IRS Issues Final Rules on Minimum Funding Requirements

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By Kristen Ricaurte Knebel

Sept. 8 — The Internal Revenue Service at last issued final regulations on the determination of minimum required contributions for single-employer defined benefit plans.

The final rules (T.D. 9732, RIN 1545-BH71), issued Sept. 8, also address the excise tax under tax code Section 4971 for failing to satisfy the minimum funding requirements for defined benefit plans, the IRS said.

Determining the amount of the minimum required contribution for a plan year depends on whether the value of plan assets is less than or equal to the plan's funding target for the year, the IRS said. If the value of the assets is less than the plan's funding target for the plan year, then the minimum required contribution for that year is “equal to the sum of the plan’s target normal cost for the plan year plus any applicable shortfall amortization installments and waiver amortization installments,” the IRS said.

If the value of the plan assets equals or is more than the funding target for the plan year, then the minimum contribution requirement is “equal to the target normal cost of the plan for the plan year reduced (but not below zero) by any such excess,” the IRS said.

The IRS and Treasury Department initially proposed the rules in 2008, providing employers sponsoring single-employer defined benefit plans with guidance on minimum required contributions under the funding rules enacted by the Pension Protection Act of 2006.

Amortization Shortfalls 

“The regulations provide that the “shortfall amortization installments with respect to a shortfall amortization base established for a plan year generally are the annual amounts necessary to amortize that shortfall amortization base in level annual installments over the 7-year period beginning with that plan year,” the IRS said.

Shortfall amortization installments are calculated using the applicable interest rates for the plan year in which the shortfall amortization base was determined, the IRS said. The shortfalls aren't redetermined in the succeeding plan years, regardless of whether interest rates have changed under Section 430(h)(2) for those plan years, the IRS said.

In addition, the installments aren't redetermined if the valuation date for a plan changes after the plan year that the shortfall amortization base was established, the IRS said.

“In such a case, the dates on which the installments are assumed to be paid are changed to the anniversaries of the new valuation date, and the difference in present value attributable to this change is reflected in any new shortfall amortization base,” the IRS said.

Shortfall amortization bases are established for a plan year only if the value of plan assets is less than the funding target for the plan year. The base, which can be positive or negative, is equal to the funding shortfall for the plan year, “minus the sum of the present values of any remaining shortfall amortization installments and waiver amortization installments,” the rules said.

Quarterly Contributions 

The final regulations' rules for accelerated quarterly contributions for plans that have funding shortfalls are similar to those in IRS Notice 89-52, but have been updated to reflect statutory changes, the IRS said.

In a case in which a plan has a funding shortfall for the preceding plan year, the employer maintaining the plan must make required quarterly payments for the current plan year, the regulations said.

“The amount of each required quarterly installment is equal to 25 percent of the required annual payment. For this purpose, the required annual payment is equal to the lesser of 90 percent of the minimum required contribution under section 430(a) for the plan year or 100 percent of the minimum required contribution under section 430(a)” for the previous plan year, the IRS said.

The final regulations also provide rules on the liquidity requirements that generally apply for plans that are required to make quarterly contributions, the IRS said.

If a plan sponsor is required to submit quarterly payments under Section 430(j)(3), the sponsor is considered to have failed to pay “the full amount of the required installment for a quarter to the extent that the value of the liquid assets contributed after the end of that quarter and on or before the due date for the installment is less than the liquidity shortfall” for that quarter, the IRS said.

Because of this, to satisfy the quarterly contribution requirement, liquid assets amounting to the shortfall must be contributed after the end of that quarter and on or before the due date for that quarter's installment, the IRS said.

The final regulations set forth definitions that apply for purposes of applying the excise tax rules of Section 4971 that the PPA modified. The final rules generally retain the definitions in the proposed rules, but were modified to reflect changes to the tax code made by the Cooperative and Small Employer Charity Pension Flexibility Act of 2014, the IRS said.

The rules are applicable for plan years beginning on or after Jan. 1, 2016, and are effective upon publication in the Federal Register, which is scheduled for Sept. 9.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Phil Kushin at pkushin@bna.com

Text of the final rule is at http://op.bna.com/der.nsf/r?Open=klan-a26h6k.