balance). (iv) Plan A’s remaining prefunding balance as of January 1, 2011, is only $100,000, which is not enough to avoid the restriction on prohibited payments under paragraph (d)(3) of this section. Accordingly, unless Plan A’s sponsor utilizes one of the methods described in paragraph (f) of this section to avoid the restriction, Plan A is subject to the re- striction on prohibited payments in paragraph (d)(3) of this section and cannot pay accelerated benefit distributions elected by participants with an annuity starting date of April 1, 2011, or later. (v) Plan A’s prefunding balance remains at $100,000 because, under paragraph (a)(5)(iii) of this section, the deemed reduction rules do not apply if the prefunding balance is not large enough to increase the adjusted value of plan assets enough to avoid the restriction. However, the earlier deemed reduction of $200,000 continues to apply because all elections (in- cluding deemed elections) to reduce a plan’s funding standard carryover balance or prefunding balance are irrevocable and must be unconditional in accordance with paragraph (g)(2)(ii)(A) of this section. Example 3. (i)Thefactsarethesameasin Example 1. On July 1, 2011, the enrolled actuary for Plan A calculates the actual adjusted funding target as $3,700,000 as of January 1, 2011. There- fore, the 2011 AFTAP would have been 81.08% without reducing the prefunding balance (that is, plan assets of $3,300,000 minus the prefunding balance of $300,000, divided by the adjusted funding target of $3,700,000), and Plan A would not have been subject to the restrictions under paragraph (d)(3) of this section. (ii) However, paragraph (g)(5)(i)(C) of this section requires that any prior reductions in the prefunding or funding standard carryover balances continue to apply, and so Plan A’s prefunding balance remains at the reduced amount of $100,000 as of January 1, 2011. The enrolled actuary certifies that the 2011 AFTAP is 86.49% (that is, plan assets of $3,300,000 reduced by the prefunding balance of $100,000, divided by the adjusted funding target of $3,700,000). Example 4. (i) Plan B is a collectively bargained plan with assets of $2,500,000 and a prefunding balance of $150,000 as of January 1, 2011. On August 14, 2010, the enrolled actuary for Plan B certified the AFTAP for 2010 to be 83%. No unpredictable contingent events giving rise to unpredictable contingentevent benefits occurred during 2010 and no plan amendments took effect in 2010 that were not taken into account in the certified AFTAP. (ii) On January 10, 2011, Plan B’s sponsor amends the plan to increase benefits effective on February 1, 2011. The amendment would increase Plan B’s funding target by $350,000. Under the rules of paragraph (g)(3) of this section, the determination of whether the amendment is permitted to take effect is based on a comparison of the inclusive presumed adjusted funding target with the updated interim value of adjusted plan assets. (iii) Plan B’s interim value of adjusted plan assets as of the valuation date is $2,350,000 (that is, $2,500,000 minus the prefunding balance of $150,000). Prior to reflecting the amendment, Plan B’s presumed adjusted funding target as of January 1, 2011, is $2,831,325, which is equal to the interim value of adjusted plan assets as of the valuation date of $2,350,000, divided by the presumed AFTAP of 83%. Increasing Plan B’s presumed adjusted funding target by $350,000 to reflect the amendment results 2009–50 I.R.B.836December 14, 2009 in an inclusive presumed adjusted funding target of $3,181,325 and would result in a presumed AFTAP of 73.87% (that is, the interim value of adjusted plan assets as of the valuation date of $2,350,000 divided by the inclusive presumed adjusted funding target of $3,181,325). (iv) Because Plan B’s presumed AFTAP was over 80% prior to taking the amendment into account but would be less than 80% if the amendment were taken into account, section 436(c) and paragraph (c) of this section prohibit the planamendment from taking effect unless the adjusted plan assets are increased so that the inclusive presumed AFTAP would be increased to 80%. This would require an additional amount of $195,060 (that is, 80% of the inclusive presumed adjusted funding target of $3,181,325 less the interim value of adjusted plan assets of $2,350,000). (v) Plan B’s prefunding balance of $150,000 is not large enough for Plan B to avoid the restriction on plan amendments, and therefore the deemed elec- tion to reduce the prefunding balance under para- graph (a)(5) of this section does not apply, and the amendment cannot take effect unless the plan spon- sor makes a contribution described in paragraph (f)(2) of this section. Example 5. (i) The facts are the same as inExam- ple 4, except that Plan B’s sponsor decides to make a contribution on February 1, 2011, to avoid the ben- efit limitation as provided in paragraph (f)(2) of this section. As of February 1, 2011, Plan B’s effective interest rate for the 2011 plan year has not yet been determined. Pursuant to paragraph (f)(2)(i)(A)(2)of this section, Plan B’s effective interest rate for 2011 is treated as 6.25%, which is the largest of the three seg- ment interest rates applicable to the 2011 plan year, as provided in paragraph (f)(2)(i)(A)(2)ofthissection. (ii) The amount of the contribution as of Jan- uary1,2011,neededtoavoidtherestrictiononplan amendments under paragraph (c) of this section is $195,060. However, becausethe contribution is not paid until February 1, 2011, the necessary contribu- tion amount must be adjusted to reflect interest that would otherwise have accrued between the valua- tion date and the date of the contribution, at Plan B’s effective interest rate for the 2011 plan year. The amount of the required contribution after adjustment is $196,048, determined as $195,060 increased for one month of compound interest at an effective an- nual interest rate of 6.25%. (iii) In accordance with paragraph (g)(4)(i) of this section, the inclusive presumed AFTAP as of February 1, 2011, is 80 percent. Example 6. (i)ThefactsarethesameasinEx- ample 5. As of April 1, 2011, the enrolled actuary for the plan has not certified the 2011 AFTAP. Beginning April 1, 2011, Plan A’s presumed AFTAP is equal to be 70%, 10 percentage points lower than the inclusive presumed AFTAP as of February 1, 2011, in accordance with paragraphs (g)(2)(iii)(A) and (h)(2) of this section. On July 1, 2011, the enrolled actuary for the plan calculates the actual adjusted funding target, prior to taking the plan amendment into account, as $2,700,000, and determines the actual effective interest rate for 2011 to be 5.25%. On this basis, the actual AFTAP for 2011 (prior to taking the amendment into account) as 87.04% (that is, adjusted assets of $2,350,000 divided by the adjusted funding target of $2,700,000). Reflecting the $350,000 increase in funding target due to the plan amendment would increase the adjusted funding target to $3,050,000 and would decrease Plan B’s AFTAP to 77.05%. (ii) Based on the calculated adjusted funding tar- get, the amount that was necessary to avoid the bene- fit restriction under paragraph (c) of this section was $90,000 (that is, 80% of the adjusted funding target reflecting the plan amendment (or $3,050,000), mi- nus the adjusted value of plan assets of $2,350,000). This amount must be adjusted for interest between the valuation date and the date the contribution was made using the effective interest rate for Plan B. Therefore, the amount required on the payment date of February 1, 2011, was $90,385 (that is, $90,000 adjusted for compound interest for one month at Plan B’s effec- tive interest rate of 5.25% per year). (iii) Under paragraph (g)(3)(ii)(B) of this sec- tion, the contribution made on February 1, 2011, is recharacterized as an employer contribution under section 430 to the extent that it exceeded the amount necessarytoavoidapplicationoftherestrictionon plan amendments under paragraph (c) of this section. Therefore, $105,663 (that is, the $196,048 actual con- tribution paid on February 1, 2011, minus the $90,385 required contribution based on the actual AFTAP) is recharacterized as an employer contribution under section 430 for the 2011 plan year. As such, it may be applied toward the minimum required contribution for 2011, or the plan sponsor can elect to credit the contribution to Plan B’s prefunding balance to the extent that the contributions for the 2011 plan year exceed the minimum required contribution. (iv) This recharacterization applied only because the 436 contribution was made during a period prior to the certification of Plan B’s actual AFTAP for 2011 and during which no presumption applied (that is, when section 436 is applied based on the 2010 AFTAP, which was high enough that no restrictions applied for 2010). If the contribution had been made during a time when the presumptions applied (for instance, after April 1, 2011, when the presumed AFTAP was under 80%) then the only portion of the 436 contribution that would be recharacterized as an employer contribution under section 430 would be the portion of the interest adjustment attributable to the difference between the highest segment rate (6.25%) and the plan’s actual effective interest rate (5.25%), in accordance with paragraph (f)(2)(i)(A)(2) of this section. (v) After reflecting the plan amendment and the present value of the portion of the section 436 con- tribution that is not recharacterized as an employer contribution under section 430, the adjusted assets as of January 1, 2011, for purposes of section 436 are $2,440,000 ($2,350,000 plus $90,000) and the inclusive adjusted funding target is $3,050,000. Ac- cordingly, the enrolled actuary certifies the inclusive AFTAP for 2011 as 80% ($2,440,00 ÷ $3,050,000). Note that assets for section 430 purposes are not increased to reflect the section 436 contribution as of January 1, 2011. Example 7. (i) The facts are the same as in Example 6, except that on July 1, 2011, the enrolled actuary for Plan B calculates the actual adjusted funding target (before reflecting the plan amend- ment) as $3,000,000 and certifies the actual AFTAP as 78.33% prior to reflecting the plan amendment (that is, adjusted plan assets of $2,350,000 divided by the actual adjusted funding target of $3,000,000). Based on the provisions of paragraph (c) of this section, because the AFTAP prior to reflecting the amendment is less than 80%, the contribution requiredtoavoidtherestrictiononplanamendments would have been the amount equal to the increase in funding target due to the plan amendment, or $350,000. (ii) However, according to paragraph (g)(5)(ii)(A) of this section, the enrolled actuary’s certification of the 2011 AFTAP does not affect the application of the limitation under paragraph (c) of this section to the amendment, because the amendment to Plan B took effect prior to the date of the certification. Therefore, it is not necessary for Plan B’s sponsor to contribute an additional amount in order for the plan amendment to remain in effect regardless of the extent to which the certified AFTAP for the plan year is less than the presumed inclusive AFTAP. (h)Presumed underfunding for pur- poses of benefit limitations—(1)Presump- tion of continued underfunding—(i)In general. This paragraph (h)(1) applies to aplanforaplanyearifalimitationunder paragraph (b), (c), (d), or (e) of this sec- tion applied to the plan on the last day of the preceding plan year. If this paragraph (h)(1) applies to a plan, the first day of the plan year is a section 436 measurement date and the presumed adjusted funding target attainment percentage for the plan is the percentage under paragraph (h)(1)(ii) or (iii) of this section, whichever applies to the plan, beginning on that first day of the plan year and ending on the date specified in paragraph (h)(1)(iv) of this section. (ii)Rule where preceding year certifi- cation issued during preceding year—(A) General rule. In any case in which the plan’s enrolled actuary has issued a certi- fication under paragraph (h)(4) of this sec- tion of the adjusted funding target attain- ment percentage for the plan year preced- ing the current plan year before the first day of the current plan year, the presumed adjusted funding target attainment percent- age of the plan for the current plan year is equal to the prior plan year adjusted fund- ing target attainment percentage until it is changed under paragraph (h)(1)(iv) of this section. (B)Special rule for late certifications. If the certification of the adjusted funding target attainment percentage for the prior plan year occurred after the first day of the 10th month of that prior plan year, the plan is treated as if no such certification was made, unless the certification took into ac- count the effect of any unpredictable con- tingent event benefits that are permitted to December 14, 20098372009–50 I.R.B. be paid based on unpredictable contingent events that occurred, and any plan amend- ments that became effective, during the prior plan year but before the certification (and any associated section 436 contribu- tions). (iii)No certification for preceding year issued during preceding year—(A) Deemed percentage continues.Inany case in which the plan’s enrolled actuary has not issued a certification under para- graph (h)(4) of this section of the adjusted funding target attainment percentage of the plan for the plan year preceding the current plan year during that prior plan year, the presumed adjusted funding tar- get attainment percentage of the plan for the current plan year is equal to the pre- sumed adjusted funding target attainment percentage that applied on the last day of the preceding plan year until the pre- sumed adjusted funding target attainment percentage is changed under paragraph (h)(1)(iii)(B) or (h)(1)(iv) of this section. Thus, if the prior plan year was a 12-month plan year (so that the last day of the plan year was after the first day of the 10th month of the plan year and the rules of section 436(h)(2) and paragraph (h)(3) of this section applied to the plan for that plan year), then the presumed adjusted funding target attainment percentage for the current plan year is presumed to be less than 60 percent. By contrast, if the prior plan year was less than 9 months, the presumed adjusted funding target attain- ment percentage for the current plan year is the presumed adjusted funding target attainment percentage at the last day of the preceding plan year. (B)Enrolled actuary’s certification in following year. In any case in which the plan’s enrolled actuary has issued the certi- fication under paragraph (h)(4) of this sec- tion of the adjusted funding target attain- ment percentage of the plan for the plan year preceding the current plan year on or after the first day of the current plan year, the date of that prior plan year certi- fication is a new section 436 measurement date for the current plan year. In such a case, the presumed adjusted funding tar- get attainment percentage for the current plan year is equal to the prior plan year adjusted funding target attainment percent- age (reduced by 10 percentage points if paragraph (h)(2)(iv) of this section applies to the plan) until it is changed under para- graph (h)(1)(iv) of this section. The rules of paragraph (h)(1)(ii)(B) of this section apply for purposes of determining whether the enrolled actuary has issued a certifi- cation of the adjusted funding target at- tainment percentage for the prior plan year during the current plan year. (iv)Duration of use of presumed ad- justed funding target attainment percent- age. If this paragraph (h)(1) applies to a plan for a plan year, the presumed adjusted funding target attainment percentage de- termined under this paragraph (h)(1) ap- plies until the earliest of— (A) The first day of the 4 th month of the plan year if paragraph (h)(2) of this section applies; (B) The first day of the 10th month of the plan year if paragraph (h)(3) of this section applies; (C) The date of a change in the pre- sumed adjusted funding target attainment percentage under paragraph (g)(4) of this section; or (D) The date the enrolled actuary issues a certification underparagraph (h)(4) of this section of the adjusted funding target attainment percentage for the plan year. (2)Presumption of underfunding begin- ning on first day of 4th month for certain underfunded plans—(i)In general.This paragraph (h)(2) applies to a plan for a plan year if— (A) The enrolled actuary for the plan has not issued a certification of the ad- justed funding target attainment percent- age for the plan year before the first day of the 4th month of the plan year; and (B) The plan’s adjusted funding target attainment percentage for the preceding plan year was either— (1) At least 60 percent but less than 70 percent; or (2) At least 80 percent but less than 90 percent. (ii)Special rule for first plan year a plan is subject to section 436. This para- graph (h)(2) also applies to a plan for the first effective plan year if— (A) The enrolled actuary for the plan has not issued a certification of the ad- justed funding target attainment percent- age for the plan year before the first day of the 4th month of the plan year; and (B) The prior plan year adjusted fund- ing target attainment percentage is at least 70 percent but less than 80 percent. (iii)Presumed adjusted funding target attainment percentage. If this paragraph (h)(2) applies to a plan for a plan year and the date of the enrolled actuary’s certifica- tion of the adjusted funding target attain- ment percentage under paragraph (h)(4) of this section for the prior plan year (taking into account the special rules for late cer- tifications under paragraph (h)(1)(ii)(B) of this section) occurred before the first day of the 4th month of the current plan year, then, commencing on the first day of the 4th month of the current plan year— (A) The presumed adjusted funding tar- get attainment percentage of the plan for the plan year is reduced by 10 percentage points; and (B) The first day of the 4th month of the plan year is a section 436 measurement date. (iv)Certification for prior plan year.If this paragraph (h)(2) applies to a plan and the date of the enrolled actuary’s certifica- tion of the adjusted funding target attain- ment percentage under paragraph (h)(4) of this section for the prior plan year (taking into account the rules for late certifications under paragraph (h)(1)(ii)(B) of this sec- tion) occurs on or after the first day of the 4th month of the current plan year, then, commencing on the date of that prior plan year certification— (A) The presumed adjusted funding tar- get attainment percentage of the plan for the current plan year is equal to 10 per- centage points less than the prior plan year adjusted funding target attainment percent- age; and (B) The date of the prior plan year certi- fication is a section 436 measurement date. (v)Duration of use of presumed ad- justed funding target attainment percent- age. If this paragraph (h)(2) applies to a plan for a plan year, the presumed adjusted funding target attainment percentage de- termined under this paragraph (h)(2) ap- plies until the earliest of— (A) The first day of the 10th month of the plan year if paragraph (h)(3) of this section applies; (B) The date of a change in the pre- sumed adjusted funding target attainment percentage under paragraph (g)(4) of this section; or (C) The date the enrolled actuary issues a certification underparagraph (h)(4) of this section of the adjusted funding target attainment percentage for the plan year. 2009–50 I.R.B.838December 14, 2009 (3)Presumption of underfunding begin- ning on first day of 10th month. In any case in which no certification of the specific ad- justed funding target attainment percent- age for the current plan year under para- graph (h)(4) of this section is made with respect to the plan before the first day of the 10th month of the plan year, then, com- mencing on the first day of the 10th month of the current plan year— (i) The presumed adjusted funding tar- get attainment percentage of the plan for the plan year is presumed to be less than 60 percent; and (ii) The first day of the 10th month of the plan year is a section 436 measurement date. (4)Certification of AFTAP—(i) Rules generally applicable to certifications—(A)In general.The enrolled actuary’s certification referred to in this section must be made in writing, must be signed and dated to show the date of the signature, must be provided to the plan administrator, and, except as otherwise provided in paragraph (h)(4)(ii) of this section, must certify the plan’s adjusted funding target attainment percentage for the plan year. Except in the case of a range certification described in paragraph (h)(4)(ii) of this section, the certification must set forth the value of plan assets, the prefunding balance, the funding standard carryover balance, the value of the funding target used in the determination, the aggregate amount of annuity purchases included in the adjusted value of plan assets and the adjusted funding target, the unpredictable contingent event benefits permitted to be paid for unpredictable contingent events that occurred during the current plan year that were taken into account for the current plan year (including any associated section 436 contributions), the plan amendments that took effect in the current plan year that were taken into account for the current plan year (including any associated section 436 contributions), any benefit accruals that were restored for the plan year (including any section 436 contributions), and any other relevant factors. The actuarial assumptions and funding methods used in the calculation for the certification must be the actuarial assumptions and funding methods used for the plan for purposes of determining the minimum required contributions under section 430 for the plan year. (B)Determination of plan assets.For purposes of making any determination of the adjusted funding target attainment per- centage under this section, the determina- tion is not permitted to include in plan as- sets contributions that have not been made to the plan by the certification date. Thus, the enrolled actuary’s certification of the adjusted funding targetattainment percent- age for a plan year cannot take into account contributions that are expected to be made after the certification date. Notwithstand- ing the foregoing, for plan years beginning before January 1, 2009, the enrolled ac- tuary’s certification of the adjusted fund- ing target attainment percentage is permit- ted to take into account employer contri- butions for the prior plan year that are rea- sonably expected to be made for that prior plan year but have not been contributed by the date of the enrolled actuary’s certifica- tion. See paragraphs (h)(4)(iii) and (v) of this section for rules relating to changes in the certified percentage. (ii)Special rules for certification within range—(A)In general. Under this para- graph (h)(4)(ii), the plan’s enrolled actuary is permitted to certify during a plan year that the plan’s adjusted funding target at- tainment percentage for that plan year ei- ther is less than 60 percent, is 60 percent or higher (but is less than 80 percent), is 80 percent or higher, or is 100 percent or higher. If the enrolled actuary has issued such a range certification for a plan year and the enrolled actuary subsequently is- sues a certification of the specific adjusted funding target attainment percentage for the plan before the end of that plan year, then the certification of the specific ad- justed funding target attainment percent- age is treated as a change in the applicable percentage to which paragraph (h)(4)(iii) of this section applies. (B)Effect of range certification before certification of specific percentage.If a plan’s enrolled actuary issues a range certification pursuant to this paragraph (h)(4)(ii), then, for purposes of this section (including application of the limitations of sections 436(b) and (c), contributions described in sections 436(b)(2), 436(c)(2), and 436(e)(2), and the mandatory reduc- tion of the prefunding and funding stan- dard carryover balances under paragraph (a)(5) of this section), the plan is treated as having a certified percentage at the smallest value within the applicable range until a certification of the plan’s specific adjusted funding target attainment per- centage for the plan year has been issued under paragraph (h)(4)(i) of this section. However, if the plan’s enrolled actuary has issued a range certification for the plan year but does not issue a certification of the specific adjusted funding target attain- ment percentage for the plan by the last day of that plan year, the adjusted funding target attainment percentage for the plan is retroactively deemed to be less than 60 percent as of the first day of the 10th month of the plan year. (C)Effect of range certification on and after certification of specific percentage. Once the certification of the specific ad- justed funding target attainment percent- age is issued by the plan’s enrolled actuary, the certified percentage applies for all pur- poses of this section on and after the date of that certification. If the plan sponsor made section 436 contributions to avoid application of a benefit limitation during the period a range certification was in ef- fect, those section 436 contributions are recharacterized as employer contributions under section 430 to the extent the con- tributions exceed the amount necessary to avoid application of a limitation based on the specific adjusted funding target attain- ment percentage as certified by the plan’s enrolled actuary on or before the last day of the plan year. (iii)Change of certified percent- age—(A)Application of new percentage. If the enrolled actuary for the plan provides a certification of the adjusted funding tar- get attainment percentage of the plan for the plan year under this paragraph (h)(4) (including a range certification) and that certified percentage is superseded by a subsequent determination of the adjusted funding target attainment percentage for that plan year, then, except to the extent provided in paragraph (h)(4)(iv)(B) of this section, that later percentage must be applied for the portion of the plan year beginning on the date of the earlier cer- tification. The subsequent determination could be the correction of a prior incorrect certification or it could be an update of a prior correct certification to take into account subsequent facts under the rules of paragraph (h)(4)(v) of this section. The implications of such a change depend on December 14, 20098392009–50 I.R.B. whether the change is a material change or an immaterial change. See paragraph (h)(4)(iv) of this section. (B)Material change. A change in a plan’s certified adjusted funding target at- tainment percentage constitutes a material change for a plan yearif plan operations with respect to benefits that are addressed by section 436, taking into account any ac- tual contributions and elections under sec- tion 430(f) made by the plan sponsor based on the prior certified percentage, would have been different based on the subse- quent determination of the plan’s adjusted funding target attainment percentage for the plan year. A change in a plan’s adjusted funding target attainment percentage for a plan year can be a material change even if the only impact of the change occurs in the following plan year under the rules for de- termining the presumed adjusted funding target attainment percentage in that follow- ing year. (C)Immaterial change. In general, an immaterial change is any change in an ad- justed funding target attainment percent- age for a plan year that is not a mate- rial change. In addition, subject to the re- quirement to recertify the adjusted funding target attainment percentage in paragraph (h)(4)(v)(B) of this section, a change in ad- justed funding target attainment percent- age is deemed to be an immaterial change if it merely reflects a change in the fund- ing target for the plan year or the value of the adjusted plan assets after the date of the enrolled actuary’scertification result- ing from— (1) Additional contributions for the pre- ceding year that are made by the plan spon- sor; (2) The plan sponsor’s election to re- duce the prefunding balance or funding standard carryover balance; (3) The plan sponsor’s election to apply the prefunding balance or funding standard carryover balance to offset the prior plan year’s minimum required contribution; (4) A change in funding method or ac- tuarial assumptions, where such change required actual approval of the Commis- sioner (rather than deemed approval); (5) Unpredictable contingent event benefits which are permitted to be paid because the employer makes the section 436 contribution described in paragraph (f)(2)(iii)(A) of this section; (6) Unpredictable contingent event ben- efits which are permitted to be paid be- cause the plan’s enrolled actuary deter- mines that the increase in the funding tar- get attributable to the occurrence of the unpredictable contingent event would not cause the plan’s adjusted funding target at- tainment percentage to fall below 60 per- cent; (7) A plan amendment which takes ef- fect because the employer makes the sec- tion 436 contribution described in para- graph (f)(2)(iv)(A) of this section, the lia- bility for which was not taken into account in the certification of the adjusted funding target attainment percentage; or (8) A plan amendment which takes ef- fect because the plan’s enrolled actuary de- termines that the increase in the funding target attributable to the plan amendment would not cause the plan’s adjusted fund- ing target attainment percentage to fall be- low 80 percent, the liability for which was not taken into account in the certification of the adjusted funding target attainment percentage. (iv)Effect of change in percent- age—(A)Material change. In the case of a material change, if the plan’s prior op- erations were in accordance with the prior certification of the adjusted funding target attainment percentage for the plan year (rather than the actual adjusted funding target attainment percentage for the plan year), then the plan will not have satisfied the requirements of section 401(a)(29) and section 436. Even if the plan’s prior operations were in accordance with the subsequent certification of the adjusted funding target attainment percentage, the plan will not have satisfied the quali- fication requirements of section 401(a) because the plan will not have been oper- ated in accordance with its terms during the period of time the prior certification applied. In addition, in the case of a mate- rial change, the rules requiring application of a presumed adjusted funding target attainment percentage under paragraphs (h)(1) through (h)(3) of this section con- tinue to apply from and after the date of the prior certification until the date of the subsequent certification. (B)Immaterial change. An immaterial change in the adjusted funding target at- tainment percentage applies prospectively only and does not change the inapplicabil- ity of the presumptions under paragraphs (h)(1), (2), and (3) of this section prior to the date of the later certification. (v)Rules relating to updated certifi- cation—(A)In general. This paragraph (h)(4)(v) sets forth rules relating to up- dates of an actuary’s certification of the plan’s adjusted funding target attainment percentage for a plan year. Paragraphs (h)(4)(v)(B) and (D) of this section re- quire that an updated adjusted funding target attainment percentage be certified in certain situations. Even if the updated adjusted funding target attainment per- centage is not required to be certified, plan administrators may request that the actuary prepare an updated certification of the adjusted funding target attainment percentage, as described in paragraphs (h)(4)(v)(C) and (E) of this section. Any updated adjusted funding target attain- ment percentage determined under this paragraph (h)(4)(v) will apply beginning as of the date of the event that gave rise to the need for the update which is a section 436 measurement date. Thus, pursuant to this paragraph (h)(4)(v), the updated funding target attainment percentage ap- plies thereafter for all purposes of section 436, including application with respect to unpredictable contingent events occurring on or after the measurement date (but not for unpredictable contingent events that occurred before such measurement date or for benefits with annuity starting dates before that measurement date). The up- dated adjusted funding target attainment percentage will continue to apply for the remainder of the plan year and will be used for the presumed adjusted funding target attainment percentage for the next plan year, unless there is a later updated certification of adjusted funding target attainment percentage for the plan year. (B)Requirement to recertify AFTAP if plan sponsor contributes to threshold. If, during the plan year, unpredictable contingent event benefits are permitted to be paid, a plan amendment takes effect, or benefits are permitted to accrue because the plan sponsor makes a contribution described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of this section, then, in accordance with paragraph (f)(2)(ii)(C) of this section, the plan’s enrolled actuary must issue an updated certification of the adjusted funding target attainment percentage that takes into account such contribution as well as the 2009–50 I.R.B.840December 14, 2009 liability for unpredictable contingent event benefits that are permitted to be paid, plan amendments that take effect during the plan year, and restored benefits. (C)Optional recertification of AFTAP after other unpredictable contingent event or plan amendment. Except as provided in paragraph (h)(4)(v)(D) of this section, if, during a plan year, unpredictable contingent event benefits are permitted to be paid, or a plan amendment takes effect, because either the plan sponsor makes a contribution described in paragraph (f)(2)(iii)(A) or (f)(2)(iv)(A) of this section, or the plan’s enrolled actuary determines that the increase in the funding target attributable to the occurrence of the unpredictable contingent event or the plan amendment would not cause the plan’s adjusted funding target attainment percentage to fall below the applicable 60 percent or 80 percent threshold (taking into account the occurrence of all previous unpredictable contingent event benefits and plan amendments to the extent not already reflected in the certified adjusted funding target attainment percentage for the plan year (or update)), then the plan administrator may request that the plan actuary issue an updated certification of the adjusted funding target attainment percentage that takes into account the unpredictable contingent event benefits or plan amendments and any associated section 436 contribution. (D)Requirement to recertify AFTAP after deemed immaterial change.Ifa change in the adjusted funding target attainment percentage as a result of one of the items listed in paragraph (h)(4)(iii)(C) of this section would be a material change, then the change is treated as an immaterial change only if the plan’s enrolled actuary recertifies the adjusted funding target attainment percentage for the plan year as soon as practicable after the event that gives rise to the change. (E)Optional recertification after other immaterial change. If a change in the ad- justed funding target attainment percent- age is immaterial, then the plan adminis- trator may request that the plan actuary is- sue an updated certification of the adjusted funding target attainment percentage that takes into account the unpredictable con- tingent event benefits or plan amendments and any associated section 436 contribu- tion. (5)Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) of this section. The following examples illustrate the rules of paragraphs (h)(1), (h)(2), and (h)(3) of this section. Unless otherwise indicated, the examples in this section are based on the information in this paragraph (h)(5). Each plan is a non-collectively bargained defined benefit plan with a plan year that is the calendar year and a valuation date of January 1. The plan year is subject to sec- tion 436 in 2008. The plan does not have a funding standard carryover balance or a prefunding balance as of any of the dates mentioned, and the plan sponsor does not elect to utilize any of the methods in para- graph (f) of this section to avoid applica- ble benefit restrictions. No range certifica- tion under paragraph (h)(4) of this section has been issued. The plan sponsor is not in bankruptcy. The examples read as fol- lows: Example 1. (i) On July 15, 2010, the adjusted funding target attainmentpercentage (“AFTAP”) for Plan T for 2010 is certified to be 65%. Based on this AFTAP, Plan T is subject to the restriction on prohibited payments in paragraph (d)(3) of this section for the remainder of 2010. (ii) Beginning January 1, 2011, Plan T’s AFTAP for 2011 is presumed to be equal to the AFTAP for 2010, or 65%, under the provisions of paragraph (h)(1)(ii) of this section. Accordingly, the restriction on prohibited payments in paragraph (d)(3) of this section continues to apply. (iii) On March 1, 2011, the enrolled actuary for the plan certifies that the actual AFTAP for 2011 is 80%. Therefore, beginning March 1, 2011, Plan T is no longer subject to the restriction under paragraph (d)(3) of this section, and so Plan T resumes paying the full amount of any prohibited payments elected by participants with an annuity starting date of March 1, 2011, or later. Example 2. (i)ThefactsarethesameasinEx- ample 1, except that the enrolled actuary for the plan does not certify the AFTAP for 2011 until June 1, 2011, when it is certified to be 66%. (ii) Beginning January 1, 2011, Plan T’s AFTAP for 2011 is presumed to be equal to the AFTAP for 2010, or 65%, under the provisions of paragraph (h)(1)(ii) of this section. Accordingly, the restriction on prohibited payments in paragraph (d)(3) of this section continues to apply. (iii) Pursuant to paragraph (h)(2)(iv) of this sec- tion, beginning April 1, 2011, the AFTAP for 2011 is presumed to be 55% (10 percentage points less than the AFTAP for 2010). Plan T is subject to the restriction on prohibited payments under paragraph (d)(1) of this section for annuity starting dates on or after April 1, 2011. In addition, Plan T is subject to the restriction on unpredictable contingent event benefits under paragraph (b) of this section for unpredictable contingent events occurring on or after April 1, 2011 and benefits are required to be frozen on and after April 1, 2011 under paragraph (e) of this section. (iv) Once the enrolled actuary for the plan cer- tifies that the AFTAP for 2011 for Plan T is 66%, Plan T is no longer subject to the restriction under paragraph (d)(1) of this section, but it is subject to the restriction under paragraph (d)(3) of this section. Plan T must resume paying prohibited payments, as restricted under paragraph (d)(3) of this section, for participants who elect benefits in accelerated forms of payment and who have an annuity starting date of June 1, 2011, or later. In addition, Plan T must provide benefits for any unpredictable contingent event occurring on or after January 1, 2011, to the extent permitted under paragraph (b) of this section. Similarly, Plan T is no longer subject to the restriction on benefit accruals under paragraph (e) of this section, and benefit accruals resume under Plan T beginning June 1, 2011, unless Plan T provides otherwise. Example 3. (i) The facts are the same as inEx- ample 1, except that the enrolled actuary for the plan does not certify the 2011 AFTAP until November 15, 2011. Beginning October 1, 2011, Plan T is conclusively presumed to have an AFTAP of less than 60%, in accordance with the provisions of paragraph (h)(3) of this section. Accordingly, Plan T is subject to the restrictions in paragraphs (b), (d)(1), and (e) of this section commencing on October 1, 2011. (ii) On November 15, 2011, the enrolled actu- ary for the plan certifies that the AFTAP for 2011 is 72%. However, because the certification occurred after September 30, 2011, the certification does not constitute a new section 436 measurement date, and Plan T continues to be subject to the restrictions on unpredictable contingent event benefits, prohibited payments, and benefit accruals under paragraphs (b), (d)(1), and (e) of this section. (iii) Beginning January 1, 2012, the 2012 AFTAP for Plan T is presumed to be equal to the 2011 AFTAP of 72%. Because the presumed 2012 AFTAP is between 70% and 80% and, therefore, paragraph (h)(2) of this section (which provides for a 10 percentage point reduction in a plan’s AFTAP in certain cases) will not apply, the presumed AFTAP will remain at 72% until the plan’s enrolled actuary certifies the AFTAP for 2012 or until paragraph (h)(3) of this section applies on the first day of the 10th month of the plan year. Because the presumed AFTAP is 72%, Plan T is no longer subject to the restrictions on prohibited payments under paragraph (d)(1) of this section, and Plan T must provide benefits for any unpredictable contingent event occurring on or after January 1, 2012, to the extent permitted under paragraph (b) of this section and must resume paying prohibited payments, as restricted under paragraph (d)(3) of this section, that are elected by participants with annuity starting dates on or after January 1, 2012. Similarly, Plan T is no longer subject to the restriction on benefit accruals under paragraph (e) of this section, and benefit accruals resume under Plan T beginning January 1, 2012, unless Plan T provides otherwise. Example 4. (i) The facts are the same as inEx- ample 3, except that the enrolled actuary for the plan does not issue a certification of the AFTAP for 2011 for Plan T until February 1, 2012. (ii) Beginning on January 1, 2012, the presump- tions in paragraph (h)(1)(iii) of this section apply for the 2012 plan year. Because the enrolled actuary for December 14, 20098412009–50 I.R.B. the plan has not certified the AFTAP for 2011, the presumed AFTAP as of October 1, 2011, continues to apply for the period beginning January 1, 2012. Therefore, the AFTAP as of January 1, 2012, is presumed to be less than 60%, and Plan T continues to be subject to the restrictions on unpredictable contingent event benefits under paragraph (b) of this section, prohibited payments under paragraph (d)(1) of this section, and benefit accruals under paragraph (e)ofthissection. (iii) On February 1, 2012, the enrolled actuary for the plan certifies that the AFTAP for 2011 for Plan T is 65%. Because the enrolled actuary for the plan has not issued a certification of the AFTAP for 2012, the provisions of paragraph (h)(1)(iii)(B) of this section apply. Accordingly, the certification date for the 2011 AFTAP (February 1, 2012) is a section 436 measurement date and 65% is the presumed AFTAP for 2012 beginning on that date. (iv) Because the presumed AFTAP is over 60% but less than 80%, the full restriction on prohibited payments under paragraph (d)(1) of this section no longer applies; however, the partial restriction on prohibited payments under paragraph (d)(3) of this section applies beginning on February 1, 2012. Therefore, Plan T must pay a portion of the prohibited payments elected by participants with annuity starting dates on or after February 1, 2012. Furthermore, based on the presumed AFTAP of 65%, the restriction on unpredictable contingent event benefits under paragraph (b) of this section ceases toapplyforeventsoccurringonorafterFebruary 1, 2012, to the extent permitted under paragraph (b) of this section and the restriction on benefit accruals under paragraph (e) of this section no longer applies so that, unless Plan T provides otherwise, benefit accruals will resume as of February 1, 2012. Example 5. (i)ThefactsarethesameasinEx- ample 3, except that the enrolled actuary for the plan does not issue a certification of the actual AFTAP for Plan T as of January 1, 2011, until May 1, 2012. (ii) Beginning on January 1, 2012, the presump- tions in paragraph (h)(1)(iii) of this section apply for the 2012 plan year. Because the enrolled actu- ary for the plan has not certified the actual AFTAP as of January 1, 2011, the presumed AFTAP as of October 1, 2011, continues to apply for the period beginning January 1, 2012. Therefore, the AFTAP as of January 1, 2012, is presumed to be less than 60%, and Plan T continues to be subject to the restrictions on unpredictable contingent event benefits under paragraph (b) of this section, on prohibited payments under paragraph (d)(1) of this section, and on benefit accruals under paragraph (e) of this section. (iii) Since the enrolled actuary for the plan has not issued a certification of the actual AFTAP as of January 1, 2011, the rules of paragraph (h)(1)(iii) of this section apply beginning April 1, 2012, and the AFTAP is presumed to remain less than 60%. Plan T continues to be subject to the restrictions on unpredictable contingent event benefits under paragraph (b) of this section, on prohibited payments under paragraph (d)(1) of this section, and on benefit accruals under paragraph (e) of this section. (iv) On May 1, 2012, the enrolled actuary for the plan certifies that the actual AFTAP for 2011 for Plan T is 65%. Because the enrolled actuary for the plan has not issued a certification of the actual AFTAP as of January 1, 2012, the provisions of paragraph (h)(2)(iv) of this section apply. Accordingly, on May 1, 2012, the 2012 AFTAP is presumed to be 10 percentage points less than the 2011 AFTAP, or 55%, so that the restrictions under paragraphs (b), (d), and (e) of this section continue to apply. Example 6. (i) The enrolled actuary for Plan V certifies the plan’s AFTAP for 2010 to be 69%. Based on this AFTAP, Plan V is subject to the restriction in paragraph (d)(3) of this section, and can only pay a portion (generally 50%) of the prohibited payments otherwise due to plan participants who commence benefits while the restriction is in effect. The enrolled actuary for the plan does not issue a certification of the AFTAP for 2011 until June 1, 2011. (ii) Beginning January 1, 2011, Plan V’s 2011 AFTAP is presumed to be equal to the 2010 AFTAP, or 69%, under the provisions of paragraph (h)(1)(ii) of this section. Accordingly, the restriction on prohibited payments in paragraph (d)(3) of this section continues to apply from January 1, 2011, throughMarch31,2011,andPlanTmayonlypaya portion of the prohibited payments otherwise due to participants who commence benefit payments during this period. (iii) Beginning April 1, 2011, the provisions of paragraph (h)(2)(ii) of this section apply. Under those provisions, the AFTAP beginning April 1, 2011, is presumed to be 10 percentage points lower than the presumed 2011 AFTAP, or 59%. Because Plan V’s presumed AFTAP for 2011 is less than 60%, the restrictions on unpredictable contingent event benefits under paragraph (b) of this section, on the payment of accelerated benefit distributions under paragraph (d)(1) of this section, and on benefit accruals under paragraph (e) of this section apply. Accordingly, Plan V cannot pay any unpredictable contingent event benefits for events occurring on or after April 1, 2011, or prohibited payments to participants with an annuity starting date on or after April 1, 2011, and benefit accruals cease as of April 1, 2011. (iv) On June 1, 2011, Plan V’s enrolled ac- tuary certifies that the plan’s AFTAP for 2011 is 71%. Therefore, the restrictions on unpredictable contingent event benefits, prohibited payments, and benefit accruals in paragraphs (b), (d)(1), and (e) of this section no longer apply, but the partial restriction on benefit payments in paragraph (d)(3) of this section does apply. Accordingly, Plan V begins paying unpredictable contingent event benefits for events occurring on or after January 1, 2011, to the extent permitted under paragraph (b) of this section and a portion of the prohibited payments elected by participants with an annuity starting date on or after June 1, 2011. Benefit accruals previously restricted under paragraph (e) of this section resume effective June 1, 2011, unless Plan V provides otherwise. (v) Participants who were not able to elect an ac- celerated form of payment during the period from April 1, 2011, through May 31, 2011, would be able to elect a new annuity starting date with a partial distribution of accelerated benefits effective June 1, 2011, if Plan V contained a preexisting provision per- mitting such an election after the restriction in para- graph (d)(1) of this section no longer applies. This is permitted because, under paragraph (a)(4)(ii)(B) of this section, a preexisting provision of this type is not considered a plan amendment and is therefore not subject to the plan amendment restriction in para- graph (c) of this section even though Plan V’s AFTAP for 2011 is less than 80%. (vi) Benefit accruals for the period beginning April 1, 2011, through May 31, 2011, would be auto- matically restored if Plan V contained a preexisting provision to retroactively restore benefit accruals restricted under paragraph (e) of this section after the restriction no longer applies. This is permitted because under paragraph (a)(4)(ii)(B) of this section, a preexisting provision of this type is not considered to be a plan amendment and is therefore not subject to the plan amendment restriction in paragraph (c) of this section even though Plan V’s AFTAP for 2011 is less than 80%, because the period of the restriction did not exceed 12 months. (6)Examples of rules of paragraph (h)(4) of this section. The following ex- amples illustrate the rules of paragraph (h)(4) of this section: Example 1. (i) Plan Y is a non-collectively bar- gained defined benefit plan with a plan year that is the calendar year and a valuation date of January 1. Plan Y does not have a funding standard carryover balance or a prefunding balance. Plan Y’s sponsor is not in bankruptcy. In June of 2010, the actual AFTAP for 2010 for Plan Y is certified as 65%. On the last day of the 2010 plan year, Plan Y is subject to the restrictions in paragraph (d)(3) of this section. (ii) The enrolled actuary for the plan issues a range certification on March 21, 2011, certifying that the AFTAP for 2011 is at least 60% and less than 80%. Because the certification was issued before the first day of the 4th month of the plan year, the 10 percentage point reduction in the presumed AFTAP under paragraph (h)(2) of this section does not apply. In addition, because the enrolled actuary for the plan has certified that the AFTAP is within this range, Plan Y is not subject to the full restriction on accelerated benefit payments in paragraph (d)(1) of this section or the restriction on benefit accruals under paragraph (e)ofthissection. (iii) On August 1, 2011, the enrolled actuary for the plan certifies that the actual AFTAP as of January 1, 2011, is 75.86%. This AFTAP falls within the previously certified range. Thus, the change is immaterial under paragraph (h)(4)(iii) of this section and the new certification does not change the applicability or inapplicability of the restrictions in this section. Example 2. (i) The facts are the same as inEx- ample 1, except that the plan sponsor makes an addi- tional contribution for the 2010 plan year on Septem- ber 1, 2011, that is not added to the prefunding bal- ance. Reflecting this contribution, the enrolled actu- ary for the plan issues a revised certification stating that the AFTAP for 2011 is 81%, and Plan Y is no longer subject to the restriction on accelerated benefit payments under paragraph (d)(3) of this section on that date. (ii) Although the revised certification changes the applicability of the restriction under paragraph (d)(3) of this section, the change is not a material change under paragraph (h)(4)(iii)(C)(1)ofthissectionbe- cause the AFTAP changed only because of additional contributions for the preceding year made by the plan sponsor after the date of the enrolled actuary’s initial certification. (i) [Reserved] 2009–50 I.R.B.842December 14, 2009 (j)Definitions. For purposes of this sec- tion— (1)Adjusted funding target attainment percentage—(i)In general. Except as oth- erwise provided in this paragraph (j)(1), theadjusted funding target attainment per- centagefor a plan year is the fraction (ex- pressed as a percentage)— (A)Thenumeratorofwhichisthead- justed plan assets for the plan year de- scribed in paragraph (j)(1)(ii) of this sec- tion; and (B) The denominator of which is the ad- justed funding target for the plan year de- scribed in paragraph (j)(1)(iii) of this sec- tion. (ii)Adjusted plan assets—(A)General rule. The adjusted plan assets for a plan year is generally determined by— (1) Subtracting the plan’s funding stan- dard carryover balance and prefunding balance as of the valuation date from the value of plan assets for the plan year under section 430(g) (but treating the resulting value as zero if it is below zero); and (2) Increasing the resulting value by the aggregate amount of purchases of annuities for participants and beneficia- ries (other than participants who, at the time of the purchase, were highly com- pensated employees as defined in section 414(q), which definition includes highly compensated former employees under §1.414(q)–1T, Q&A–4) which were made by the plan during the preceding 2 plan years, to the extent not included in plan assets for purposes of section 430. (B)Special rule for plans that are fully funded without regard to subtraction of funding balances from plan assets.If for a plan year the value of plan assets determined without subtracting the fund- ing standard carryover balance and the prefunding balance is not less than 100 percent of the plan’s funding target deter- mined under section 430 without regard to section 430(i), then the adjusted value of plan assets used in the calculation of the adjusted funding target attainment per- centage for the planyear is determined without subtracting the plan’s funding standard carryover balance and prefunding balance from the value of plan assets for the plan year. (C)Special rule for plans with section 436 contributions.Ifanemployermakesa contribution described in paragraph (f)(2) of this section after the valuation date in order to avoid or terminate limitations under section 436, then the present value of that contribution (determined using the effective interest rate under section 430(h)(2)(A) for the plan year) is permit- tedtobeaddedtotheplanassetsasofthe valuation date for purposes of determining or redetermining the adjusted funding tar- get attainment percentage for a plan year, but only if the liability for the benefits, amendment, or accruals that would have been limited (but for the contribution) is included in determining the adjusted fund- ing target for the plan year. (D)Transition rule.Paragraph (j)(1)(ii)(B) of this section is applied to plan years beginning after 2007 and before 2011 by substituting for “100 percent” the applicable percentage determined in accordance with the following table: In the case of a plan year beginning in calendar year: The applicable percentage is: 2008 ................................................... 92 2009 ................................................... 94 2010 ................................................... 96 (E)Limitation on transition rule. Para- graph (j)(1)(ii)(D) of this section does not apply with respect to the current plan year unless, for each plan year beginning after December 31, 2007, and before the cur- rent plan year, the value of plan assets de- termined without subtracting the funding standard carryover balance and the pre- funding balance is not less than the product of— (1) The applicable percentage deter- mined under paragraph (j)(1)(ii)(D) of this section for that plan year; and (2) The funding target (determined without regard to the at-risk rules of sec- tion 430(i)) for that plan year. (iii)Adjusted funding target—(A)In general. Except as otherwise provided in this paragraph (j)(1)(iii), the adjusted funding target equals the funding target for the plan year, determined in accordance with the rules set forth in §1.430(d)–1, but without regard to the at-risk rules under section 430(i), increased by the aggregate amount of purchases of annuities that were added to assets for purposes of determin- ing the plan’s adjusted plan assets under paragraph (j)(1)(ii)(A)(2) of this section. The definition of adjusted funding target for a plan maintained by a commercial air- line for which the plan sponsor has made the election described in section 402(a)(1) of Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780), is the same as if it did not make such an election. (B)Adjusted funding target after up- dated certification. After the plan’s en- rolled actuary prepares an updated cer- tification of the adjusted funding target attainment percentage under paragraph (h)(4)(v) of this section, the adjusted fund- ing target will also be updated to reflect unpredictable contingent event benefits and plan amendments not already taken into account. (iv)Plans with zero adjusted funding target. If the adjusted funding target for the plan year is zero, then the adjusted funding target attainment percentage for the plan year is 100 percent. (v)Plans with end of year valuation dates.[Reserved] (vi)Special rule for plans that are the result of a merger.[Reserved] (vii)Special rule for plans that are in- volved in a spinoff.[Reserved] (2)Annuity starting date—(i)Gen- eral rule.Thetermannuity starting date means, as applicable— (A) The first day of the first period for which an amount is payable as an annuity as described in section 417(f)(2)(A)(i); (B) In the case of a benefit not payable in the form of an annuity, the annuity start- ing date is the annuitystarting date for the qualified joint and survivor annuity that is payable under the plan at the same time as December 14, 20098432009–50 I.R.B. the benefit that is not payable as an annu- ity; (C) In the case of an amount payable under a retroactive annuity starting date, the benefit commencement date (instead of the date determined under paragraphs (j)(2)(i)(A) and (B) of this section); (D) The date of the purchase of an ir- revocable commitment from an insurer to pay benefits under the plan; and (E) The date of any transfer to another plan described in paragraph (j)(6)(i)(C) of this section. (ii)Special rule for beneficiaries.Ifa participant commences benefits at an an- nuitystartingdate(asdefinedinparagraph (j)(2)(i) of this section) and, after the death of the participant, payments continue to a beneficiary, the annuity starting date for the payments to the participant constitutes the annuity starting date for payments to the beneficiary, except that a new annuity starting date occurs (determined by apply- ing paragraph (j)(2)(i)(A), (B), and (C) of this section to the payments to the benefi- ciary) if the amounts payable to all bene- ficiaries of the participant in the aggregate at any future date can exceed the monthly amount that would have been paid to the participant had he or she not died. (3)First effective plan year.Thefirst effective plan yearfor a plan is the first plan year to which section 436 applies to the plan under paragraph (k)(1) or (k)(2) of this section. (4)Funding target. In general, the funding targetmeans the funding tar- get under §1.430(d)–1, without regard to the at-risk rules under section 430(i) and §1.430(i)–1. However, solely for purposes of sections 436(b)(2)(A) and (c)(2)(A), the funding target means the funding target under §1.430(i)–1 if the plan is in at-risk status for the plan year. (5)Prior plan year adjusted funding target attainment percentage—(i)In gen- eral. Except as otherwise provided in this paragraph (j)(5), theprior plan year ad- justed funding target attainment percent- ageis the adjusted funding target attain- ment percentage determined under para- graph (j)(1) of this section for the imme- diately preceding plan year. (ii)Special rules—(A)Special rule for new plans. In the case of a plan established during the plan year that was not the result of a merger or spinoff, the adjusted fund- ing target attainment percentage is equal to 100 percent for plan years before the plan was established. Except as otherwise provided in paragraph (j)(5)(ii)(B) of this section, a plan that has a predecessor plan in accordance with §1.415(f)–1(c) is not a plan established during the plan year under this paragraph (j)(5)(ii)(A). Instead, if the plan has a predecessor plan, the adjusted funding target attainment percentage for the prior plan year is the adjusted funding target attainment percentage for the prior plan year for the predecessor plan (and that predecessor plan’s adjusted funding target attainment percentage is treated as equal to 100 percent on any date on which it is ter- minated, other than in a distress termina- tion). (B)Special rules for plans that are the result of a merger.[Reserved] (C)Special rules for plans that are in- volved in a spinoff.[Reserved] (iii)Special rules for 2007 plan year—(A)General determination of 2007 adjusted funding target attainment per- centage. In the case of the first plan year beginning in 2008, except as otherwise provided in this paragraph (j)(5), the ad- justed funding target attainment percent- age for the immediately preceding plan year (the 2007 plan year) is determined as the fraction (expressed as a percentage)— (1)Thenumeratorofwhichisthevalue of plan assets determined under paragraph (j)(5)(iii)(B) of this section increased by the aggregate amount of purchases of annuities for participants and beneficia- ries (other than participants who, at the time of the purchase, were highly com- pensated employees as defined in section 414(q), which definition includes highly compensated former employees under §1.414(q)–1T, Q&A–4) which were made by the plan during the preceding 2 plan years, to the extent not included in plan assets under section 412(c)(2) (as in effect prior to amendment by PPA ’06); and (2) The denominator of which is the plan’s current liability determined pur- suant to section 412(l)(7) (as in effect prior to amendment by PPA ’06) on the valuation date for the 2007 plan year increased by the aggregate amount of pur- chases of annuities that were added to the plan assets under the rules of paragraph (j)(5)(iii)(A)(1)ofthissection. (B)General determination of value of plan assets—(1)In general.Thevalue of plan assets for purposes of this para- graph (j)(5)(iii) is determined under sec- tion 412(c)(2) as in effect for the 2007 plan year, except that the value of plan assets prior to subtracting the plan’s funding stan- dard account credit balance described in paragraph (j)(5)(iii)(B)(2)ofthissection must be adjusted so that the value of plan assets is neither less than 90 percent of the fair market value of plan assets nor greater than 110 percent of the fair market value of plan assets on the valuation date for that plan year. (2)Subtraction of credit balance.Ifa plan has a funding standard account credit balance as of the valuation date for the 2007 plan year, that balance is subtracted from the value of plan assets described in paragraph (j)(5)(iii)(B)(1)ofthissec- tion as of that valuation date. However, the subtraction does not apply if the value of plan assets prior to adjustment under paragraph (j)(5)(iii)(B)(1)ofthissectionis greater than or equal to 90 percent of the plan’s current liability as of the valuation date for the 2007 plan year. (3)Effect of funding standard car- ryover balance reduction for 2007 plan year. Notwithstanding paragraph (j)(5)(iii)(B)(2)ofthissection,if,forthe first plan year beginning in 2008, the em- ployer has made an election to reduce some or all of the funding standard car- ryover balance as of the first day of that year in accordance with §1.430(f)–1(e), then the present value (determined as of the valuation date for the 2007 plan year using the valuation interest rate for that plan year) of the amount so reduced is not treated as part of the funding standard account credit balance when that balance is subtracted from the asset value under paragraph (j)(5)(iii)(B)(2)ofthissection. (C)Plan with end-of-year valuation date. With respect to the first plan year be- ginning in 2008, if the plan had a valuation date under section 412 that was the last day of the plan year for each of the plan years beginning in 2006 and 2007, the adjusted funding target attainment percentage for the2007planyearmaybedeterminedas the fraction (expressed as a percentage)— (1) The numerator of which is the value of plan assets determined under paragraph (j)(5)(iii)(D) of this section increased by the aggregate amount of purchases of annuities for participants and beneficia- ries (other than participants who, at the time of the purchase, were highly com- 2009–50 I.R.B.844December 14, 2009 pensated employees as defined in section 414(q), which definition includes highly compensated former employees under §1.414(q)–1T, Q&A–4) which were made by the plan during the preceding 2 plan years, to the extent not included in plan assets under section 412(c)(2) (as in effect prior to amendment by PPA ’06); and (2) The denominator of which is the plan’s current liability determined pur- suant to section 412(l)(7) (as in effect prior to amendment by PPA ’06) on the valu- ation date for the second plan year that begins before 2008 (the 2006 plan year), including the increase in current liability for the 2006 plan year, increased by the ag- gregate amount of purchases of annuities that were added to the plan assets under the rules of paragraph (j)(5)(iii)(C)(1)of this section. (D)Special asset determinations for 2006 adjusted funding target attainment percentage—(1)General rule.Ifthead- justed funding target attainment percent- age for the 2007 plan year is determined under the rules of paragraph (j)(5)(iii)(C) of this section, then the value of plan assets is determined as the value of plan assets under section 412(c)(2) as in effect for the 2006 plan year, adjusted as provided in this paragraph (j)(5)(iii)(D). (2)Inclusion of contributions for 2006. Contributions made for the 2006 plan year are taken into account in determining the value of plan assets, regardless of whether those contributions are made during the plan year or after the end of the plan year and within the period specified under section 412(c)(10) (as in effect prior to amendment by PPA ’06). (3)Restriction to 90–110 percent cor- ridor. The value of plan assets taking into account the amount of contributions made for the 2006 plan year is increased or decreased, as necessary, so that it is nei- ther less than 90 percent of the fair mar- ket value of plan assets nor greater than 110 percent of the fair market value of plan assets on the valuation date for the 2006 plan year (taking into account assets attrib- utable to contributions for the 2006 plan year). (4)Subtraction of credit balance.The plan’s funding standard account credit balance as of the end of the 2006 plan year is generally subtracted from the value of plan assets determined after application of paragraph (j)(5)(iii)(D)(3)ofthissec- tion. However, this subtraction does not apply if the value of plan assets is greater than or equal to 90 percent of the plan’s current liability determined under section 412(l)(7) (as in effect prior to amendment by PPA ’06) on the valuation date for the 2006 plan year. (E)Special rules for mergers and spinoffs.Rulessimilartotherulesof paragraph (j)(5)(ii) of this section apply for purposes of determining the adjusted funding target attainment percentage for the 2007 plan year in the case of a newly established plan, a plan that is the result of a merger of two plans, or a plan that is in involved in a spinoff. (6)Prohibited payment—(i)Gen- eral rule.Thetermprohibited payment means— (A) Any payment for a month that is in excess of the monthly amount paid under a straight life annuity (plus any social secu- rity supplements described in the last sen- tence of section 411(a)(9)) to a participant or beneficiary whose annuity starting date occurs during any period that a limitation under paragraph (d) of this section is in ef- fect; (B) Any payment for the purchase of an irrevocable commitment from an insurer to pay benefits; (C) Any transfer of assets and liabili- ties to another plan maintained by the same employer (or by any member of the em- ployer’s controlled group) that is made in order to avoid or terminate the application of section 436 benefit limitations; and (D) Any other amount that is identi- fied as a prohibited payment by the Com- missioner in revenue rulings and proce- dures, notices, and other guidance pub- lished in the Internal Revenue Bulletin (see §601.601(d)(2) relating to objectives and standards for publishing regulations, rev- enue rulings and revenue procedures in the Internal Revenue Bulletin). (ii)Special rule for beneficiaries.In the case of a beneficiary that is not an in- dividual, the amount that is a prohibited payment is determined by substituting for the amount in paragraph (j)(1)(i)(A) of this section the monthly amount payable in in- stallments over 240 months that is actuari- ally equivalent to the benefit payable to the beneficiary. (7)Section 436 contributions.Section 436 contributionsare the contributions de- scribed in paragraph (f)(2) of this section that are made in order to avoid the applica- tion of section 436 limitations under a plan for a plan year. (8)Section 436 measurement date.A section 436 measurement dateis the date that is used to determine when the limi- tations of sections 436(d) and 436(e) ap- ply or cease to apply, and is also used for calculations with respect to applying the limitations of paragraphs (b) and (c) of this section. See paragraphs (h)(1)(i), (h)(2)(iii)(B), (h)(2)(iv)(B), and (h)(3)(i) of this section regarding section 436 mea- surement dates that result from application of the presumptions under paragraph (h) of this section. (9)Unpredictable contingent event. Anunpredictable contingent event benefit means any benefit or increase in benefits to the extent the benefit or increase would not be payable but for the occurrence of an unpredictable contingent event. For this purpose, anunpredictable contingent event means a plant shutdown (whether full or partial) or similar event, or an event (including the absence of an event) other than the attainment of any age, perfor- mance of any service, receipt or derivation of any compensation, or the occurrence of death or disability. For example, if a plan provides for an unreduced early re- tirement benefit upon the occurrence of an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or the occurrence of death or disability, then that unreduced early retirement benefit is an unpredictable contingent event benefit to the extent of any portion of the benefit that would not be payable but for the occur- rence of the event, even if the remainder of the benefit is payable without regard to the occurrence of the event. Similarly, if a plan includes a benefit payable upon the presence (including the absence) of circumstances specified in the plan (other than the attainment of any age, perfor- mance of any service, receipt or derivation of any compensation, or the occurrence of death or disability), but not upon a severance from employment that does not include those circumstances, that benefit is an unpredictable contingent event benefit. (10)Examples. The following exam- ples illustrate the rules of this paragraph (j): Example 1. (i) Plan S is a non-collectively bar- gained defined benefit plan with a plan year that is December 14, 20098452009–50 I.R.B. the calendar year and a valuation date of January 1. The first effective plan year is 2008. Plan S is not in at-risk status for 2008. (ii) As of January 1, 2008, Plan S has a value of plan assets (equal to the market value of assets) of $2,100,000 and a funding standard carryover balance of $200,000. During 2006, assets from Plan S were used to purchase a total of $100,000 in annuities for employees other than highly compensated employ- ees. No annuities were purchased during 2007. On May 1, 2008, the enrolled actuary for the plan deter- mines that the funding target as of January 1, 2008, is $2,500,000. (iii) The adjusted value of assets for Plan S as of January 1, 2008, is $2,000,000 (that is, plan assets of $2,100,000, plus annuity purchases of $100,000, and minus the funding standard carryover balance of $200,000). The adjusted funding target is $2,600,000 (that is, the funding target of $2,500,000, increased by the annuity purchases of $100,000). (iv) Based on the above adjusted plan assets and adjusted funding target, the adjusted funding target attainment percentage (AFTAP) as of January 1, 2008, would be 76.92%. Since the AFTAP is less than 80% but is at least 60%, Plan S is subject to the restrictions in paragraph (d)(3) of this section. Example 2. (i)ThefactsarethesameasinEx- ample 1, except that it is reasonable to expect that the plan sponsor will make a contribution of $80,000 to Plan S for the 2007 plan year by September 15, 2008. This amount is in excess of the minimum re- quired contribution for 2007. The plan sponsor elects to reduce the funding standard carryover balance by $80,000. (ii) Because it is reasonable to expect that the $80,000 will be contributed by the plan sponsor, that amount is taken into account when the enrolled actu- ary certifies the 2008 AFTAP under the special rule in paragraph (h)(4)(i)(B) of this section for plan years beginning before 2009. Accordingly, the enrolled actuary for the plan certifies the 2008 AFTAP as 80% (that is, adjusted plan assets of $2,080,000, reflecting the $80,000 in contributions receivable, divided by the adjusted funding target of $2,600,000). (iii) The ability to take contributions into ac- count before they are actually paid to the plan is available only for plan years beginning before 2009. Furthermore, if the employer does not actually make the contribution and the difference between the incorrect certification and the corrected AFTAP constitutes a material change, the plan will have violated section 401(a)(29) or will not have been operated in accordance with its terms. Example 3. (i) Plan R is a defined benefit plan with a plan year that is the calendar year and a valu- ation date of January 1. Section 436 applies to Plan R for 2008. The valuation interest rate for the 2007 plan year for Plan R is 7%. The fair market value of assets of Plan R as of January 1, 2007, is $1,000,000. The actuarial value of assets of Plan R as of January 1, 2007, is $1,200,000. The current liability of Plan R as of January 1, 2007, is $1,500,000. The funding stan- dard account credit balance as of January 1, 2007, is $80,000. The funding standard carryover balance of Plan R is $50,000 as of the beginning of the 2008 plan year. The sponsor of Plan R, Sponsor T, elects in 2008 to reduce the funding standard carryover balance in accordance with §1.430(f)–1 by $45,000. No annu- ities were purchased using plan assets during 2005 or 2006. (ii) Pursuant to paragraph (j)(5)(iii)(B)(1)ofthis section, the asset value used to determine the AFTAP for the 2007 plan year is limited to 110% of the fair market value of assets on January 1, 2007, or $1,100,000 (110% of $1,000,000). (iii) Pursuant to paragraph (j)(5)(iii)(B)(2)of this section, the funding standard account credit balance as of January 1, 2007, is subtracted from the asset value used to determine the AFTAP for the 2007 plan year. However, pursuant to paragraph (j)(5)(iii)(B)(3) of this section, the present value of the amount by which Sponsor T elected to reduce the funding standard carryover balance in 2008 is not subtracted. (iv) The present value, determined at an interest rate of 7%, of the $45,000 reduction in the funding standard carryover balance elected by Sponsor T in 2008 is $42,056. Thus, $42,056 is not subtracted from the 2007 plan year asset value. Accordingly, the funding standard account credit balance that is sub- tracted from the 2007 plan year asset value is $37,944 (that is, $80,000 less $42,056). (v) Thus, the asset value that is used to deter- mine the FTAP for the 2007 plan year is $1,100,000 less $37,944, or $1,062,056. Accordingly, for pur- poses of this section, the FTAP for the 2007 plan year for Plan R is 70.8% (that is, $1,062,056 divided by $1,500,000). Example 4. (i) Plan T is a non-collectively bar- gained defined benefit plan that was established prior to 2007. Plan T has a plan year that is the calendar year and a valuation date of January 1. The first ef- fective plan year is 2008; the plan met the conditions of paragraph (j)(1)(ii)(E) of this section for 2008. As of January 1, 2009, Plan T has a value of plan assets (equal to the market value of assets) of $3,000,000, a funding standard carryover balance of $150,000, and a prefunding balance of $50,000. During 2007 and 2008, assets from Plan T were used to purchase a to- tal of $400,000 in annuities for employees other than highly compensated employees. The funding target forPlanT(withoutregardtotheat-riskrulesofsec- tion 430(i)) is $3,200,000 as of January 1, 2009. (ii) The plan’s funding status is calculated in ac- cordance with paragraph (j)(1)(ii)(B) of this section to determine whether the special rule for fully-funded plans applies to Plan T. Accordingly, the value of plan assets determined without subtracting the funding standard carryover balance and the prefund- ing balance is 93.75% of the plan’s funding target ($3,000,000 ÷ $3,200,000). The applicable transi- tional percentage in paragraph (j)(1)(ii)(D) of this section is 94% for 2009. Because the percentage calculated above is less than 94%, the transition rule does not apply to Plan T. (iii) Accordingly, the January 1, 2009, AFTAP for Plan T is calculated without reflecting the special rule in paragraph (j)(1)(ii)(B) of this section. The AFTAP as of January 1, 2009, is calculated by dividing the adjusted assets by the adjusted funding target. For this purpose, the value of assets is increased by the annuities purchased for nonhighly compensated employees during 2007 and 2008, and decreased by the funding standard carryover balance and the prefunding balance as of January 1, 2009, resulting in an adjusted asset value of $3,200,000 (that is, $3,000,000 + $400,000 - $150,000 - $50,000). The funding target is increased by the annuities purchased for nonhighly compensated employees during 2007 and 2008, resulting in an adjusted funding target of $3,600,000 (that is, $3,200,000 + $400,000). The AFTAP for Plan T for 2009 is therefore $3,200,000 ÷ $3,600,000, or 88.89%. (k)Effective/applicability dates—(1) Statutory effective date. Section 436 gen- erally applies to plan years beginning on or after January 1, 2008. The applicability of section 436 for purposes of determining the minimum required contribution is de- layed for certain plans in accordance with sections 104 through 106 of PPA ’06. (2)Collectively bargained plan excep- tion—(i)In general. In the case of a col- lectively bargained plan that is maintained pursuant to one or more collective bargain- ing agreements between employee repre- sentatives and one or more employers rat- ified before January 1, 2008, section 436 does not apply to plan years beginning be- fore the earlier of— (A) January 1, 2010; or (B)Thelaterof— (1) The date on which the last such collective bargaining agreement relating to the plan terminates (determined without regard to any extension thereof agreed to after August 17, 2006); or (2) The first day of the first plan year to which section 436 would (but for this paragraph (k)(2)) apply. (ii)Treatment of certain plan amend- ments. For purposes of this paragraph (k)(2), any plan amendment made pur- suant to a collective bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by section 436 is not treated as a termination of the collective bargaining agreement. (iii)Treatment of plans with both col- lectively bargained and non-collectively bargained employees. In the case of a plan with respect to which a collective bargaining agreement applies to some, but not all, of the plan participants, the plan is considered a collectively bargained plan for purposes of this paragraph (k)(2) if it is considered a collectively bargained plan under the rules of paragraph (a)(5)(ii)(B) of this section. (3)Effective date/applicability date of regulations. This section applies to plan years beginning on or after January 1, 2010. For plan years beginning before January 1, 2010, plans are permitted to 2009–50 I.R.B.846December 14, 2009 rely on the provisions set forth in this section for purposes of satisfying the re- quirements of section 436. PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 9. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 10. In §602.101, paragraph (b) is amended by adding entries for §§1.430(f)–1, 1.430(g)–1, 1.430(h)(2)–1, and 1.436–1 to the table to read as follows: §602.101 OMB Control numbers. ***** (b) * * * CFR part or section where identified and described Current OMB control No. ***** 1.430(f)–1........................................................... 1545–2095 1.430(g)–1........................................................... 1545–2095 1.430(h)(2)– 1 ........................................................... 1545–2095 1.436–1........................................................... 1545–2095 ***** Steven Mille r, Acting Deput y Commissioner for Service s and Enforcement. Approved Se ptember 24, 2009. Michael Mund aca, Acting Assis tant Secretary of the Treas ury(TaxPolicy). (Filed by the Office of the Federal Register on October 14, 2009, 8:45 a.m., and published in the issue of the Federal Register for October 15, 2009, F.R. 53003) December 14, 20098472009–50 I.R.B. Part III. Administrative, Procedural, and Miscellaneous 2010 Limitations Adjusted As Provided in Section 415(d), etc. 1 Notice 2009–94 Section 415 of the Internal Revenue Code (the Code) provides for dollar limi- tations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost-of-living in- creases. Other limitations applicable to deferred compensation plans are also af- fected by these adjustments under § 415. Under § 415(d), the adjustments are to be made pursuant to adjustment proce- dures which are similar to those used to adjust benefit amounts under section 215(i)(2)(A) of the Social Security Act. The limitations that are adjusted by ref- erence to § 415(d) will remain unchanged for 2010. This is because the cost-of-liv- ing index for the quarter ended Septem- ber 30, 2009, is less than the cost-of-liv- ing index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjust- ing benefit amounts, any decline in the ap- plicable index cannotresult in a reduced limitation. For example, the limitation un- der § 402(g)(1) on the exclusion for elec- tive deferrals described in § 402(g)(3) will be $16,500 for 2010, which is the same amount as for 2009. This limitation affects elective deferrals to § 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans. Cost-of-Living Adjusted Limits for 2010 Effective January 1, 2010, the limita- tion on the annual benefit under a defined benefit plan under § 415(b)(1)(A) remains unchanged at $195,000. For partici- pants who separated from service before January 1, 2010, the limitation for defined benefit plans under § 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2009, by 1.0000. The limitation for defined contribution plans under § 415(c)(1)(A) remains un- changed for 2010 at $49,000. The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of § 415(b)(1)(A). After taking into account the applicable round- ing rules, the amounts for 2010 are as fol- lows: The limitation under § 402(g)(1) on the exclusion for elective deferrals described in § 402(g)(3) remains un- changed at $16,500. The annual compensation limit un- der §§ 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains un- changed at $245,000. The dollar limitation under § 416(i)(1)(A)(i) concerning the defi- nition of key employee in a top-heavy plan remains unchanged at $160,000. The dollar amount under § 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5-year distribution period remains unchanged at $195,000. The limitation used in the definition of highly compensated employee under § 414(q)(1)(B) remains unchanged at $110,000. The dollar limitation under § 414(v)(2)(B)(i) for catch-up con- tributions to an applicable employer plan other than a plan described in § 401(k)(11) or 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under § 414(v)(2)(B)(ii) for catch-up contri- butions to an applicable employer plan described in § 401(k)(11) or 408(p) for individuals aged 50 or over remains unchanged at $2,500. The annual compensation limitation under § 401(a)(17) for eligible partic- ipants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjust- ments to the compensation limitation under the plan under § 401(a)(17) to be taken into account, remains unchanged at $360,000. The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains un- changed at $550. The limitation under § 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500. The limitation on deferrals under § 457(e)(15) concerning deferred com- pensation plans of state and local gov- ernments and tax-exempt organizations remains unchanged at $16,500. The compensation amounts under § 1.61–21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under § 1.61–21(f)(5)(iii) remains un- changed at $195,000. The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment un- der § 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2010 are as follows: The adjusted gross income limita- tion under § 25B(b)(1)(A) for determin- ing the retirement savings contribution credit for taxpayers filing a joint return is increased from $33,000 to $33,500; the limitation under § 25B(b)(1)(B) re- mains unchanged at $36,000; and the limitation under § 25B(b)(1)(C) and (D) remains unchanged at $55,500. The adjusted gross income limita- tion under § 25B(b)(1)(A) for deter- mining the retirement savings contri- bution credit for taxpayers filing as head of household is increased from $24,750 to $25,125; the limitation un- der § 25B(b)(1)(B) remains unchanged at $27,000; and the limitation under § 25B(b)(1)(C) and (D) remains un- changed at $41,625. The adjusted gross income limita- tion under § 25B(b)(1)(A) for deter- mining the retirement savings contri- bution credit for all other taxpayers is increased from $16,500 to $16,750; the limitation under § 25B(b)(1)(B) remains unchanged at $18,000; and the 1 Based on News Release IR–2009–94 dated October 15, 2009. 2009–50 I.R.B.848December 14, 2009 limitation under § 25B(b)(1)(C) and (D) remains unchanged at $27,750. The deductible amount under § 219(b)(5)(A) for an individual mak- ing qualified retirement contributions remains unchanged at $5,000. The applicable dollar amount under § 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribu- tion for taxpayers who are active partic- ipants filing a joint return or as a qual- ifying widow(er) remains unchanged at $89,000. The applicable dollar amount under § 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpay- ers filing separate returns) is increased from $55,000 to $56,000. The applica- ble dollar amount under § 219(g)(7)(A) for a taxpayer who is not an active par- ticipant but whose spouse is an active participant is increased from $166,000 to $167,000. The adjusted gross income limita- tion under § 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for taxpayers filing a joint return or as a qualifying widow(er) is increased from $166,000 to $167,000. The adjusted gross income limitation under § 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married tax- payers filing separate returns) remains unchanged at $105,000. Drafting Information The principal author of this notice is John Heil of the Employee Plans, Tax Ex- empt and Government Entities Division. For further information regarding the data in this notice, please contact the Employee Plans’ taxpayer assistance telephone ser- vice at 1–877–829–5500 (a toll-free call) between the hours of 8:30 a.m. and 4:30 p.m. Eastern time Monday through Friday. For information regarding the methodology used in arriving at the data in this notice, please e-mail Mr. Heil at RetirementPlanQuestions@irs.gov. December 14, 20098492009–50 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is be- ing made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the new ruling does nothing more than re- state the substance and situation of a previ- ously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The fol lowing abbreviations in current use and for merly used will appear in material publis hedintheBulletin. A—Individual. Acq.—A cquiescence. B—Individual. BE—Beneficiary. BK—Bank . B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cu mulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Coo perative. Ct.D.—Court Decision. CY—County. D—Decede nt. DC—Dummy Corporation. DE—Donee. Del. Order —Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Emp loyer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduc iary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Fo reign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Fed eral Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grante e. GP—General Partner. GR—Grantor. IC—Insura nce Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—No nacquiescence. O—Organization. P—Parent Corporation. PHC—Persona l Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Pa rtnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Re al Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsi diary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Trans feree. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpay er. TR—Trust. TT—Trustee. U.S.C.—Uni ted States Code. X—Corporation. Y—Corporation. Z—Corporat ion. 2009–50 I.R.B.iDecember 14, 2009 Numerical Finding List 1 Bulletins 2009–27 through 2009–50 Announcements: 2009-56, 2009-28 I.R.B.145 2009-57, 2009-29 I.R.B.158 2009-58, 2009-29 I.R.B.158 2009-59, 2009-29 I.R.B.158 2009-60, 2009-30 I.R.B.166 2009-61, 2009-33 I.R.B.246 2009-62, 2009-33 I.R.B.247 2009-63, 2009-33 I.R.B.248 2009-64, 2009-36 I.R.B.319 2009-65, 2009-36 I.R.B.319 2009-66, 2009-37 I.R.B.364 2009-67, 2009-38 I.R.B.388 2009-68, 2009-38 I.R.B.388 2009-69, 2009-40 I.R.B.475 2009-70, 2009-41 I.R.B.499 2009-71, 2009-40 I.R.B.475 2009-72, 2009-41 I.R.B.500 2009-73, 2009-41 I.R.B.500 2009-74, 2009-42 I.R.B.537 2009-75, 2009-42 I.R.B.537 2009-76, 2009-45 I.R.B.627 2009-77, 2009-43 I.R.B.567 2009-78, 2009-44 I.R.B.594 2009-79, 2009-46 I.R.B.628 2009-80, 2009-46 I.R.B.646 2009-81, 2009-46 I.R.B.647 2009-82, 2009-48 I.R.B.720 2009-83, 2009-46 I.R.B.647 2009-84, 2009-47 I.R.B.683 2009-86, 2009-49 I.R.B.759 Notices: 2009-51, 2009-28 I.R.B.128 2009-55, 2009-31 I.R.B.170 2009-57, 2009-29 I.R.B.147 2009-58, 2009-30 I.R.B.163 2009-59, 2009-31 I.R.B.170 2009-60, 2009-32 I.R.B.181 2009-61, 2009-32 I.R.B.181 2009-62, 2009-35 I.R.B.260 2009-63, 2009-34 I.R.B.252 2009-64, 2009-36 I.R.B.307 2009-65, 2009-39 I.R.B.413 2009-66, 2009-39 I.R.B.418 2009-67, 2009-39 I.R.B.420 2009-68, 2009-39 I.R.B.423 2009-69, 2009-35 I.R.B.261 2009-70, 2009-34 I.R.B.255 2009-71, 2009-35 I.R.B.262 2009-72, 2009-37 I.R.B.325 2009-73, 2009-38 I.R.B.369 Notices— Continued: 2009-74, 2009-38 I.R.B.370 2009-75, 2009-39 I.R.B.436 2009-76, 2009-43 I.R.B.554 2009-77, 2009-40 I.R.B.449 2009-78, 2009-40 I.R.B.452 2009-79, 2009-40 I.R.B.454 2009-81, 2009-40 I.R.B.455 2009-82, 2009-41 I.R.B.491 2009-83, 2009-44 I.R.B.588 2009-84, 2009-44 I.R.B.592 2009-85, 2009-45 I.R.B.598 2009-86, 2009-46 I.R.B.629 2009-87, 2009-46 I.R.B.630 2009-88, 2009-47 I.R.B.654 2009-89, 2009-48 I.R.B.714 2009-91, 2009-48 I.R.B.717 2009-94, 2009-50 I.R.B.848 Proposed Regulations: REG-140492-02, 2009-43 I.R.B.559 REG-159704-03, 2009-46 I.R.B.632 REG-160871-04, 2009-47 I.R.B.657 REG-152166-05, 2009-32 I.R.B.183 REG-112994-06, 2009-28 I.R.B.144 REG-127270-06, 2009-42 I.R.B.534 REG-155929-06, 2009-47 I.R.B.665 REG-135005-07, 2009-47 I.R.B.681 REG-136563-07, 2009-41 I.R.B.497 REG-108045-08, 2009-43 I.R.B.557 REG-113289-08, 2009-33 I.R.B.244 REG-116614-08, 2009-42 I.R.B.536 REG-123829-08, 2009-48 I.R.B.719 REG-130200-08, 2009-31 I.R.B.174 REG-139068-08, 2009-43 I.R.B.558 REG-139255-08, 2009-49 I.R.B.747 Revenue Procedures: 2009-30, 2009-27 I.R.B.27 2009-31, 2009-27 I.R.B.107 2009-32, 2009-28 I.R.B.142 2009-33, 2009-29 I.R.B.150 2009-34, 2009-34 I.R.B.258 2009-35, 2009-35 I.R.B.265 2009-36, 2009-35 I.R.B.304 2009-37, 2009-36 I.R.B.309 2009-38, 2009-37 I.R.B.362 2009-39, 2009-38 I.R.B.371 2009-40, 2009-39 I.R.B.438 2009-41, 2009-39 I.R.B.439 2009-42, 2009-40 I.R.B.459 2009-43, 2009-40 I.R.B.460 2009-44, 2009-40 I.R.B.462 2009-45, 2009-40 I.R.B.471 2009-46, 2009-42 I.R.B.507 2009-47, 2009-42 I.R.B.524 Revenue Procedures— Continued: 2009-50, 2009-45 I.R.B.617 2009-51, 2009-45 I.R.B.625 2009-52, 2009-49 I.R.B.744 2009-53, 2009-49 I.R.B.746 Revenue Rulings: 2009-18, 2009-27 I.R.B.1 2009-19, 2009-28 I.R.B.111 2009-20, 2009-28 I.R.B.112 2009-21, 2009-30 I.R.B.162 2009-22, 2009-31 I.R.B.167 2009-23, 2009-32 I.R.B.177 2009-24, 2009-36 I.R.B.306 2009-25, 2009-38 I.R.B.365 2009-26, 2009-38 I.R.B.366 2009-27, 2009-39 I.R.B.404 2009-28, 2009-39 I.R.B.391 2009-29, 2009-37 I.R.B.322 2009-30, 2009-39 I.R.B.391 2009-31, 2009-39 I.R.B.395 2009-32, 2009-39 I.R.B.398 2009-33, 2009-40 I.R.B.447 2009-34, 2009-42 I.R.B.502 2009-35, 2009-44 I.R.B.568 2009-36, 2009-47 I.R.B.650 2009-38, 2009-49 I.R.B.736 Tax Conventions: 2009-79, 2009-46 I.R.B.628 Treasury Decisions: 9452, 2009-27 I.R.B.1 9453, 2009-28 I.R.B.114 9454, 2009-32 I.R.B.178 9455, 2009-33 I.R.B.239 9456, 2009-33 I.R.B.188 9457, 2009-41 I.R.B.482 9458, 2009-43 I.R.B.547 9459, 2009-41 I.R.B.480 9460, 2009-44 I.R.B.584 9461, 2009-41 I.R.B.488 9462, 2009-42 I.R.B.504 9463, 2009-40 I.R.B.442 9464, 2009-48 I.R.B.692 9465, 2009-43 I.R.B.542 9466, 2009-43 I.R.B.551 9467, 2009-50 I.R.B.760 9468, 2009-44 I.R.B.570 9469, 2009-48 I.R.B.687 9470, 2009-49 I.R.B.738 9471, 2009-49 I.R.B.722 1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009. December 14, 2009ii2009–50 I.R.B. Finding List of Current Actions on Previously Published Items 1 Bulletins 2009–27 through 2009–50 Announcements: 2006-93 Superseded by Ann. 2009-62, 2009-33 I.R.B.247 Notices: 2002-3 Modified and superseded by Notice 2009-68, 2009-39 I.R.B.423 2004-67 Supplemented and superseded by Notice 2009-59, 2009-31 I.R.B.170 2005-76 Modified by Notice 2009-91, 2009-48 I.R.B.717 2006-70 Obsoleted by T.D. 9453, 2009-28 I.R.B.114 2006-109 Superseded in part by Rev. Proc. 2009-32, 2009-28 I.R.B.142 2007-7 Modified by Notice 2009-82, 2009-41 I.R.B.491 2008-30 Amplified and clarified by Notice 2009-75, 2009-39 I.R.B.436 2008-43 Obsoleted by REG-113289-08, 2009-33 I.R.B.244 2009-28 Clarified by Notice 2009-69, 2009-35 I.R.B.261 2009-31 Amplified by Rev. Proc. 2009-43, 2009-40 I.R.B.460 2009-42 Amplified by Rev. Proc. 2009-43, 2009-40 I.R.B.460 2009-54 Amplified by Notice 2009-89, 2009-48 I.R.B.714 2009-58 Amplified by Notice 2009-89, 2009-48 I.R.B.714 Proposed Regulations: REG-130200-08 Hearing cancelled by Ann. 2009-81, 2009-46 I.R.B.647 Revenue Procedures: 97-27 Clarified and modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 97-49 Modified and superseded by Rev. Proc. 2009-31, 2009-27 I.R.B.107 2002-44 Superseded by Rev. Proc. 2009-44, 2009-40 I.R.B.462 2002-59 Superseded by Rev. Proc. 2009-41, 2009-39 I.R.B.439 2005-63 Modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 2006-30 Modified by Rev. Proc. 2009-53, 2009-49 I.R.B.746 2007-44 Modified by Rev. Proc. 2009-36, 2009-35 I.R.B.304 2007-65 Modified by Ann. 2009-69, 2009-40 I.R.B.475 2008-34 Superseded by Rev. Proc. 2009-46, 2009-42 I.R.B.507 2008-38 Superseded by Rev. Proc. 2009-30, 2009-27 I.R.B.27 2008-44 Superseded by Rev. Proc. 2009-35, 2009-35 I.R.B.265 2008-52 Amplified, clarified, and modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 2008-59 Superseded by Rev. Proc. 2009-47, 2009-42 I.R.B.524 2008-65 Modified by Rev. Proc. 2009-33, 2009-29 I.R.B.150 2009-16 Modified by Rev. Proc. 2009-33, 2009-29 I.R.B.150 Revenue Procedures— Continued: 2009-39 Modified by Ann. 2009-67, 2009-38 I.R.B.388 Revenue Rulings: 74-346 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 75-190 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 75-398 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 75-526 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 2009-22 Corrected by Ann. 2009-74, 2009-42 I.R.B.537 2009-29 Corrected by Ann. 2009-74, 2009-42 I.R.B.537 Treasury Decisions: 9456 Corrected by Ann. 2009-73, 2009-41 I.R.B.500 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009. 2009–50 I.R.B.iiiDecember 14, 2009 December 14, 20092009–50 I.R.B. 2009–50 I.R.B.December 14, 2009 December 14, 20092009–50 I.R.B. INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select More Topics. Then select Internal Revenue Bulletins. INTERNAL REVENUE BULLETINS ON CD-ROM Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to six weeks, plus mailing time, for delivery. WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BULLETIN If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. 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