IRS delays effective date of new funding rules for single employer pension plans

Tough new IRS rules governing the funding of single employer pension plans will not take effect until plan years beginning on or after January 1, 2009, the Service has announced. The IRS had originally intended for the regulations to take effect in 2008.

PPA

The Pension Protection Act of 2006 (PPA) made many changes to the complex rules on pension plan funding. Many of the changes are designed to beef-up the amount of contributions required from the sponsoring employer to increase, in turn, the amount of assets available to fund monthly pension payments promised to employee participants when they retire.

Sections 430 and 436 of the Tax Code, both enacted in the PPA, were scheduled to take effect January 1, 2008. Code Sec. 430 changes the funding requirements for single employer defined benefit plans. Code Sec. 436 limits distributions and benefit accruals for under-funded plans.

Delay

For 2008, the IRS indicated that it will not challenge a reasonable interpretation of these provisions except for certain requirements:

• Employer-specific substitute mortality tables may be used as provided under the proposed regulations only if the employer obtains IRS approval using Rev. Proc. 2007-37;

• Methods of estimating the funding target attainment percentage (FTAP) for the preceding year (2007 in this case) can only be used for applying the benefit limitations of Code Sec. 436 if the methods are permitted in Treasury regulations (final regulations will permit the estimation methods in the proposed regulations to be used for 2008);

• Benefit restrictions under Code Sections 436(d) (accelerated distributions) and 436(e) (benefit accruals) must begin, as provided in the proposed regulations, on the fourth month of the plan year if the plan does not have an actuary's certification of the plan's adjusted FTAP (AFTAP); and

• Plans must use fair market value and averaging only as permitted by the proposed regs to determine the value of plan assets under Code Sec. 430(g)(3).

Small plans

The IRS also provided some transition rules for small plans with a valuation date on the last day of the plan year for years beginning in 2006-2008. A small plan for purposes of these rules is one having 500 or fewer participants.

(Notice 2008-21)