Announcement 2004-59

Part III. Administrative, Procedural, and Miscellaneous
Plan Amendments Following
Election of Alternative Deficit
Reduction Contribution
Notice 2004–59
This notice provides guidance on the restrictions that are placed on plan amendments following an employer’s election
of the alternative deficit reduction contribution under § 412(l)(12) of the Internal
Revenue Code (the “Code”) and section
302(d)(12) of the Employee Retirement
Income Security Act of 1974 (“ERISA”),
as added by section 102 of the Pension
Funding Equity Act of 2004, Pub. L.
108–218 (“PFEA ’04”).
I. Background
Section 102 of PFEA ’04, which
was enacted on April 10, 2004, added
§ 412(l)(12) to the Code and section
302(d)(12) to ERISA. Section 412(l)(12)
of the Code permits certain employers
who are required to make additional contributions under § 412(l) to elect a reduced
amount of those contributions (“alternative deficit reduction contributions”) for
certain plan years. An employer is eligible
to make such an election if it is (1) a commercial passenger airline, (2) primarily
engaged in the production or manufacture
of a steel mill product or the processing
of iron ore pellets, or (3) an organization
described in § 501(c)(5) that established a
plan on June 30, 1955, to which § 412 now
applies. On April 12, 2004, the Internal
Revenue Service (the “Service”) issued
Announcement 2004–38, 2004–18 I.R.B.
878, which provides guidance for making
the election for an alternative deficit reduction contribution. On May 6, 2004, the
Service issued Announcement 2004–43,
2004–21 I.R.B. 955 (corrected by Announcement 2004–51, 2004–23 I.R.B.
1041), which provides further guidance
for making the election for the alternative
deficit reduction contribution and provides
guidance regarding notices that must be
provided to participants, beneficiaries, and
the Pension Benefit Guaranty Corporation
following the making of the election.
Section 412(l)(12)(B) provides that
no amendment that increases the liabilities of the plan by reason of any increase

September 7, 2004

in benefits, any change in the accrual
of benefits, or any change in the rate at
which benefits become nonforfeitable under the plan shall be adopted during any
applicable plan year, unless (1) the plan’s
enrolled actuary certifies (in such form
and manner prescribed by the Secretary)
that the amendment provides for an increase in annual contributions that will
exceed the increase in annual charges to
the funding standard account attributable
to such amendment, or (2) the amendment is required by a collective bargaining
agreement that is in effect on April 10,
2004. Section 412(l)(12)(B) further provides that, if a plan is amended during any
applicable plan year (i.e., a plan year for
which the § 412(l)(12) election is made)
in violation of the preceding sentence, any
election under § 412(l)(12) shall not apply
to any applicable plan year ending on or
after the date on which the amendment is
adopted.
Section 302 of ERISA contains minimum funding standard requirements that
are parallel to those under § 412 of the
Code, and section 302(d)(12) of ERISA
provides an election that is identical to the
election under § 412(l)(12) of the Code.
Under section 101 of Reorganization Plan
No. 4 of 1978, 1979–1 C.B. 480, the Secretary of the Treasury has sole interpretive
authority over the interpretation of section 302(d)(12) of ERISA. Accordingly,
the guidance set forth in this notice applies as well under section 302(d)(12) of
ERISA.
Section 412(c)(12) of the Code provides that, in determining projected benefits, the funding method of a collectively
bargained plan (other than a multiemployer plan) shall anticipate benefit increases scheduled to take effect during the
term of the collective bargaining agreement applicable to the plan.
Section 1.412(c)(3)–1(d)(1)(i) of the
Income Tax Regulations provides that,
except as otherwise provided by the Commissioner, a reasonable funding method
does not anticipate changes in plan benefits that become effective, whether or not
retroactively, in a future plan year or that
become effective after the first day of, but
during, a current plan year.

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Rev. Rul. 77–2, 1977–1 C.B. 120,
provides guidance regarding the minimum
funding requirements with respect to a
change in the benefit structure of a qualified pension plan that becomes effective
during a plan year. Section 2.02 of Rev.
Rul. 77–2 provides that, in the case of
a change in the benefit structure that becomes effective as of a date during a plan
year (but subsequent to the first day in
such plan year), the charges and credits
to the funding standard account shall not
reflect the change in such benefit structure
for the portion of such plan year prior to
the effective date of such change, and shall
reflect the change in such benefit structure
for the portion of the plan year subsequent
to the effective date of the change. Section 3 of Rev. Rul. 77–2 provides that, in
determining the charges and credits for the
plan year, in lieu of using the rule of section 2.02, a plan is permitted to disregard a
change in benefit structure that is adopted
after the valuation date for the year.
Section 412(c)(8) provides that any
amendment applying to a plan year that is
adopted after the close of the plan year but
no later than 21/2 months after the close of
the plan year and that does not reduce the
accrued benefit of any participant determined as of the beginning of the first plan
year to which the amendment relates shall,
at the election of the plan administrator, be
deemed to have been made on the first day
of such plan year (subject to additional restrictions on plan amendments that reduce
benefits). Pursuant to Rev. Proc. 94–42,
1994–1 C.B. 717 and Rev. Rul. 79–325,
1979–2 C.B. 190, § 412(c)(8) also applies
to plan amendments adopted during the
plan year to which the amendment relates.
II. Questions and Answers Regarding
Plan Amendments Following a
§ 412(l)(12) Election
Q–1. Which plan amendments are subject to the requirements of § 412(l)(12)(B)
(regarding plan amendments increasing
benefits)?
A–1. Plan amendments that are subject
to the requirements of § 412(l)(12)(B)
are referred to in this notice as “restricted
amendments”. A plan amendment is a restricted amendment if it is adopted during
a plan year for which an election for an

2004–36 I.R.B.

alternative deficit reduction contribution
is in effect, is not required by a collective
bargaining agreement in effect on April
10, 2004, and increases benefits (including
an increase in an early retirement benefit
or retirement-type subsidy), changes the
accrual of benefits in a manner that results
in increased accruals, or changes the rate
at which benefits become nonforfeitable
in a manner that results in faster vesting.
Thus, for example, with respect to a plan
not maintained pursuant to a collective
bargaining agreement, a plan amendment
adopted February 1, 2004, and providing a
benefit increase effective during the 2004
calendar plan year is a restricted amendment if the employer makes an election for
an alternative deficit reduction contribution for the 2004 plan year. Furthermore,
if that employer makes an election for the
alternative deficit reduction contribution
for the 2005 plan year, the plan amendment adopted in 2004 will continue to
be a restricted amendment for the 2005
plan year. For purposes of determining
whether a plan amendment is a restricted
amendment, a plan amendment is considered adopted at the later of the time
it is adopted or made effective. Thus, a
plan amendment with different benefit
increases that become effective during
different plan years is considered adopted
during each plan year in which each benefit increase becomes effective (if no earlier
than the date on which the amendment is
added to the plan).
A plan amendment adopted during a
plan year for which the employer did not
make an election for the alternative deficit
reduction contribution (or a plan amendment considered adopted during such a
plan year) is not a restricted amendment
for the plan year adopted or for the subsequent plan year, even if the employer
makes an election for an alternative deficit
reduction contribution for the subsequent
plan year. However, such a plan amendment will be considered adopted during the
subsequent plan year for purposes of determining whether the amendment is a restricted amendment unless an election is
made under § 412(c)(8) to treat the plan
amendment as made on the first day of the
plan year in which adopted and unless the
amendment is treated as effective as of the
beginning of the plan year.
Annual cost-of-living adjustments to
statutory limits that are implemented

2004–36 I.R.B.

pursuant to plan terms that are adopted
and in effect before the beginning of
the plan year for which the alternative
deficit reduction contribution election is
made are not treated as plan amendments
that are subject to the requirements of
§ 412(l)(12)(B). Thus, annual cost-of-living adjustments to the § 401(a)(17) limit
and the § 415(b)(1)(A) dollar limit that are
automatically put into effect pursuant to
plan terms that are adopted and in effect
before the beginning of the plan year are
not treated as restricted amendments.
Q–2. What plan terms must a restricted
amendment include?
A–2. A restricted amendment must
include terms that require that contributions to the plan for all plan years in which
the alternative deficit reduction contribution election is in effect will exceed
the § 412(l)(12)(B) amount described in
Q&A–3 of this notice. A restricted amendment may satisfy this requirement by reflecting the formula for the § 412(l)(12)(B)
amount set forth in Q&A–3 of this notice.
Alternatively, a restricted amendment may
satisfy this requirement by providing for a
dollar amount of contributions or for some
other method of determining contributions
if the amount of contributions specified
in the plan exceeds the § 412(l)(12)(B)
amount. For this purpose, the terms of a
collective bargaining agreement pursuant
to which a plan is maintained are deemed
included in plan terms.
If a restricted amendment is adopted
prior to August 31, 2004, the plan complies with this Q&A–2 if, no later than
October 31, 2004, the plan is amended to
provide for contributions that exceed the
§ 412(l)(12)(B) amount.
Q–3. How is the § 412(l)(12)(B)
amount determined?
A–3. The § 412(l)(12)(B) amount is
equal to the sum of the minimum required
contribution under § 412 determined as
if the restricted amendment had not been
made (taking into account the alternative
deficit reduction contribution election)
plus the incremental amendment amount.
The incremental amendment amount is
equal to the difference between the required minimum contribution under § 412
that would have been due taking into account the restricted amendment and the
required minimum contribution under
§ 412 that would have been due disregarding the restricted amendment. These

448

two calculations are made as if the alternative deficit reduction contribution
had not been elected. The calculation of
the required minimum contribution under
§ 412 that would have been due taking
into account the restricted amendment
generally is made as if the amendment
had been adopted and made effective on
the first day of the plan year (i.e., the
amendment must be fully reflected in plan
costs for this purpose). However, if the
amendment does not provide for benefit
increases attributable to service prior to
the beginning of the plan year, and is not
effective as of the first day of the plan year,
the amendment may instead be treated in
accordance with the rules of section 2.02
of Rev. Rul. 77–2. In addition, the rules
of § 412(c)(12) apply to the determination
of the § 412(l)(12)(B) amount. For rules
regarding the treatment of a credit balance
generated as a result of contributions made
with respect to the § 412(l)(12)(B) amount
for the prior plan year, see Q&A–5.
The § 412(l)(12)(B) amount is computed without regard to any funding
waiver for the plan year. Accordingly,
the terms of a restricted amendment do
not comply with § 412(l)(12)(B) if, under
the terms of the plan as amended by the
restricted amendment, any portion of the
contribution in excess of the incremental
amendment need not be made if a funding
waiver is granted.
Q–4. How does the § 412(l)(12)(B)
amount affect the application of the minimum funding requirements of § 412?
A–4. The § 412(l)(12)(B) amount does
not affect the computation of minimum
required contributions under § 412. Thus,
for example, quarterly contributions under
§ 412(m) are not required to reflect the
minimum contribution required to maintain the applicability of the alternative
deficit reduction contribution election. If
an amount in excess of minimum required
contributions is contributed for a plan year
on account of the § 412(l)(12)(B) amount,
the plan’s funding standard account will
reflect a credit balance on account of the
excess. In addition, even if an amendment
is considered adopted in a later year or
years for purposes of determining whether
an amendment is a restricted amendment
for a plan year for purposes of applying
§ 412(l)(12)(B), the rules of § 412(c)(12)
(requiring the funding method of a collectively bargained plan to take into account

September 7, 2004

certain anticipated benefit increases) may
require the amendment to be taken into
account at an earlier time for purposes of
computing minimum required contributions under § 412.
Q–5: How does a credit balance generated as a result of contributions made with
respect to the § 412(l)(12)(B) amount for
the prior plan year affect the computation
of the § 412(l)(12)(B) amount for the plan
year?
A–5: If a restricted amendment was
adopted in a prior plan year for which
the alternative deficit reduction contribution election was made, the credit
balance resulting from the excess of the
§ 412(l)(12)(B) amount for the prior plan
year over the minimum required contribution for the prior plan year must be disregarded in computing the § 412(l)(12)(B)
amount for the current plan year. Thus, for
example, assume that an employer elects
the alternative deficit reduction contribution for both the 2004 and 2005 calendar
plan years, adopts a restricted amendment
during the 2004 plan year, and contributes
the § 412(l)(12)(B) amount for the 2004
plan year, creating a credit balance as of
the end of the 2004 plan year. The determination of the § 412(l)(12)(B) amount
for the 2005 plan year (which reflects the
restricted amendment adopted in 2004 as
well as any restricted amendments adopted
in 2005) is made as if there were no credit
balance resulting from the excess of the
§ 412(l)(12)(B) amount for the 2004 plan
year over the minimum required contribution for the 2004 plan year. However, if
the contributions made for the 2004 plan
year exceed the § 412(l)(12)(B) amount
for that plan year, the credit balance attributable to that excess can be taken into
account in determining the § 412(l)(12)(B)
amount for 2005.
Q–6. How does the plan’s enrolled actuary certify that a restricted amendment
provides for an increase in annual contributions that will exceed the increase in annual charges to the funding standard account attributable to such amendment?
A–6. The plan’s enrolled actuary certifies that a restricted amendment provides
for an increase in annual contributions that
will exceed the increase in annual charges
to the funding standard account attributable to such amendment by filing a certification with the Service that, following
the adoption of the plan amendment, the

September 7, 2004

plan includes terms to the effect that contributions to the plan while the alternative
deficit reduction contribution election is
in effect will exceed the § 412(l)(12)(B)
amount described in Q&A–3 of this notice.
The certification may be based either on
plan terms incorporating the formula described in Q&A–3 or on plan terms providing for either an amount of contributions or an alternative formula for contributions under which contributions for the
plan year will exceed the § 412(l)(12)(B)
amount. The certification must also provide the derivation of the § 412(l)(12)(B)
amount as well as the amount of contributions required under the terms of the
plan (if determined under an alternative
formula).
The certification with respect to a restricted amendment made during a plan
year must be filed on or before the due date
for the filing of Form 5500 for the plan
year at the following address:
Internal Revenue Service
Commissioner, Tax Exempt and
Government Entities Division
Attention: SE:T:EP:RA:T
Alternative DRC Election Amendment
Certification
P.O. Box 27063
McPherson Station
Washington, D.C. 20038
Q–7. What are the consequences of
failure to include the plan terms required
under § 412(l)(12)(B) as part of a restricted
amendment?
A–7. If a restricted amendment does
not contain the plan terms required under § 412(l)(12)(B) in a plan year, then
the alternative deficit reduction contribution election is no longer valid for the plan
year and cannot be made in any succeeding plan year.
Q–8. What are the consequences of
failure to contribute the amount required
under a restricted amendment that includes
plan terms that satisfies the plan language
requirements of § 412(l)(12)(B)?
A–8. If the contribution required under
the terms of a restricted amendment is not
made on or before the due date for contributions for the plan year, then the alternative deficit reduction contribution election
is no longer valid for the plan year and cannot be made in any succeeding plan year.

449

Paperwork Reduction Act
The collection of information contained
in this notice has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1889.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this notice is in Q&A–6. This information is required to meet the requirements of section
102 of the Pension Funding Equity Act
of 2004 to monitor and make valid determinations with respect to employers that
elect an alternative deficit reduction contribution for certain plans and make restricted amendments. As a result of such
elections, an employer’s deficit reduction
contribution for certain plans will be based
on amounts specified under § 412(l)(12) of
the Code. The likely respondents are businesses or other for-profit institutions, and
nonprofit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 400 hours.
The estimated annual burden per respondent/recordkeeper varies from 3 to 5
hours, depending on individual circumstances, with an estimated average of 4
hours. The estimated number of respondents and/or recordkeepers is 100.
The estimated frequency of responses is
occasional.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.
Drafting Information
The principal authors of this notice are
James E. Holland of the Employee Plans,
Tax Exempt and Government Entities Division and Linda S. F. Marshall of the
Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). Mr. Holland may be
reached at 202–283–9699 (not a toll-free
number).

2004–36 I.R.B.