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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9467]
RIN 1545–BG72; RIN 1545–BH07

Measurement of Assets and Liabilities
for Pension Funding Purposes; Benefit
Restrictions for Underfunded Pension
Plans
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.

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SUMMARY: This document contains final
regulations providing guidance
regarding 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, regarding the use of
certain funding balances maintained for
those plans, and regarding benefit
restrictions for certain underfunded
defined benefit pension plans. These
regulations reflect provisions added by
the Pension Protection Act of 2006, as
amended by the Worker, Retiree, and
Employer Recovery Act of 2008. These
regulations affect sponsors,
administrators, participants, and
beneficiaries of single employer defined
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.
FOR FURTHER INFORMATION CONTACT:
Michael P. Brewer, Lauson C. Green, or
Linda S.F. Marshall at (202) 622–6090
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
2095. The collections of information in
this final regulation are in §§ 1.430(f)–
1(f), 1.430(h)(2)–1(e), 1.436–1(f), and
1.436–1(h). The information required
under § 1.430(f)–1(f) is required in order
for plan sponsors to make elections
regarding a plan’s credit balances upon
occasion. The information required
under § 1.430(h)(2)–1(e) is required in
order for a plan sponsor to make an
election to use an alternative interest
rate for purposes of determining a plan’s
funding obligations under § 1.430(h)(2)–

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1. The information required under
§§ 1.436–1(f) and 1.436–1(h) is required
in order for a qualified defined benefit
plan’s enrolled actuary to provide a
timely certification of the plan’s
adjusted funding target attainment
percentage (AFTAP) for each plan year
to avoid certain benefit restrictions.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number.
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.
Background
This document contains final Income
Tax Regulations (26 CFR part 1) under
sections 430(d), 430(f), 430(g), 430(h)(2),
430(i), and 436, as added to the Internal
Revenue Code (Code) by the Pension
Protection Act of 2006 (PPA ’06), Public
Law 109–280 (120 Stat. 780), and
amended by the Worker, Retiree, and
Employer Recovery Act of 2008
(WRERA ’08), Public Law 110–458 (122
Stat. 5092).
Section 412 provides minimum
funding requirements that generally
apply for pension plans (including both
defined benefit pension plans and
money purchase pension plans). PPA
’06 makes extensive changes to those
minimum funding requirements for
defined benefit plans that generally
apply for plan years beginning on or
after January 1, 2008. Section 430,
which was added by PPA ’06, specifies
the minimum funding requirements that
apply to single employer defined benefit
pension plans (including multiple
employer plans) pursuant to section
412. Section 436, which was also added
by PPA ’06, sets forth certain limitations
on benefits that may apply to a single
employer defined benefit plan based on
its funded status. Neither section 430
nor section 436 applies to
multiemployer plans.
Section 302 of the Employee
Retirement Income 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 additional funding
rules for single employer plans that are
parallel to those in section 430 of the
Code. In addition, section 206(g) of
ERISA sets forth benefit limitations that
are parallel to those in section 436 of the
Code. Under section 101 of
Reorganization Plan No. 4 of 1978 (43

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FR 47713) and section 3002(c) of ERISA,
the Secretary of the Treasury has
interpretive jurisdiction over the subject
matter addressed in these regulations for
purposes of ERISA, as well as the Code.
Thus, these final Treasury Department
regulations issued under sections 430
and 436 of the Code apply for purposes
of sections 206(g) and 303 of ERISA.
If the value of plan assets (less the
sum of the plan’s prefunding balance
and funding standard carryover balance)
is less than the funding target, section
430(a)(1) defines the minimum required
contribution as the sum of the plan’s
target normal cost and the shortfall and
waiver amortization charges for the plan
year. If the value of plan assets (less the
sum of the plan’s prefunding balance
and funding standard carryover balance)
equals or exceeds the funding target,
section 430(a)(2) defines the minimum
required contribution as 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
otherwise provided in section 430(i)(1)
(regarding 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
funding balances—referred to as the
prefunding 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 represents the
accumulation of the contributions that

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
an employer makes for a plan year that
exceed the minimum required
contribution 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 circumstances to use those
excess contributions in order to satisfy
the minimum funding requirement in a
subsequent plan year. However, section
430(f)(6)(iii) provides 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
contribution 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 under 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. Accordingly, 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 balance as a credit
against the minimum required
contribution for a plan year. Under
section 430(f)(3)(C), the prefunding
balance or funding standard carryover
balance can only be used for a plan year
if the value of plan assets for the
preceding plan year (after subtracting
the prefunding balance) was at least 80
percent of the funding target
(determined without regard to the atrisk rules of section 430(i)) for that
preceding plan year. In addition, section
430(f)(4) requires that the prefunding
balance and the funding standard
carryover balance be subtracted from the
value of plan assets for certain purposes
(including the determination of the
plan’s funding target attainment
percentage (FTAP), as defined under
section 430(d)(2)), and section 430(f)(8)
requires that the prefunding balance and
the funding standard carryover balance
be adjusted for actual investment return
on plan assets. In order to give
employers the opportunity to minimize
the impact of the requirement to
subtract the prefunding balance and
funding standard carryover balance
from plan assets, section 430(f)(5)
permits an employer to elect to reduce
those balances.
Section 430(g)(1) provides that all
determinations made with respect to
minimum required contributions for a
plan year (such as the value of plan
assets and liabilities) are made as of the

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plan’s valuation date. Section 430(g)(2)
provides that, other than for plans with
100 or fewer participants (determined as
provided in section 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
controlled group are treated as a single
plan for this purpose, but only
participants with respect to the
employer or member of the controlled
group are taken into account.
Section 430(g)(3) provides rules
regarding the determination of the value
of plan assets for purposes of section
430. Under section 430(g)(3)(A), except
as otherwise 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 actuarial 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
contribution 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 valuation date for
the current plan year, using 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
valuation 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
exclude those contributions and also
must exclude interest on those
contributions (determined at the plan’s
effective interest rate for the plan year)
for the period between the date of the
contribution and the valuation date.
Under section 430(h)(2)(A), a plan’s

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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 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
determination of any present value or
other computation under section 430 is
to be made on the basis of actuarial
assumptions and methods each of
which is reasonable (taking into account
the experience of the plan and
reasonable expectations) and which, in
combination, offer the actuary’s best
estimate of anticipated experience
under the plan.
Section 430(h)(2) specifies the interest
rates that must be used in determining
a plan’s target normal cost and funding
target. Under section 430(h)(2)(B),
present value is determined using three
interest rates (segment rates) for the
applicable month, each of which applies
to benefit 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 beginning on
the first day of the plan year. The
second segment rate applies to benefits
reasonably determined to be payable
during the 15-year period following the
initial 5-year period. The third segment
rate applies to benefits reasonably
determined 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
determined 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 24month period 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 alternative to the use of the
three segment 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
transition 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 interest rates to be
used in the valuation are based on a
blend of the segment rates and the longterm corporate bond rates used for plan

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years prior to the effective date of PPA
’06. Under section 430(h)(2)(G)(iv), a
plan sponsor may elect to have this
transition rule not apply.
Section 430(i) sets forth special rules
that apply to a plan that is in at-risk
status. If a plan is in at-risk status, then
special assumptions must be used in
determining the plan’s funding target
and target normal cost, a loading factor
is applied to the plan’s liabilities in
certain cases, and, under section
409A(b)(3), restrictions apply to the
employer’s ability to set aside assets for
purposes of paying deferred
compensation to a covered employee
under a nonqualified deferred
compensation plan.
Under section 430(i)(4), a plan is in
at-risk status for a year if, for the
preceding year: (1) The plan’s FTAP,
determined without regard to the at-risk
assumptions, was less than 80 percent
(with a transition rule discussed in the
next sentence); and (2) the plan’s FTAP,
determined using 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. If a plan
is in at-risk status, the plan’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
eligible 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

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benefits accrued or earned as of the
beginning of the plan year determined
using the special assumptions described
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 plan years,
a loading factor. That loading 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; determined using the special
assumptions described 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 accrue, 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 atrisk status is adjusted for plan-related
expenses expected to be paid from plan
assets during the plan year and
mandatory employee contributions
expected to be made during the plan
year under the same rules that apply 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 addition, 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
defined benefit plan (other than a
multiemployer 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)) 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 target 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, an unpredictable contingent

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event benefit means 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
amendment 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
required 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

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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 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
supplements that are provided under
the plan) to a participant or beneficiary,
(2) any payment for the purchase of an
irrevocable commitment from an insurer
to pay benefits, 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
section 436(f)(1), an employer is
permitted 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 involved) 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
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
percentage for 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.

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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
situations in which an employer is
deemed to have made the election in
section 430(f)(5) to reduce the plan’s
funding standard carryover balance or
prefunding balance. Such an election
has the effect of increasing 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 election with
respect to the limitations under section
436(d) or a deemed election in the case
of a plan maintained pursuant to a
collective bargaining agreement), 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.
Section 436(h) sets forth a series of
presumptions that apply during the
portion of the plan year 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 10th 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

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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
prohibited payments or future benefit
accruals under section 436(d) or (e)
ceases to apply to a plan, those
payments and benefit accruals resume,
effective as of the day following the
close of the limitation period.
Section 436(j) provides definitions
that are used under section 436,
including 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
administrator of a single employer plan
is required to provide a written notice
to participants and beneficiaries within
30 days after certain specified dates.
These dates include the date the plan
has become subject to a restriction
described in the ERISA provisions 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

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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
provisions 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 section 1107 of
PPA ’06 applies to an amendment of a
plan, section 1107 provides that the
plan does not fail to meet the anticutback requirements of section
411(d)(6) by reason of such amendment,
except as otherwise provided by the
Secretary of the Treasury.
Proposed regulations regarding the
rules for funding balances under section
430(f) and the benefit restrictions for
underfunded plans under section 436
were published on August 31, 2007
(REG–113891–07, 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
covering the rules of sections 430(d), (g),
(h)(2), and (i)) were published on
December 31, 2007 (REG–139236–07, 72
FR 74215). The regulations 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 (2008–1 CB 431)
provides that the regulations under
section 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

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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 a modification to the asset
valuation method set forth in section
430(g)(3)(B). Notice 2009–22 (2009–14
IRB 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 (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), regarding
measurement of assets and liabilities for
pension funding purposes, with certain
revisions. The Treasury Department and
the IRS published proposed regulations
relating to other portions of the rules
under section 430 (including sections
430(a), (c), and (j)) on April 15, 2008
(REG–108508–08, 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 application 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. However, the final
regulations contain modifications to this
definition to reflect amendments 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

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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
target normal cost of the plan for the
plan year 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 by
subtracting the amount of any
mandatory employee contributions
expected to be made during the plan
year. For this purpose, the final
regulations 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
benefits taken into account in
determining target 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 otherwise allocated to service 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 actual
benefits earned during the part of the
year before the valuation date must be
included in the target normal cost. The
final regulations generally adopt the
definition of the funding target for a
plan that is not in at-risk status as set
forth in the proposed regulations, but
with a few clarifications that take into
account comments received on the
proposed regulations. Under the
regulations, the funding target of a plan
for the plan year is the present value
(determined as of the valuation date) of
all benefits 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 crossreferenced in §§ 1.430(i)–1 and 1.436–1.
Under the final regulations, except 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 denominator of which is the funding
target of the plan for the plan year
(determined without regard to the atrisk rules under section 430(i) and
§ 1.430(i)–1).

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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 determining 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 numerator 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 106 of PPA ’06 to
disclose its FTAP for purposes of the
annual funding notice under section
101(f) of ERISA.2
The regulations adopt the special rule
set forth in the proposed regulations for
determining the FTAP for a new plan.
Under the final regulations, if the
funding target 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 regulations, 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
regarding the determination of present
value in order to clarify the application
of various rules that were set forth in the
proposed regulations. Under the
regulations, the present value of a
benefit with respect to a participant that
is taken into account under 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
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 a plan
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.

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date and then discounting the resulting
product using the appropriate interest
rate. The probability that the benefit
will be paid with respect to the
participant at that future date is
determined using actuarial assumptions
as to the probability of future service,
advancement in age, and other events
(such as death, disability, termination of
employment, and selection of an
optional form of benefit) that affect
whether the participant or beneficiary
will be eligible for the benefit and
whether the benefit will be paid at that
future date.
As under the proposed regulations,
these regulations provide that the
benefits 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
terminated 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 determining the funding
target for the current plan year), the
current plan year (in which case they
will be taken into account in
determining the target normal cost for
the current plan year), and future plan
years (in which case they will not be
taken into account in determining either
the funding target 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 benefits are
a function of the accrued benefit and
where benefits are a function of service,
but the final regulations modify those
rules for benefits in other
circumstances.
To the extent that the amount of a
benefit 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 portion 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

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53009

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 account 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 benefit that is taken into account in
determining 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 benefit that is
determined as the excess of a function
of the participant’s service over a
function of the participant’s accrued
benefit, the amount of the funding target
and the target normal cost attributable to
the portion 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 participant’s service at that time.
Under those rules, the benefit would
have been allocated 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
comments, 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 determining the

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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
determination of the funding target and
the target normal cost would not have
taken into account any benefit
limitations or anticipated 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 benefit 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
section 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 limitations 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
permitted to anticipate any future
applications of the section 436 benefit
restrictions.
The final regulations retain the
treatment from the proposed regulations
regarding the non-recognition of the
benefit accrual limitations of section
436(e) in determining 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 permitted
to provide for accruals, with the goal of
improving the plan’s funded status.
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 provide that if the plan
contains a provision 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.

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As under the proposed regulations,
these regulations provide that a plan
generally is required to reflect in the
plan’s funding target and target normal
cost the liability 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 alternative treatment
of benefits that are funded through
insurance contracts, the regulations
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
available 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 irrevocable 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. A plan’s
treatment of benefits funded through
insurance contracts pursuant to either of
these methods is part of the plan’s
funding method. Accordingly, that
treatment can be changed only with the
consent of the Commissioner.
Except as otherwise provided, the
determination 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
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
the irrevocable commitment is excluded from plan
assets.

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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 benefits 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
determining 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
21⁄2 months after the close of the plan
year). This is consistent with the IRS’s
prior interpretations of the pre-PPA ’06
counterpart 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 CB
190), which provides that section
412(c)(8) applies to plan amendments
made during the plan year (as well as to
plan amendments made within 21⁄2
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 21⁄2 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 section 412(d)(2)
election is made.
Accordingly, the rule in section 2.02
of Revenue Ruling 77–2 (1977–1 CB
120) under which the charges for a plan
year are based on a blend of the charges
determined 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 structure that does not become
effective until a future plan year is
disregarded) continues to apply. This is
because section 430 does not contain
any provision that corresponds to
section 412(c)(12) as in effect prior to
amendments made by PPA ’06 (under
which the provisions of a collective
bargaining agreement were taken into
account for funding purposes before the
corresponding plan amendments
became effective).

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The regulations clarify that if an
amendment 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 attributable to service
before the beginning of the plan year is
taken into account in the funding target
for the year.4
To address a concern regarding
avoidance of the benefit restrictions
under section 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. Under this rule, in any
case in which an increase in the target
normal cost as the result of a plan
amendment made after the valuation
date would have caused the benefit
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
benefits permitted to be paid for
unpredictable contingent events that
occurred 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
section 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
regulations require all currently
employed plan participants, formerly
employed plan participants (including
retirees and terminated vested
participants), and other individuals
currently entitled to benefits under the
plan to be included in the valuation.
Unlike § 1.412(c)(3)–1(c)(3)(ii), the
regulations do not permit exclusion
from the valuation 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
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
account of a contribution under section 436(c)(2).

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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 experience 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 former 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
determination of any present value or
other computation under section 430
must be made on the basis of actuarial
assumptions 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,
mortality tables, and actuarial
assumptions that apply to plans in atrisk status. Under the final regulations,
with respect to the actuarial
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 under 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
assumption.
The regulations provide that actuarial
assumptions established for a plan year
cannot subsequently be changed for that
plan year unless the Commissioner
determines that the assumptions that
were used are unreasonable. Similarly,
the regulations provide that a funding
method established for a plan year
cannot subsequently be changed for that
plan year unless the Commissioner
determines that the use of that funding
method for that plan year is
impermissible. For this purpose,
actuarial assumptions and funding

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methods are established by the timely
completion (and filing, if required) of
the actuarial report (Schedule SB,
‘‘Single-Employer Defined Benefit Plan
Actuarial Information’’ of Form 5500,
‘‘Annual Return/Report 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
actuarial assumptions and methods will
continue to apply, unless the
Commissioner permits or requires other
actuarial assumptions 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
overall funding method used by the
plan, but also each specific method of
computation used in applying the
overall method. However, the choice of
which actuarial assumptions 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 probability on the
determination of the present value of
those benefit payments under section
430. In general, any determination of
present value or any other computation
under the regulations must take into
account the probability that future
benefit payments under the plan will be
made in the form of optional forms of
benefits provided under the plan
(including single-sum distributions),
determined on the basis of the plan’s
experience and other related
assumptions, and any difference in the
present value of future benefit payments
that results from the use of actuarial
assumptions in determining benefit
payments 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

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that are different from those prescribed
by section 430(h) if the present value of
the distribution is determined by
valuing, using special actuarial
assumptions, the annuity (either the
deferred 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 valuation date is
substituted for the mortality 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 mortality 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.
In addition, under this special
computation, the valuation interest rates
under section 430(h)(2) are used for
purposes of discounting the projected
annuity payments from their expected
payment dates to the valuation date
(rather than the interest 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 phasein 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).
The proposed regulations would have
provided that, in the case of a
distribution that is subject to section
417(e)(3) but is determined as the
greater of the benefit determined using
the assumptions required 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 distribution is
greater than the present value
determined using this annuity
substitution method. Commenters
requested a similar rule where the value
of the distribution is lower because of
the use of different actuarial
assumptions that are not more favorable,

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citing the situation where section 415
may require the use of less favorable
actuarial assumptions. In response to
these concerns, the final regulations
provide that, if a distribution that is
subject to section 417(e)(3) is
determined on a basis other than using
the applicable interest rates and the
applicable mortality table under section
417(e)(3), then the computation 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 annuity
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 crediting rules using actuarial
assumptions that satisfy the
requirements of the regulations. 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
distribution determined under the rules
of section 411(a)(13)(A), the amount of
the future 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 distribution must
be determined by converting the
projected account balance to an annuity
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 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

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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
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
purpose, 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 mortality 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. 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
minimum funding purposes before the
occurrence 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)
under 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 is de minimis,
the regulations permit the use of a zero
probability of the occurrence of the
event.
The regulations provide that 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 using
estimating techniques such as the
standard actuarial approximation 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 payments for
the year as of the end of the year; or by
assuming that the payment is made in

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the middle of the year. In the case of a
participant for whom there is a less than
100 percent probability that the
participant will terminate employment
during the plan year, for purposes of
determining the benefits expected to
accrue, be earned, or 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.
Like the proposed regulations, the
final regulations reflect the provisions of
section 430(h)(5), requiring approval of
the Commissioner for changes in
actuarial assumptions for certain large
plans. Under the regulations, except as
otherwise provided, 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
sponsored by a member of a controlled
group which maintains plans with over
$50 million 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 current plan year
(disregarding the effect on the plan’s
funding shortfall resulting from changes
in interest and mortality assumptions)
that exceeds $50,000,000, or that
exceeds $5,000,000 and is 5 percent or
more of the funding target of the plan
before such change.
The proposed regulations did not
contain an exception to this rule for a
plan exiting 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 obtaining the
Commissioner’s approval. To address
these concerns, the final regulations
provide that 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
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 contribution 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

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approval for changes in funding method
for the first plan year that a plan applies
all the provisions of the regulations
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
funding 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 regulations generally
adopt the rules that were set forth in the
corresponding proposed regulations.
Subject to the limitations otherwise
provided, the regulations provide that 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 contribution for
the plan year (determined after taking
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
apply where the plan sponsor elects to
use all or a portion of the prefunding
balance or the funding standard
carryover 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
prefunding balance for a plan. A
prefunding 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, and decreased (but not
below zero) by the sum of, as of the first
day of a plan year, any amount of the

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53013

prefunding balance that was used to
offset the minimum required
contribution of the plan for the
preceding plan year and any reduction
in the prefunding balance for the plan
year. The plan sponsor’s initial election
to add to the prefunding balance
constitutes an election to maintain a
prefunding balance (so that no special
election is necessary to establish a
prefunding balance). The prefunding
balance is adjusted further for actual
investment return for the plan year.
The regulations provide that if the
plan sponsor elects to add to the plan’s
prefunding balance, as of the first day of
a plan year, the prefunding balance is
increased by the amount so elected by
the plan sponsor. 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
contribution 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 limitations) to the
plan for such preceding plan year over
the minimum required contribution for
such preceding plan year. In addition, a
contribution for a plan year to correct an
unpaid minimum required contribution
for a prior plan year is not treated as
part of the present value of excess
contributions. 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 provide that the
plan’s effective interest rate under
section 430(h)(2)(A) for the preceding
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
contributions that are excess
contributions for a 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
balance. This rule was intended to
preclude an employer from avoiding the
requirement 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 experienced 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

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prevent plan sponsors from adding
excess contributions to the prefunding
balance in situations 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 sponsor makes an election to use
the balance to offset the minimum
contribution requirement and
subsequently replenishes the
prefunding balance.
The proposed regulations would have
provided that the plan sponsor is
permitted 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 effect 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
standard account under section 412(b)
(as in effect prior to PPA ’06) as of the
end of the pre-effective plan year for 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 required contribution for
the plan) is the positive balance in the
funding standard account under section

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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 standard 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 required
contribution of the plan for the
preceding plan year and any reduction
in the funding standard carryover
balance for the plan year. The
regulations also provide that the
funding standard carryover balance is
adjusted further to reflect the actual rate
of return on plan assets for the
preceding plan year.
For both the funding standard
carryover balance and the prefunding
balance, the regulations provide that the
adjustment for investment return is
applied to the balance as of the
beginning of the preceding plan year
after subtracting amounts used to offset
the minimum required contribution for
the preceding plan year and after any
reduction of balances for that preceding
plan year. For this purpose, the actual
rate of return on plan assets for the
preceding plan year is determined on
the basis of fair market value and must
take into account the amount and timing
of all contributions, distributions, and
other plan payments 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
valuation 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 valuation date for the
plan year. After the elections 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
adjustments 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 subtracted from the value of

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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
binding 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 regulations 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). 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
commenters, the final regulations
provide ordering rules regarding the
application of use and reduction
elections with respect to prefunding and
funding standard carryover balances.
The regulations provide that the amount
of prefunding balance or funding
standard carryover balance that may be
used to offset the minimum required
contribution for the plan year must take
into account any decrease in those
balances which result from a prior
election 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
application of the ordering rules of
section 430(f)(5)(A). Under these rules,
an election to reduce the funding
standard carryover 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

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standard carryover balance to offset the
minimum required contribution for the
plan year (including an election to
satisfy the quarterly contribution
requirement) 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 required 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
prefunding balance or funding standard
carryover balance or to use the
prefunding balance or funding standard
carryover balance to offset the minimum
required contribution with respect to a
plan year, a special rule applies to
determine the amount of remaining
prefunding balance or funding standard
carryover balance that may be used to
offset the minimum required
contribution 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 carryover 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 equivalent of the current year
election is determined by dividing the
amount of the current year election by
a number equal to 1 plus the rate of
investment return for the prior plan
year. The funding standard carryover
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 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 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
elections made for the second year.
Accordingly, under the final
regulations, a prefunding balance or a
funding standard carryover balance is
maintained in a manner that tracks the
way the balances are reported on
Schedule SB, ‘‘Single-Employer Defined
Benefit Plan Actuarial Information’’ of
Form 5500, ‘‘Annual Return/Report of
Employee Benefit Plan’’. Thus, the
balances at the beginning of the year are
increased (by investment experience or
by addition to the prefunding balance)

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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
funding standard carryover balance
greater than zero, the regulations
provide that no amount of the plan’s
prefunding balance may be used to
offset the minimum required
contribution. Thus, a plan’s funding
standard carryover balance must be
exhausted before the plan’s prefunding
balance may be used to offset the
minimum required contribution.
The regulations provide that an
election to use the prefunding balance
or funding 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 percent. The plan’s
prior plan year funding ratio generally
is equal to the fraction (expressed 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 funding standard carryover
balance), and the denominator of which
is the funding target of the plan for the
preceding plan year (determined
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 purposes 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
contribution in the second year of the
plan. Commentators requested rules
with respect to plan mergers and spinoffs. 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

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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 following
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 balance. Thus, a plan
must exhaust its funding standard
carryover balance before it is permitted
to make an election to reduce its
prefunding balance.
Like the proposed regulations, these
regulations provide that any election
under this section by the plan sponsor
must be made by providing written
notification of the election to the plan’s
enrolled actuary and the plan
administrator. The written notification
must set forth the relevant details of the
election, including the specific dollar
amounts involved in the election. Thus,
a conditional or formula-based election
generally does not satisfy the
requirements.
The final regulations provide rules
regarding the timing of elections to use
or reduce the prefunding balance or
funding standard carryover balance that
are generally the same as under the
proposed regulations. Under the final
regulations, any election to add to the
prefunding balance or to use the
prefunding balance or funding 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 reduce the prefunding
balance or funding standard carryover
balance for a plan year (for example, in
order to avoid a benefit restriction under
section 436) must be made by the end
of the plan year to which the election
relates. These timing rules establish the
latest date that an election can be made.
An employer is permitted to make an
earlier election, and, in certain
circumstances, may need to make such
an earlier election in order to timely
satisfy a quarterly contribution
requirement under section 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 funding standard carryover
balance and the prefunding balance to

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the extent needed to avoid an unpaid
minimum required contribution under
section 4971(c)(4) taking into account
any contributions that are or are not
made. In addition, the regulations allow
a plan sponsor to provide a standing
election in writing to the plan’s enrolled
actuary to add the maximum amount
possible each year to the prefunding
balance.5 Any election made pursuant
to a standing 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
administrator 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
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.
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
unconditional). However, an election to
use the prefunding balance or funding
standard carryover balance to offset 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 contribution
requirements 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, ‘‘Single5 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.

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Employer Defined Benefit 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
standard carryover balance for the first
plan year beginning in 2008 to offset the
minimum 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 effective 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
relating to a plan’s valuation date and
the valuation of a plan’s assets for a plan
year under section 430(g). The rules
under the regulations relating to
valuation dates do not reflect significant
changes from those under the proposed
regulations. The regulations provide
that 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 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 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 (including active and
inactive participants and all other
individuals entitled to future benefits).

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For purposes of making this
determination, 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
participants that the plan is reasonably
expected to have on each day during the
first plan year.
The regulations provide that 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.
However, a change of a plan’s valuation
date that is required by section 430 is
treated as having been approved 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 determined in one of two ways: As
the fair market 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 determined for
one or more earlier determination dates,
subject to a 90 to 110 percent corridor.
The method of determining the value of
assets is part of the plan’s funding
method and, accordingly, may only be
changed with the consent of the
Commissioner.
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 Commissioner, 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 CB
962) and Revenue Procedure 2006–13
(2006–1 CB 315). See § 601.601(d)(2)
relating to objectives and standards for
publishing regulations, revenue rulings
and revenue procedures in the Internal
Revenue Bulletin.
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

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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
contribution is made by the deadline for
contributions for the immediately
preceding plan year under section
430(j). However, for the first plan year
that begins on or after January 1, 2008,
any such prior plan year contribution is
taken into account at the full value
without a present value discount,
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 contribution (and any interest on
the contribution for the period between
the contribution date and the valuation
date, determined using the effective
interest rate under section 430(h)(2)(A)
for the plan year) must be subtracted
from plan assets in determining the
value of plan assets as of the valuation
date. If the result of this subtraction 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 situation,
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).
The regulations provide that the
adjusted 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 asset balance on the valuation
date that were not included in the plan’s
asset balance on the earlier
determination date, reduced for benefits

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and all other amounts paid from plan
assets during the period beginning with
the prior determination date and ending
immediately before the valuation date,
and adjusted for expected earnings. 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 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 begins 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 without 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 described in § 1.414(l)–1(b)(4)
are treated as an amount paid from plan
assets. In addition, except as otherwise
provided by the Commissioner, for
purposes of this determination, assets
that are added to a plan as a result of
a plan-to-plan transfer are treated in the
same manner as contributions. It is
expected that future proposed
regulations will provide additional
rules, including rules relating to plan
mergers.
The regulations provide that if the
value of plan assets determined under
the averaging method would otherwise
be less than 90 percent of the fair market
value of plan assets, then the value of
plan assets is equal to 90 percent of the
fair market 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
regarding determination of average plan
assets made by WRERA ’08, portions of
the regulations have been reserved to
provide rules regarding adjustments for

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53017

expected earnings that are applied in
determining average plan assets. These
issues are expected to be addressed in
future proposed regulations. In the
interim, Notice 2009–22 (2009–14 IRB
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 valuation method that is made for
the first plan year beginning in 2008, the
first plan year beginning in 2009, or the
first plan year beginning 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
determining 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
regulations are generally based on the
24-month moving averages of 3 separate
segment rates for the month that
includes the valuation 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 portion 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
period beginning on the valuation date
for the plan year in the case of a plan
with a beginning of year valuation date.
The second segment rate, which is
based on the portion of the corporate

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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
segment rate, which is based on the
portion of the corporate bond yield
curve over the period between 20 years
and 60 years, applies to benefit
payments that are expected to be paid
after the 20-year period. For example, if
a series of monthly payments is
assumed to be made beginning on the
valuation date, the second segment rate
will apply beginning with the 61st such
payment and the third segment rate will
apply beginning with the 241st such
payment. Except 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 corporate 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
Commissioner for that month based on
yields for that month on investment
grade corporate bonds with varying
maturities that are in the top three
quality levels available. Notice 2007–81
(2007–2 CB 899) provides guidance on
the monthly corporate bond yield curve
and the related first, second, and third
segment rates, including 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, revenue rulings and
revenue procedures in the Internal
Revenue Bulletin.
The proposed regulations would have
used the rules for applying the first
segment rate as stated in this preamble
to all plans, regardless of the valuation
date for the plan. Some commenters
noted that section 430(h)(2)(B)(i) applies
the first segment 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 regulations
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
Treasury Department continue to
believe that the position set forth in the
proposed regulations remains the best
method of valuing assets and liabilities
as of the valuation date. Accordingly,
the final regulations reserve 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 may
address this in the future.

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The regulations reflect the special
interest 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 accordance with section 6615 of
the U.S. Troop Readiness, Veterans’
Care, Katrina Recovery, and Iraq
Accountability Appropriations 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
alternative interest rates rather than the
segment rates for the month that
includes the valuation date. These
elections are made by providing written
notification of the election to the plan’s
enrolled actuary. These elections may
be adopted for a plan year without
obtaining the consent of the
Commissioner but, once adopted, they
will apply 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 alternative
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 another
election, for purposes of determining
the funding target, target normal cost,
shortfall amortization installments,
waiver amortization installments, and
the present value of those installments,
the plan sponsor 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 24month moving average for that month—
in lieu of the segment rates. The target
normal cost and funding target
determined 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 Department believe that,
while this is a reasonable interpretation
of the statute, the better view is that this
option should not be available when the
plan elects to use the monthly corporate
bond yield curve. Accordingly, this
interpretation can be used for plan years

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beginning during 2008 and 2009 (so, for
example, for a plan year beginning on
January 1, 2009, the plan sponsor could
elect to use the monthly corporate bond
yield curve for September, October,
November 2008, or December 2008, or
January 2009, based on data for that
month), but such an election is not
permitted 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 permits these
elections to be made without approval,
with approval required only for a later
change or revocation of election. In
response to the comments, the final
regulations 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 beginning in 2010 can elect to
switch to use the monthly corporate
bond yield curve for the plan year
beginning in 2011 and subsequent years
without approval of the Commissioner
(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
requires the approval of the
Commissioner.
The final regulations provide that, in
the case of a plan sponsor using the
monthly corporate bond yield curve, 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 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, the
regulations provide that any reference to
the plan sponsor means the plan
administrator within the meaning of
section 414(g).
The regulations provide that, except
as otherwise provided, the effective
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

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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
determine the effective interest rate for
a plan year for which a plan’s funding
target is equal to zero. The final
regulations provide that if, for the plan
year, the plan’s funding target is equal
to zero, then the effective 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 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 determined based
on the dates those installments are
assumed to be paid, using the same
timing rules that apply in determining
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 installments assumed to be paid
during the subsequent 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,
notwithstanding the general rules for
determination of segment rates, for plan
years beginning 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, multiplied 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 sponsor 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.

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The proposed regulations would have
required that the pre-PPA ’06 weighted
average be determined as of the same
month as the segment rates. In response
to comments, the final regulations
provide that this weighted average
interest rate can be determined for the
same month that is used 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 under
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
regulations provides special rules
related to determining the funding target
and making 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
member 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 regulations provide that a
plan is in at-risk status for a plan year
if the FTAP for the preceding 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 preceding plan
year is less than 70 percent. For this
purpose, the FTAP is defined in the
same manner as under § 1.430(d)–1. The
at-risk 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 prefunding balance
and the funding standard carryover
balance under section 430(f)(4)(B), and
the denominator 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

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53019

imposed with respect to certain plans in
at-risk status).
In the case of a new plan that was
neither 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 final regulations reserve a
place for rules regarding 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 atrisk funding target and the at-risk target
normal cost of the plan for the plan year
are generally determined in the same
manner as for plans not in at-risk status,
but using special actuarial assumptions.
In addition, the at-risk funding target
and the at-risk target normal cost are
increased to take into account a loading
factor if the plan has been in at-risk
status for at least 2 out of the preceding
4 plan years. In any case, the at-risk
funding target and the at-risk target
normal cost of a plan for a plan year
cannot be less than the plan’s funding
target and target normal cost determined
without regard to the at-risk rules. This
minimum value is determined on a
plan-wide (rather than a participant-byparticipant) basis.
The actuarial assumptions used to
determine 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 regulations.
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 beginning with the current plan
year) an employee 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 retirement
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 special at-risk actuarial

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assumptions, all employees 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
regulations clarify that the special early
retirement assumption applies to all
participants (employees, terminated
vested participants, and beneficiaries)
who have not commenced payment and
is not limited to employees. In addition,
the final regulations 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 atrisk actuarial assumptions, all
participants and beneficiaries (not just
the participants who are subject to the
special early retirement assumption)
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.
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 target determined as if the plan
were not in at-risk status and the
funding target determined as if the plan
had been in at-risk status for each of the
preceding 4 plan years. For this
purpose, the funding target determined
as if the plan had been in at-risk status
for each of the preceding 4 plan years
is determined without applying the
loading 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 determining 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
under section 430(i), the regulations set
forth rules for making certain
calculations with respect to the first
plan year to which section 430 applies
to the plan. These rules are generally the
same as the rules that apply for that
plan year for purposes of section 436.
There is no special rule for
determining 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 beginning in 2008,
if the plan’s FTAP for the preceding
plan year was less than the 65 percent

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needed to be in at-risk status (pursuant
to the transition rule described in
section 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 status (because the at-risk
funding target cannot be less than the
funding target for a plan that is not in
at-risk status). However, plans for which
the effective date of section 430 is
delayed for purposes of determining 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
effective 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 multiemployer plan is a qualified plan
only if it satisfies the requirements of
section 436. This requirement is a
qualification requirement. A plan
satisfies the requirements of section 436
only if the plan meets the requirements
of these regulations. The final
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
limitations 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) limitation applicable to
accelerated benefit payments (such as
single-sum distributions). Except as
otherwise provided 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
maintained by the employer or plan
sponsor): (1) Plan years when the plan
was maintained by a predecessor
employer within the meaning of
§ 1.415(f)–1(c)(1); (2) plan years of
another 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 maintained by the
predecessor employer); and (3) plan

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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
defined benefit plan.
3. Terminated plans.
The proposed regulations did not
contain 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 special rules
for plan terminations. Under the final
regulations, in general, any section 436
limitations in effect immediately before
the termination of a plan continue to
apply. However, the limitations under
section 436(d) do not apply to
prohibited payments 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 commitment from an
insurer to pay benefit liabilities with
respect to participants in connection
with the standard termination of a plan,
in accordance with 4041(b)(3) of ERISA
and 29 CFR 4041.28, does not violate
section 436(d).
4. Multiple employer plans.
The regulations under section 436
apply to plans maintained by one
employer (including a controlled group
of employers) 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 under 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 employees of different
employers 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 section 413(c)(4)(B)
that has not made the election for
section 413(c)(4)(A) to apply), the
regulations apply as if all participants in
the plan were employed by a single
employer. Some commenters objected to
the separate application 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 inures only
to the benefit of its employees in the
event of plan termination, it is
inappropriate to apply the requirements
of section 436 separately for each
employer. No change has been made to
reflect this comment because the IRS

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and the Treasury Department believe
that this rule is consistent with the
applicable statutory requirement under
section 413(c)(4)(A) that applies that the
funding rules apply separately to each
employer.
5. Treatment of plan as of close of
prohibited or cessation period.
The final regulations use the term
section 436 measurement date to
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 final
regulations provide that, if a limitation
on benefit accruals under section 436(e)
applies to a plan, then, unless the plan
provides otherwise, benefit accruals
under the plan will resume effective as
of the section 436 measurement date as
of which benefit accruals are no longer
restricted. If the accruals resume
effective in the middle of a plan year,
the plan must comply with the rules
relating to partial years of participation
and the prohibition on double proration
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
apply, 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 provide that
the participant will be offered the
opportunity to have a new election
under which the form of benefit
previously elected may be modified,
subject to applicable qualification
requirements, and clarify 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
accruals that were limited under the
rules of section 436(e) are credited
under the plan once the limitation no
longer applies, subject to applicable
qualification requirements (including
the limitations of section 436(c)). If a
plan provides for the restoration of

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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 unpredictable 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 certification 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
contain 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 because of the
limitations of section 436(c), but is
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.

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53021

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 funding 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
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 plan
is 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%.

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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
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
pursuant to one or more collective
bargaining agreements between an
employee representative 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
considered 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 bargaining agreement.
A number of commentators asked which
participants are taken into account in

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this calculation. The final regulations
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 employees 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.
The section 436 measurement date is
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 applying 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
participants and beneficiaries within 30
days after certain specified dates,
including the date the plan has become
subject to a restriction described in the
ERISA provisions 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). 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

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contingent event benefit 8 must provide
that the benefit 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 contribution specified in section
436(b)(2), as described in section VII.F
of this preamble.
The regulations provide that an
unpredictable contingent event benefit
is 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, and
that an unpredictable contingent event
is a plant shutdown (whether full or
partial) or similar event, or 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. For
example, if a plan provides for an
unreduced early retirement 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 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
(including the absence) of
circumstances specified in the plan
(other than the attainment of any age,
performance 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.
Unpredictable contingent event
benefits 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
8 See also Notice 2007–14, 2007–1 CB 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.

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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 calendar 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 benefits
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
shutdown benefits related to the 2010
plant shutdown are not permitted to be
paid in a 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 regulations clarify that
the limitations of section 436(b) apply
on a participant-by-participant 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
participant satisfies the plan’s eligibility
requirements (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 limitations 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
unpredictable 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

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provide for cessation, suspension, or
reduction 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
increasing liability for benefits only if
the plan provides that no amendment to
the plan that has the effect of increasing
liabilities 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 become 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
application of section 436(c) to certain
pre-existing plan provisions. Under the
regulations, if a plan contains a
provision that provides for the
automatic restoration of benefit accruals
that were not permitted to accrue
because of the application 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
restoration of benefit accruals that were
not permitted to accrue because of the
application 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 to be
addressed in future proposed
regulations.

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53023

In accordance with section 436(c)(3),
the limitation on amendments
increasing liabilities does not apply to
any amendment that provides for an
increase in benefits under a formula that
is not based on a participant’s
compensation, but only if the rate of
increase in benefits does not exceed the
contemporaneous rate of increase in
average wages of participants covered
by the amendment. Like the proposed
regulations, 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
participants who are covered by the
current amendment and ending on the
effective date of the current amendment.
If the participants covered by an
amendment include both currently
employed participants and terminated
participants, all covered participants are
included in determining the increase in
average wages of the participants
covered by the amendment. For this
purpose, terminated participants who
are not employees at any time during
the period from the effective date of the
most recent benefit increase applicable
to all the participants who are covered
by the current amendment and ending
on the effective date of the current
amendment are treated as having no
increase or decrease in wages for the
period after severance 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
participants. However, the amendment
that applies only to terminated
participants (who received no increase
in wages from the employer 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
amendment (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 pursuant to statute, plan
termination amendments or partial
terminations under section 411(d)(3),
and vesting increases required by the
rules for top-heavy plans under section
416) from the requirements of section
436(c) to the extent the increase in
vesting is necessary to enable the plan
to continue to satisfy the requirements
for qualified plans. In addition, the final

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regulations provide that 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) applies.
The final regulations contain a rule to
clarify when an amendment is
considered to take effect for purposes of
section 436(c). Under these regulations,
in the case of an amendment that
increases benefits, the amendment takes
effect under 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 occurrence of death, disability, or
severance 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 amendment
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
participant’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

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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
requests such a prohibited payment, the
plan must permit the participant to elect
to defer payment to a later date to the
extent permitted under applicable
qualification requirements. Questions
have arisen regarding whether this
deferral right must be provided to a
participant who has separated from
service and has attained normal
retirement age if the plan does not
otherwise provide such a participant
with the right to defer commencement
of benefits. The final regulations clarify
that, if a participant requests a
prohibited payment at a time when that
form of payment cannot 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
requirements (such as sections
411(a)(11) and 401(a)(9)). Thus, where
payment of an optional 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
handle an election for a prohibited
payment by paying the maximum
amount permitted 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 accordance with
a participant’s actual election (with the
associated spousal consent, if
applicable). However, the final
regulations 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 participants 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

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benefit to the extent then permitted
under section 436(d)(3). Any such
optional forms must satisfy section
436(d) and applicable qualification
requirements, including satisfaction 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 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 offered
under 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
questions 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 determination 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 annuity to
the participant or beneficiary (plus any
social security supplements described

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
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
benefit 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 optional 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 annuity 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
guidance 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
final regulations require that, 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 the requirements of
section 436(d)(3), the plan must permit
a participant or beneficiary to elect to
bifurcate the benefit into unrestricted
and restricted portions. The plan must
also offer the participant or beneficiary
any other optional form of benefit
otherwise available under the plan at
that annuity starting date that would
satisfy the 50 percent/PBGC maximum
benefit guarantee amount limitation, as
well as any general right to defer
commencement of benefits under the

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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
unrestricted portion of the benefit for
purposes of the rule requiring the
participant’s benefit to be bifurcated
into unrestricted and restricted portions.
The final regulations clarify that the
benefit for the unrestricted portion of
the benefit is calculated at the annuity
starting date with respect to each
optional form of benefit that does not
satisfy the 50 percent/PBGC maximum
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 payment of a participant’s
entire benefit which is not permitted
under section 436(d)(3), the bifurcation
rule requires the plan to offer the
participant half that amount as a singlesum payment (with the remainder being
payable as a life annuity or any other
optional form available under the plan
at that annuity starting date that does
not include a prohibited payment).
However, for an optional form of
benefit that is a prohibited payment on
account of a social security leveling
feature or a refund of employee after-tax
contributions feature, the unrestricted
portion of the benefit is that optional
form of benefit applied 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 instead would be a result of
applying the plan’s social security
leveling option provision to half of the
participant’s total benefit. This may
often result in the unrestricted portion
being a series of payments ending at the
assumed social security commencement
date (which, in combination with a life
annuity for the restricted portion
commencing at the same annuity
starting date plus the participant’s
anticipated social security benefit,
would provide level income to the
participant to the extent permitted
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 (determined 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.
If the participant or beneficiary elects
to bifurcate the benefit, the plan must
provide, with respect to the unrestricted

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53025

portion, 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 benefit in any
optional form of benefit available under
the plan at that annuity starting date
that does not include a prohibited
payment. If a plan provides for an
optional form of benefit that applies to
only a portion of the participant’s
benefit, that optional 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
unrestricted and restricted portions of
the benefits.
Under the regulations, a plan is
permitted to provide for separate
elections with respect to the
unrestricted and restricted portions of
the benefit, without regard to whether
the participant or beneficiary 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
immediate 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 certification 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

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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
providing benefit election packages to
participants 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 provide special optional
forms that are available only when the
restrictions of section 436(d) apply.
One approach would be to provide a
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 apply 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 participant with the
opportunity to defer commencement
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 participant, anticipates the
application of the section 436(d)
restriction on prohibited payments.
Under this approach, with respect to an
optional form of benefit that includes a
prohibited payment that is not

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permitted to be paid and for which no
additional information is needed to
make that determination (such as
information regarding a social security
leveling optional form of benefit), rather
than wait for the participant or
beneficiary to elect such optional form,
the plan is permitted to provide 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 optional forms for which no
additional information from the
participant or beneficiary is needed to
make that determination and the plan
identifies the option that the bifurcation
election replaces. Thus, if section
436(d)(3) applies to a plan during a
period and the plan’s prohibited
payments include a single-sum
payment, installments for 10 years, and
various life annuities with social
security leveling features that depend
on information from the participant
regarding assumed social security
commencement date and social security
amount, then during this period the
plan can offer 50% of the single-sum
payment and 50% of the 10-year
installments, without having to offer
half of each of the potential life
annuities with social security leveling
features. Thus, the package presented to
a participant would generally present
optional forms of benefit that satisfy the
requirements of section 436(d) at the
annuity starting date (but if the
participant 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 updated information
would be provided to the participant
that takes into account the plan’s new
status. As part of the overall
methodology, a plan may provide
special optional forms that are available
only when the restrictions of section
436(d) apply. Thus, the package
presented to a participant 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
payments under a single optional form
of benefit) is made in accordance with
the 50 percent/PBGC maximum benefit
guarantee amount limitation cannot
receive any additional payment that
would be a prohibited payment during

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any period of consecutive plan years to
which any of the limitations under
section 436(d) apply. Benefits provided
to a participant and any beneficiary of
that participant are aggregated for
purposes of determining whether the
distribution complies with the
limitations under section 436(d)(3). The
final regulations 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 provides 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 payment means any
payment for a month that is in excess
of the monthly amount paid under a
single life annuity (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
payment for the purchase of an
irrevocable commitment from an insurer
to pay benefits. 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
limitations. In addition, the
Commissioner may provide for other
amounts to be identified as prohibited

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payments in revenue rulings and
procedures, notices, and other guidance
published in the Internal Revenue
Bulletin.
Commenters raised several concerns
regarding the definition of the term
annuity starting date as 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 under 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 term annuity starting date is
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 annuity. 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
starting date, the annuity starting date is
the benefit commencement date. The
effect of the change in the definition of
annuity starting date will be to provide
plan administrators with some
additional time to adjust their
administrative practices to take into
account a newly issued certification 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
respect 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 starting 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

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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
liabilities transferred (determined in
accordance with section 414(l)).
However, any such transfer would have
to independently satisfy section 414(l),
which generally would not be possible
where only a portion of a participant’s
or beneficiary’s accrued benefit 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.
E. Limitation on Benefit Accruals
In accordance with section 436(e), the
final regulations require a plan to
provide 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
provisions 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.

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53027

F. Rules Relating to Techniques To
Avoid Benefit Limitations
The final regulations provide rules
regarding techniques that the plan
sponsor may utilize to avoid or
terminate benefit limitations under
section 436 that are largely unchanged
from the rules in the proposed
regulations. For example, under the
final regulations, an employer
sponsoring 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 sufficient 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
designated at the time of the
contribution as a contribution used to
avoid the application of a limitation
under section 436(b), 436(c), or 436(e).
To address questions raised with respect
to the proposed regulations, the final
regulations provide general rules that
apply to all contributions pursuant to
section 436(f) (referred to as section 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
separate from any minimum required
contributions under section 430 and are
disregarded in determining the
maximum addition to the prefunding
balance under section 430(f)(6) and
§ 1.430(f)–1(b)(1)(i)(B). The designation
of a contribution as a section 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, cannot subsequently be
recharacterized with respect to any plan
year as a contribution to satisfy a
minimum required contribution
obligation, or otherwise. Thus, if a plan

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sponsor makes a section 436
contribution 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 section 430 for the
plan year. The designation 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
purpose, the section 436 contribution is
considered 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 section 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
adjustment 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
recharacterized 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 effect, or the benefit
accruals are permitted to resume. In
addition, any section 436 contribution
with respect to a plan year must be paid
during the plan year. Furthermore, no
prefunding balance or funding standard
carryover balance under section 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

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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 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 amendment 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

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limitation on accruals under section
436(e), the amount of the contribution
under 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
funding 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
limitations 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, held in escrow by a
bank or insurance 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.

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G. Presumed Underfunding for Purposes
of Benefit Limitations
1. General rules relating to operation
of presumptions.
Section 436(h) sets forth rules under
which the limitations of section 436 are
applied during the portion of a plan
year before the enrolled actuary has
certified 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 under section 436
are applied to the plan as if the AFTAP
for the year were the presumed AFTAP
determined under 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
presumed 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
assets is equal to the value of adjusted
plan assets 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

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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
prefunding 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).

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53029

The regulations also provide special
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 be
used 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 benefits can
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
unpredictable contingent event benefits
and plan amendments during the
presumption period, the presumed
adjusted funding target must be adjusted
to take into account the increase in the
funding target attributable to the
unpredictable contingent event benefits
or the plan amendment, as well as the
increase in the funding target
attributable to 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
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 term inclusive
presumed adjusted funding target for
this value. The inclusive presumed
adjusted funding target is used to
calculate an inclusive 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

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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
carryover 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
prefunding balance) is permitted to
reduce those balances in order to
increase the updated 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
contribution that would allow payment
of unpredictable contingent event
benefits or would permit a plan
amendment increasing 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 presumed
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 benefits,
nor is the plan permitted to restrict a
plan amendment increasing benefit
liabilities from becoming effective based
on an expectation that the limitations
under section 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,

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unpredictable 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
contingent 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 inclusive presumed
AFTAP to be less than 80 percent, then,
after the contribution described in
section 436(c)(2)(B) is made, the
presumed AFTAP would be 80 percent.
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
section 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
balance 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
presumptions under section 436(h)
apply to a plan during a period and the
plan’s enrolled actuary has not yet
issued the certification 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

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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

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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 the enrolled
actuary’s certification 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

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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
permitted 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
providing benefits with respect to
multiple unpredictable contingent
events occurring within the plan year or
plan amendments taking effect within
the plan year, the section 436(b)
restriction on unpredictable contingent
event benefits and the section 436(c)
restriction on plan amendments are
applied with respect to each
unpredictable contingent event or
amendment by treating the increase in
the funding target attributable to that
event or amendment as if it included the
increase in the funding target
attributable to any earlier event or

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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
amendments 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 applied in the prior plan
year based on a 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
presumptions 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 10th 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 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.

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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
limitation 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 10th month for plans with
no current year certification.
The final regulations reflect the rules
of section 436(h)(2), under which a plan

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for which the actuary has not issued a
certification before the first day of the
10th month of the plan year is
conclusively presumed to have an
AFTAP of less than 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
for the plan for purposes of determining
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.

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As an alternative to certifying a
specific 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 the earlier 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 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
as a 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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
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
provides 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
section 430(f) made by the 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

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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
requiring 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 attributable to the unpredictable
contingent event benefits or the plan
amendment.
The regulations provide that a
material 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 of a material change where the
plan 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

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53033

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 deeming
it to be an immaterial change, the
revised percentage must be applied
beginning with the date of the event that
gave rise to the need for the updated
certification. As under the proposed
regulations, 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, the
funding target means the funding target
under section 430(d) or section 430(i),
as applicable 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, at the time of the purchase, were
highly 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 atrisk 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,
determined without regard to the
subtraction of the funding standard
carryover balance 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

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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 be later
than 2008 in the case of a plan
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.

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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.
J. Timeliness of Certification of a Plan’s
AFTAP
A number of comments were received
raising issues concerning potential
delays in the completion and delivery of
9 Section 436(m) provides for special rules to
apply in determining a plan’s AFTAP for the
preceding plan year 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 a plan 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.

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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)
provides 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 violates
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 determinable 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
permitted 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
expected to address the interaction of
the rules of section 436 and the rules of
§ 1.411(d)–4 that relate to employer
discretion. These future proposed
regulations are expected to conform the
rules of § 1.411(d)–4, Q&A–6(b),
regarding employer discretion in plan
funding to the requirements of section
436. These future proposed regulations

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are also expected to address the extent
to which § 1.411(d)–4, Q&A–4(b) (under
which a plan may permit 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 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 these final
regulations for purposes of satisfying the
requirements of section 430. This
reliance applies section by section
under the final regulations.
Alternatively, for plan years beginning
before January 1, 2010, plans are
permitted to rely on the proposed
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.
Section 436 generally 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
delayed for certain plans in accordance
with sections 104 through 106 of PPA
’06. In the case of a collectively
bargained plan that is maintained
pursuant to one or more collective
bargaining agreements between
employee representatives and one or
more employers 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 without
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 purposes
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
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.

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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. Alternatively, for plan
years beginning before January 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
enactment of section 436 (or pursuant to
these regulations) until the last day of
the first plan year beginning on or after
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 optional forms of
benefit that include prohibited
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
Treasury Decision is not a significant
regulatory 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 substantial
number of small entities. The estimated
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 the
amendment. However, an amendment that
eliminates or decreases benefits that have not yet
accrued does not violate section 411(d)(6), provided
that the amendment is adopted and effective before
the benefits accrue.

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53035

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 benefit plan’s enrolled
actuary to provide a timely certification
of the plan’s AFTAP for each plan year
to avoid certain benefit restrictions,
which is 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.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
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
sections 430(h)(1), 430(h)(4), and
430(h)(5). Section 430 and this section

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apply to single employer defined benefit
plans (including multiple employer
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)). 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.
Paragraph (b) of this section sets forth
certain definitions that apply for
purposes of section 430. Paragraph (c) of
this section provides rules regarding
which benefits are taken into account in
determining a plan’s target normal cost
and funding target. Paragraph (d) of this
section sets forth the rules regarding the
plan provisions that are taken into
account in making these determinations,
and paragraph (e) of this section
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) applies, the rules of section
430 and this section are applied
separately for each employer under the
plan, as if each employer maintained a
separate plan. Thus, the plan’s funding
target and target normal 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
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 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, the target
normal cost of the 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 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)

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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 valuation date and benefits
expected to accrue, be earned, or be
otherwise allocated to service 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 attributable to increases in
compensation for the current plan year
even if that increase in benefits is with
respect to benefits attributable 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
employee contributions (within the
meaning of § 1.411(c)–1(c)(4)) that are
made during the plan year.
(iii) Special adjustments—(A) In
general. The target normal cost of the
plan for the plan year (determined
under paragraph (b)(1)(i) of this section)
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 employee
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 (determined as of the valuation
date) of all benefits 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
percentage—(i) In general. Except as
otherwise provided in this paragraph
(b)(3), the funding 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 subtraction of the

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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
delayed 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
accordance 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
benefit) with respect to a participant
that is taken into account under the
rules of paragraph (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 product using
the appropriate interest rate under
§ 1.430(h)(2)–1. The probability that the
benefit will be paid with respect to the
participant at such future date is
determined using the actuarial
assumptions that satisfy the standards of
paragraph (f) of this section as to the
probability of future service,
advancement in age, and other events
(such as death, disability, termination of
employment, and selection of optional
form of benefit) that affect whether the
participant or beneficiary will be
eligible 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
determining the target normal cost and

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
the funding target under paragraph (b)
of this section 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 (within the meaning of
§ 1.411(d)–3(g)). The benefits taken into
account are based on the participant’s or
beneficiary’s status (such as active
employee, vested or partially vested
terminated employee, or disabled
participant) 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
general. 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 participant’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 service (or is
the excess of a function of the
participant’s years of service over a
function 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 participant’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 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)(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 portion of a participant’s benefit that
is taken into account in the funding
target for a plan year is determined by
applying the function 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 determining 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. For example, a
benefit that is assumed to be payable at
a particular 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 benefit as of the
beginning of the plan year, and that
benefit is taken into account in the
target normal cost in the amount of 90

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percent of the increase in the accrued
benefit during 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 paragraph (c)(1)(ii)(C), then
the portion of a participant’s benefit that
is taken into account in determining the
funding target for a plan year is
determined by applying the function to
the participant’s years of service as of
the first day of the plan year, and the
portion of the benefit that is taken into
account in determining 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
example, if a plan provides a postretirement death benefit of $500 per
year of service, then the funding target
is determined based on a death benefit
of $500 multiplied by a participant’s
years of service at the beginning of the
year, and if the participant earns or is
expected to earn a full year of service
during the plan year, the target normal
cost is based on the additional $500 in
death benefits 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
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 determining 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. For example, if a plan
provides a Social Security supplement
for a participant who retires after 30
years of service that is equal to a
participant’s Social Security benefit, the
funding target with respect to the
benefit payable beginning at a particular
age (which reflects the probability of
retirement at that age) is determined
based on the projected Social Security
benefit 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

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53037

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
projected Social Security benefit
payable at the particular age multiplied
by a fraction, the numerator of which is
one and the denominator of which is the
participant’s projected years of service
at the particular age.
(iii) Application of section 436
limitations to funding target and target
normal cost determination—(A) Effect
of limitation on unpredictable
contingent event benefits. The
determination of the funding target and
the target normal cost of a plan for a
plan year must take into account any
limitation on unpredictable contingent
event benefits under section 436(b) with
respect to unpredictable contingent
events which occurred before the
valuation date, but must not take into
account anticipated funding-based
limitations on unpredictable contingent
event benefits under section 436(b) with
respect to unpredictable contingent
events which are expected 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 treatment 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
funding target and the target normal cost
of a plan for a plan year must take into
account any limitation on prohibited
payments under section 436(d) with
respect to any annuity starting date that
was before the valuation date, but must
not take into account any limitation on
prohibited payments under section
436(d) for any annuity starting date on
or after the valuation date (however, the
determination must take into account
benefit distributions under 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
accruals. Except as otherwise provided
in this paragraph (c)(1)(iii)(D), the
determination of the funding target of a
plan for a plan year must take into
account any limitation on benefit
accruals under section 436(e) applicable
before the valuation date. However, if
the plan terms provide for the automatic
restoration 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 amendment under

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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
determination 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 determination 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
benefits—(A) Liquidity shortfalls. The
determination of the funding target and
the target normal cost of a plan for a
plan year must take into account any
restrictions on payments under section
401(a)(32) on account of a liquidity
shortfall (as defined in section 430(j)(4))
for periods preceding the valuation date.
The determination 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 of a liquidity shortfall or
possible liquidity shortfall for any
period on or after the valuation date.
(B) High 25 limitation. The
determination of the funding target and
the target normal cost of a plan for a
plan year must take into account any
restrictions on payments 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 termination, the benefit
is treated as distributed for purposes of
section 430 and this section.
Accordingly, the funding target does not
include any liability for the benefit and
the plan assets do not include the
security. The determination of the
funding target and the target normal cost
of a plan for a plan year must not take
into account any restrictions on
payments under § 1.401(a)(4)–5(b) to
highly compensated employees that are
anticipated with respect to annuity
starting dates on or after the valuation
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

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target and target normal cost the liability
for benefits that are funded through
insurance contracts held by the plan,
and to include the corresponding
insurance contracts in plan assets.
Paragraph (c)(2)(ii) of this section sets
forth an alternative to this general
approach. A plan’s treatment of benefits
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
benefits. 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
insurance contracts are excluded from
plan assets. This treatment is only
available 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 irrevocable contractual
right under the insurance contracts,
based on premiums paid to the
insurance company prior to the
valuation date. For example, in the case
of a retired participant receiving
benefits from an annuity 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 active 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
valuation 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
participant’s or beneficiary’s right to
receive those benefits is not an
irrevocable contractual right and,
therefore, the liability for benefits
provided under the contract must be
taken into account in determining the

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plan’s funding target and target normal
cost and the contracts cannot be
excluded from plan assets.
(d) Plan provisions taken into
account—(1) General rule—(i) Plan
provisions 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
valuation date. If a plan administrator
makes the election described in 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). Section 412(d)(2)
applies to any plan amendment adopted
no later than 21⁄2 months after the close
of the plan year, including 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 21⁄2 months after the
close of the plan year), but takes effect
by the last day of the plan year, the
amendment is taken into account in
determining the plan’s funding target
and target normal cost for the plan year
if the plan administrator makes the
election described in section 412(d)(2)
with respect to such amendment.
(iii) Determination of when an
amendment takes effect. For purposes of
this paragraph (d)(1), the determination
of whether an amendment that increases
benefits 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 benefits, 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

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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,
establishment 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
effect 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 because 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
unpredictable contingent event benefits
permitted to be paid for unpredictable
contingent events that occurred during
the current plan year and all plan
amendments that took effect in the
current plan year (including all
amendments to which this paragraph
(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 under the rules of this
paragraph (d), then the allocation of
benefits that is used to determine the
funding target and the target normal cost
for that plan year is based on the plan
as amended. Thus, if an amendment
that is taken into account for a plan year
increases a participant’s accrued benefit
for service prior to the beginning of the
plan year, then the present value of that
increase is included in the funding
target for the plan year.
(e) Plan population taken into
account—(1) In general. In making any
determination of the funding target or
target normal cost under paragraph (b)
of this section, the plan population is
determined as of the valuation date. The
plan population must include three
classes of individuals—
(i) Participants currently employed in
the service of the employer;

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(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
entitled to benefits under the plan.
(2) Assumption regarding rehiring of
former employees—(i) Special exclusion
for ‘‘rule of parity’’ cases. Certain
individuals 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
participants. Whether former 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 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 paragraph (b) of this section, the
actuarial assumptions and funding
method used for the plan must not
anticipate the affiliation with the plan of
future participants not employed in the
service of the employer on the plan’s
valuation date. However, any such
determination may anticipate the
affiliation 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 funding
method used in determination of
present value—(1) Selection of actuarial
assumptions and funding method—(i)
General rules. The determination of any
present value or other computation
under section 430 and this section must
be made on the basis of actuarial
assumptions and a funding method.
Except as otherwise specifically
provided (for example, in § 1.430(h)(2)–
1(b)(6) or section 4006(a)(3)(E)(iv) of the
Employee Retirement 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

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used in making a certification of the
adjusted funding target attainment
percentage for a plan year must be the
same as those disclosed on 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’’).
(ii) Changes in actuarial assumptions
and funding method. Actuarial
assumptions established for a plan year
cannot subsequently be changed for that
plan year unless the Commissioner
determines that the assumptions that
were used are unreasonable. Similarly,
a funding method established for a plan
year cannot subsequently be changed for
that plan year unless the Commissioner
determines that the use of that funding
method for that plan year is
impermissible.
(iii) Procedures for establishing
actuarial assumptions and funding
method. For purposes of this paragraph
(f)(1), in the case of a plan for which an
actuarial report 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 filing 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
assumptions and the funding method
are established by the delivery of the
completed report 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 applicable date
described in the two preceding
sentences, then the same actuarial
assumptions (such as the same interest
rate and mortality table elections) and
funding 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 another
funding method permitted under
section 430 to be used for the current
plan year.
(iv) Scope of funding method. A
plan’s funding method includes not
only the overall funding method used
by the plan but also each specific
method of computation used in
applying the overall method. However,
the choice of which actuarial
assumptions 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

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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 assumptions 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), 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 determining 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 benefit payments will be paid as
single sums or other optional forms
under a plan and the impact of that
probability on the determination 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 benefit
payments under the plan will be made
in the form of any optional form of
benefit provided under the plan
(including single-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 payments in any such
optional form of benefit that are
different from those prescribed by
section 430(h).

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(iii) Single-sum and similar
distributions—(A) Distributions using
section 417(e) assumptions. 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), for purposes of applying
paragraph (f)(4)(ii) of this section, 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)
(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.
Except as otherwise provided in this
paragraph (f)(4)(iii), the present value of
a distribution 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 annuity 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
substituted 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 discounting 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
generational mortality and phase-in of
interest rates. In determining the
present value of a distribution under
this paragraph (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
mortality 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 permitted to
make adjustments to the interest rates in
order to reflect differences between the
phase-in of the section 430(h)(2)

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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. In
the 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
different from the present value
determined using the rules of paragraph
(f)(4)(iii)(B) of this section, based on
actuarial assumptions 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 determined
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
applied as of the valuation date by
comparing the present value of the
section 417(e)(3) benefit determined
under the rules of paragraph (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 using 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
described 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 assumptions that satisfy
the requirements of paragraph (f)(3) of
this section. Thus, if a plan provides for
a single-sum distribution equal to the
balance of a participant’s hypothetical
account under a cash balance plan, then
the amount of that future distribution is
equal to the projected account balance

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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)
General rule. In the case of an
applicable defined benefit plan
described in section 411(a)(13)(C), if the
amount of an annuity distribution is
based on either the balance of a
hypothetical account maintained for a
participant or the accumulated
percentage of a participant’s final
average compensation, then the amount
of that annuity distribution is calculated
by converting the projected account
balance (or accumulated percentage of
final average 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.
Except as otherwise provided in
paragraph (f)(5)(ii)(C) of this section, if
the plan bases the conversion of the
projected account balance (or
accumulated percentage of final average
compensation) to an annuity 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
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 annuity).
(C) Optional application of
generational 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 permitted 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
determines 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

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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
assumed to be zero if there is not more
than a de minimis likelihood that the
unpredictable contingent event will
occur.
(7) Reasonable techniques
permitted—(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
approximation 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
payments 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 employment during the plan
year, for purposes of determining the
benefits expected to accrue, be earned,
or 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 cannot be changed from the
actuarial assumptions that were used for
the preceding plan year without the
approval of the Commissioner if the
changes in assumptions result in a

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53041

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 resulting 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 before
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
determined 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 multiemployer
plans and disregarding plans with no
unfunded vested benefits) exceed
$50,000,000.
(iii) Automatic approval to resume
use of previously used assumptions
upon exiting at-risk status during phasein. A plan that is not in at-risk status for
the current plan year and that was in atrisk 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
required at-risk assumptions during the
period the plan was in at-risk status.
(9) Examples. The following examples
illustrate the rules of this section.
Unless otherwise indicated, these
examples are based on the following
assumptions: The normal retirement age
is 65, the minimum required
contribution for the plan is determined
under the rules of section 430 starting
in 2008, the plan year is the calendar
year, the valuation date is January 1, no
plan-related expenses are paid or
expected to be paid from plan assets,
and the plan does not provide for
mandatory employee contributions. The
examples are as follows:
Example 1. (i) Plan P provides an accrued
benefit equal to 1.0% of a participant’s
highest 3-year average compensation for each
year of service. Plan P provides that an early
retirement benefit can be received at age 60
equal to the participant’s accrued benefit
reduced by 0.5% per month for early
commencement. On January 1, 2010,

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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.
Participant 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 × 12 ×
($47,000 + $50,000 + $52,000) ÷ 3].
Participant A’s expected benefit accrual for
2010 is $800 [0.01 × 13 × ($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 function 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
paragraph (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 × (1 ¥ 0.005 × 60
months)]. The expected accrual of the early
retirement benefit during 2010 that is taken
into account for Participant A with respect to
the decrement at age 60 when determining
the 2010 target normal cost is zero, because
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 paragraph (f)(7)(ii) of this
section for an alternative approach for
determining the expected accrual with
respect 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 × (1 ¥ 0.005 × 48 months)]. The
portion of the early retirement benefit that is
taken into account for Participant 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 annual accrual × (1 ¥ 0.005
× 48 months)].
Example 2. (i) The facts are the same as
in Example 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 addition, the supplement is limited so that
it does not exceed 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 Participants 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 service, the allocation of the
benefit for purposes of determining the target
normal cost and funding target is made under
paragraph (c)(1)(ii)(D) of this section. The

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portion of the annual temporary supplement
for Participant B with respect to the early
retirement decrement occurring at age 60 that
is taken into account in determining the
funding target for the 2010 plan year is
$4,800 [($500 × 12 months) × 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 × 12 months)
× 20 years of past service ÷ 26 years of service
at assumed early retirement age]. In each
case, the allocable portion 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 retirement decrement occurring at
age 60 that is taken into account in
determining the target normal cost for the
2010 plan year is $240 [($500 × 12 months)
× 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 [($500 × 12
months) × 1 year of service expected to 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,
until age 62 (or assumed death, if earlier).
(iv) For Participant C, the portion of the
annual temporary supplement with respect to
the early retirement decrement occurring at
age 61 (when the participant is first eligible
for the benefit) that is taken into account in
determining the funding target for the 2010
plan year is $5,600 [($500 × 12 months) × 14
years of past service ÷ 15 years of service at
assumed early retirement age]. The present
value of this amount reflects a payment
period beginning with the decrement at age
61 until age 62 (or death if earlier).
Example 3. (i) The facts are the same as
in Example 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 participant’s
annual accrued benefit at the time of death,
or $10,000. The benefit is limited as
necessary to ensure 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 funding target for
Participant A.

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(iv) The excess of the death benefit over
Participant 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 Participant 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 × 12 years of past
service ÷ 16 years of service at assumed age
of death).
(v) The total single-sum death benefit for
Participant A with respect to the death
decrement at age 64 that is taken into account
in determining the funding 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 the excess death
benefit attributable to service during 2010 as
determined in accordance with paragraph
(c)(1)(ii)(D) of this section. As described in
Example 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 with paragraph (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 × 13 years of service as of
December 31, 2010 ÷ 16 years of service at
assumed age of death). The change in the
allocable 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 expected decrease in
the allocable portion of the death benefit in
excess of the accrued benefit).
Example 4. (i) The facts are the same as
in Example 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
retirement benefit with service projected to
normal retirement age. The valuation is based
on the assumption that all surviving spouses
choose to receive their benefit in the form of
a single sum. For Participant A, the value of
the qualified pre-retirement survivor annuity
is less than 100 times Participant A’s
projected monthly retirement benefit.

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
(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 determining the target normal
cost is made in accordance with paragraph
(c)(1)(ii)(B) of this section. As described in
Example 1, Participant A’s accrued benefit
based on service and compensation as of
January 1, 2010, is $5,960, or $496.67 per
month. Accordingly, the portion of the
single-sum death benefit corresponding to
the accrued benefit, or $49,667 (100 times
$496.67), is taken into account when
determining 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, Participant A’s accrued benefit with
service projected to normal retirement is
$8,443 [.01 × 17 years of service at age 65 ×
($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
Participant 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 Participant 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 section. 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
funding target for the 2010 plan year is
$15,521 ($20,694 × 12 years of past service
÷ 16 years of service at assumed age of
death). The total single-sum death benefit for
Participant A with respect to the death
decrement 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 the accrued benefit during 2010
and the expected change in the allocable
portion of the excess death benefit
attributable to service during 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
Participant A’s accrued benefit is therefore
$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 × 17 years of service at age 65 × ($50,000
+ $52,000 + $54,000) ÷ 3], or $736.67 per

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month. The corresponding death benefit is
$73,667. The excess portion of the single-sum
death benefit to be allocated 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 × 13 years of service as of
December 31, 2010 ÷ 16 years of service at
assumed age of death).
(viii) The change in the allocable portion
of Participant A’s excess death benefit during
2010, with respect to the death decrement at
age 64, is a decrease of $1,437 ($14,084 ¥
$15,521). 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
$5,229 ($6,666 expected increase in
Participant A’s death benefit based on the
expected increase in the accrued benefit,
minus an expected decrease of $1,437 in the
amount of the death benefit in excess of the
amount attributable to the accrued benefit).
Example 5. (i) The facts are the same as
in Example 1. In addition, the plan provides
a disability benefit to participants who
become disabled after completing 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
calculating the disability benefit, service
continues to accrue 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 service. Participant A’s annual
disability benefit at normal 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 target normal cost
and funding target is determined in
accordance with paragraph (c)(1)(ii)(B) of this
section. Accordingly, the portion of the
disability benefit 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
benefit 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
determined under paragraph (c)(1)(ii)(D) of
this section. The portion of Participant A’s
excess disability benefit 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 × (12
years of past service ÷ 15 years of service at
assumed date of disability)]. The total
disability benefit for Participant A, with
respect to the disability decrement occurring
at age 63, that is taken into account in
determining the funding target for the 2010
plan year is $8,536 ($5,960 + $2,576).

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53043

(v) The portion of Participant A’s disability
benefit 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 ×
(12 years of past service ÷ 16 years of service
at assumed date of disability)].
(vi) If in fact Participant A becomes
disabled at age 63, the funding target will
reflect the full disability benefit to which
Participant A will be entitled at normal
retirement age, based on service projected to
normal retirement age (17 years) and final
average 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
in Example 5, except that the disability
benefit is based on the accrued benefit
calculated using service and compensation
earned to the date of disability.
(ii) Because the disability benefit is a
function of the participant’s accrued benefit,
the portion of Participant A’s disability
benefit that is taken into account when
determining the funding target for the 2010
plan year is Participant A’s annual accrued
benefit as of January 1, 2010, or $5,960, as
determined in Example 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
accrual for 2010 determined in Example 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 revenue
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 payments 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
expected to be made after 20 years, using the
third segment interest rate of 6.56%.
Example 8. (i) The facts are the same as in
Example 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), there is a 5%
probability of withdrawal at age 50, and that
those participants who withdraw receive a
deferred annuity starting at age 65.

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations

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 Participant 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 20th
year after the valuation date), using the
second segment interest rate of 6.09%; and
$61,471.46, which is the present value of
payments expected to be made after the 20th
year, using 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 associated with
Participant E’s assumed age 50 withdrawal
benefit is $3,419.84 ($68,396.75 × 5%).
Example 9. (i) The facts are the same as in
Example 8, except the plan offers a singlesum distribution payable at normal
retirement age (age 65) determined based on
the applicable interest rates and the
applicable mortality table under section
417(e)(3). The actuary 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 single-sum payment,
the portion of the 2009 funding target that is
attributable to Participant E’s assumed singlesum 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 period after the
annuity starting date, the 2009 applicable
mortality rates are substituted for the 2009
male annuitant mortality rates. This portion
of the funding 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 20th year after the valuation
date), using 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 20th year following the
valuation date, using the third segment
interest rate of 6.56%. These present value
amounts reflect 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 target
attributable to Participant E’s assumed singlesum payment based on withdrawal at age 50
is $2,451.83 ($70,052.30 × 5% × 70%). After
taking into account the 5% probability of
withdrawal and the 30% probability of
electing a straight life annuity, the portion of
the 2009 funding target that is attributable to
Participant E’s assumed straight life annuity
(based on assumed withdrawal at age 50),
deferred to age 65, is equal to 30% of the
result obtained in Example 8.
Example 10. (i) The facts are the same as
in Example 9, except the plan offers an
immediate single sum upon withdrawal at
age 50 determined based on the applicable
interest rates and the applicable mortality
table under section 417(e)(3). The actuary
assumes that 70% of the participants will
elect to receive 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 Participant
E’s assumed single-sum payment based on
withdrawal 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

Age

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65
66
67
68

Maturity

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 20th year
after the valuation 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 20th year following the valuation date,
using the third segment interest rate of
6.56%. These present value amounts reflect
the 2009 male nonannuitant mortality 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 × 5% ×
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 enrolled
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%
probability 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 reflects the sum
of each year’s expected payments, discounted
at the yield rates described in paragraph (i)
of this Example 11, as shown below:
Yield rate

Present value

........................................................
........................................................
........................................................
and over .........................................

19.5 .....................................................
20.5 .....................................................
21.5 .....................................................
Varies .................................................

6.97%
6.90%
6.84%
Varies

..............................................................
..............................................................
..............................................................
..............................................................

$5,897.88
5,524.69
5,164.63
50,806.92

Total .............................................

.............................................................

.........................................................................

67,394.12

(iii) Applying the 5% probability of
withdrawal, the 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 × 5%).
Example 12. (i) The facts are the same as
in Example 10, except that the plan
determines the amount of the immediate
single-sum distribution upon withdrawal 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 applicable mortality table under
section 417(e)(3) is used for both
calculations.
(ii) Before taking into account the 5%
probability of withdrawal and the 70%

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probability of electing a single-sum payment,
the present value of Participant E’s singlesum distribution as of January 1, 2009, using
an interest rate of 6.25%, based on
withdrawal at age 50, is $77,391.88. This
amount is determined by calculating the
projected single-sum distribution 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 January 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%
probability of withdrawal and the 70%

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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 rates and
applicable mortality table under section
417(e)(3) is $68,908.39, as developed in
Example 10. Corresponding to plan
provisions, the present value 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 2009 plan year
that is attributable to Participant E’s assumed
single-sum payment (based on withdrawal at

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
age 50) is $2,708.72 ($77,391.88 × 5% ×
70%).
Example 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
hypothetical account balance equal to
$150,000 on that date. In the 2009 actuarial
valuation, the enrolled actuary assumes that
the hypothetical account balances will
increase with annual interest credits of 7%
until the participant commences receiving
his or her benefit, corresponding to the
actuary’s best estimate of future interest rates
credited under the terms of the plan. 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 terminate 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 annual interest
crediting rate of 7%. The funding target for
the 2009 plan year attributable to Participant
F’s benefit at age 65 is $158,525.81, which is
calculated by discounting the projected
hypothetical account 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
in Example 13, except that the actuary
assumes that 10% of the participants will
choose to collect their benefits in the form of
a straight life annuity. The plan provides that
the participant’s account balance at
retirement is converted to an annuity using
the applicable 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 in Example 13. This
amount is converted to an annuity payable
commencing at age 65 by dividing the
projected 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
resulting annuity factor is 10.8321, reflecting
one year of interest at the first segment rate
(5.07%) corresponding to the first year of the
expected annuity payments (the fifth year
after the valuation date), 15 years of interest
at the second segment rate (6.09%) and all
remaining years at the third segment rate
(6.56%). The projected future annuity is
therefore $196,619.40 divided by 10.8321, or
$18,151.55 per year.
(iii) Before taking into account the 10%
probability that the participant will elect to
take the distribution in the form of a lifetime

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annuity, the funding 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 made during
the year the participant turns age 65 (the 5th
year after the valuation date), using the first
segment interest rate of 5.07%; $116,321.72,
which is the present value of payments
expected to be made during the 6th through
the 20th 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 target 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 in Example 13.
Example 15. (i) Plan H provides a monthly
benefit of $50 times service for all
participants. 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 January 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, valuation
or defer recognition of the amendment to the
January 1, 2011, valuation. However, under
paragraph (d)(2) of this section, because the
plan amendment would not have been
permitted to take effect under 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

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53045

$25,000 that results from the plan
amendment.

(g) Effective/applicability dates and
transition rules—(1) Statutory effective
date/applicability date—(i) In general.
Section 430 generally 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
delayed for certain plans in accordance
with sections 104 through 106 of PPA
’06.
(ii) Applicability of special
adjustments. The special adjustments of
paragraph (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. This section applies to plan
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 requirements of
section 430 are treated as having been
approved by the Commissioner and do
not require the Commissioner’s specific
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.

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(B) Optional earlier application of
regulations. 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 funding method for that plan
year is treated as having been approved
by the Commissioner and does not
require the Commissioner’s specific
prior approval. For example, if the
change in funding method includes a
change in the valuation software, the
change in the valuation software is
treated as having been approved by the
Commissioner and does not require the
Commissioner’s specific prior approval.
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
allocation. Any change in a plan’s
funding method for a plan year earlier
than the first plan year beginning on or
after January 1, 2010, that is necessary
to apply the rules of paragraph (c)(1)(ii)
of this section 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
funding. For a plan for which the
minimum required contribution is not
determined under section 430 for the
first plan year that begins on or after
January 1, 2008, pursuant 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 specific prior approval.
(4) Approval for changes in actuarial
assumptions. The Commissioner’s
specific prior approval is not required
with respect to any actuarial
assumptions that are adopted for the
first plan year for which section 430
applies to determine the minimum
required contribution for the plan and
that are not inconsistent with the
requirements 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

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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
assets—(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,
reduced by the plan’s funding standard
account 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. The value of
plan assets for the 2007 plan year under
this paragraph (g)(5)(ii)(B) is determined
under section 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 standard account credit
balance 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
adjustment 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 percent of the fair market
value of plan assets. If the value of plan
assets determined under 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 paragraph
(g)(5)(ii)(B) of this section as of that
valuation date to determine the value of
plan assets for the 2007 plan year.
However, the value of plan assets is not
reduced below zero.
(B) Effect of funding standard
carryover balance reduction for the 2008
plan year. Notwithstanding the rules of
paragraph (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 carryover 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

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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 standard account
credit balance when that balance 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
section provides rules relating to the
application of prefunding and funding
standard carryover balances under
section 430(f). Section 430 and this
section apply to single employer
defined benefit plans (including
multiple employer plans) that are
subject to section 412, but do not apply
to multiemployer plans (as defined in
section 414(f)). Paragraph (b) of this
section sets forth rules regarding a
plan’s prefunding balance and a plan
sponsor’s election to maintain a funding
standard carryover balance. Paragraph
(c) of this section provides rules under
which those balances must be
subtracted from plan assets. Paragraph
(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 balances (which
will affect the determination of the
value of plan assets for purposes of
sections 430 and 436). Paragraph (f) of
this section sets forth rules regarding
elections under this section. Paragraph
(g) of this section contains examples.
Paragraph (h) of this section contains
effective/applicability 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 separately 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
separate 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 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 this section are applied as if all
participants in the plan were employed
by a single employer.
(b) Maintenance of balances—(1)
Prefunding balance—(i) In general. A
plan sponsor is permitted to elect to

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
maintain a prefunding balance for a
plan. A prefunding 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
provided in paragraph (b)(1)(iii) of this
section. The plan sponsor’s initial
election to add to the prefunding
balance under paragraph (b)(1)(ii) of this
section constitutes an election to
maintain a prefunding balance. 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. If the
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 effective 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 of the excess
contributions for the preceding 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
contribution. The present value of the
excess contribution for the preceding
plan year is the excess, if any, of—
(1) The present value (determined
under the rules of paragraph (b)(1)(iv)(B)
of this section) of the employer
contributions (other than contributions
to avoid or terminate benefit limitations
described in § 1.436–1(f)(2)) to the plan
for such preceding plan year; over
(2) The minimum required
contribution for such preceding plan
year.
(C) Treatment of unpaid minimum
required 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 contribution 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
balance 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.

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(iv) Adjustments for interest—(A)
Adjustment of excess contribution. The
present value of the excess contribution
for the preceding year (as determined
under 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
valuation date for the preceding plan
year, using the plan’s effective interest
rate under section 430(h)(2)(A) for the
preceding plan year.
(2) Funding standard carryover
balance—(i) In general. A funding
standard carryover balance is
automatically established 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-effective
plan year for the plan. The funding
standard carryover balance as of the
beginning 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 section.
(ii) Decreases. As of the first day of
each plan year, the funding standard
carryover balance of a plan is decreased
(but not below zero) by the sum of—
(A) Any amount of the funding
standard carryover balance 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 funding
standard carryover balance under
paragraph (e) of this section for the plan
year.
(3) Adjustments for investment
experience—(i) In general. A plan’s
prefunding balance under paragraph
(b)(1) of this section and a plan’s
funding standard carryover balance
under paragraph (b)(2) of this section as
of the first day of a plan year must be

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53047

adjusted to reflect the actual rate of
return on plan assets for the preceding
plan year. For this purpose, the actual
rate of return on plan assets for the
preceding plan year is determined on
the basis of fair market value and must
take into account the amount and timing
of all contributions, distributions, and
other plan payments 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
balance 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 required
contribution for the preceding plan year
pursuant to paragraph (d) of this
section. 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
contributions attributable to use of
funding balances. Notwithstanding
paragraph (b)(1)(iv)(A) of this section, to
the extent that a contribution is
included in the present value of excess
contributions solely because the
minimum required contribution has
been offset under paragraph (d) of this
section, the contribution is adjusted 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. If
a 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
investment 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 under
paragraphs (b)(1)(iii) and (b)(2)(ii) of this
section, the amount of the prefunding
balance or funding standard carryover
balance that is used to offset the
minimum required contribution under
paragraph (d) of this section or reduced
under paragraph (e) of this section is
discounted from the valuation date to
the first day of the plan year using the

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effective interest rate under section
430(h)(2)(A) for the plan year.
(5) Special rule for quarterly
contributions—(i) Quarterly
contributions due on or after the
valuation date. For purposes of
applying a prefunding balance or
funding 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 the
election (using the plan’s effective
interest 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
paragraphs (b)(1)(iii) and (b)(2)(ii) of this
section, 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 offset 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
subtracted from the value of plan assets
for purposes of sections 430 and 436,
except 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
determining new shortfall amortization
base—(i) Prefunding balance. 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 under paragraph (d) of this
section to use the prefunding balance to
offset the minimum required
contribution is made for the plan year.
(ii) Funding standard carryover
balance. 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 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

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the minimum required contribution 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
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,
that specified amount is not subtracted
from the value of plan assets for
purposes of determining the funding
shortfall 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
shortfall under section 430(c)(4) is
reduced by $15 million ($20 million less
$5 million) to $85 million. For purposes
of this paragraph (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 contribution for
the plan year (determined after taking
into account any waiver under section
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
contributions 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
contribution 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

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the due date of the required installment.
If the election to use all or a portion of
the prefunding balance or the funding
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 contribution 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 required
installment at the effective interest rate
plus 5 percentage points, and then
further 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 satisfied by an
election to apply the funding standard
carryover balance that is made on July
1 (21⁄2; 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
funding 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
balances 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 required
contribution for a plan year must take
into account any decrease in those
balances which results from a prior
election either to use the prefunding
balance or funding standard carryover
balance under 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
example, 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 available prefunding
balance or funding standard carryover
balance that can be used with respect to
an election made after April 1, 2010.
(B) Exception to chronological rule.
Notwithstanding the general rule of
paragraph (d)(1)(ii)(A) of this section, all
elections under section 430(f)(5) and
paragraph (e) of this section to reduce
the prefunding balance or funding

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
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 section
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 requirement) 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 required
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 prefunding balance or funding
standard carryover balance to offset a
minimum required contribution for a
prior plan year.
(C) Investment experience. In addition
to reflecting any decrease in the
prefunding balance or the funding
standard carryover 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 minimum 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
adjusted 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
elections 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) or paragraph (e) of this section
(including 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

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carryover balances available for that
subsequent election. Under this special
rule, in lieu of decreasing the funding
standard carryover 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
equivalent 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 prefunding 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 section 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 elections
made for the second year.
(2) Requirement to use funding
standard 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 prefunding balance may be
used to offset the minimum 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. An election to 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 otherwise 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

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53049

date for the preceding plan year,
reduced by the amount of any
prefunding balance (but not the amount
of any funding standard carryover
balance); and
(B) The denominator of which is the
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
involved 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 carryover balances
under this paragraph (e). If such an
election is made, the amount of those
balances that must be subtracted from
the value of plan assets 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 plan’s prior plan year
funding ratio under 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 paragraph (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
standard carryover balance before
prefunding balance. To the extent that
a plan has a funding standard carryover
balance greater than zero, no election
under paragraph (e)(1) of this section is
permitted to be made that reduces the
plan’s prefunding balance. Thus, a plan
must exhaust its funding standard
carryover balance before it is permitted
to make an election under paragraph

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(e)(1) of this section with respect to its
prefunding balance.
(f) Elections—(1) Method of making
elections—(i) In general. Any election
under this section by the plan sponsor
must be made by providing written
notification of the election to the plan’s
enrolled actuary and the plan
administrator. The written notification
must set forth the relevant details of the
election, including the specific dollar
amount involved in the election (except
as provided in paragraph (f)(1)(ii) of this
section). Thus, except as provided in
paragraph (f)(1)(ii) of this section, a
conditional 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
provide a standing election in writing to
the plan’s enrolled actuary to use the
funding standard carryover balance and
the prefunding balance to offset the
minimum required contribution for the
plan year to the extent needed to avoid
an unpaid minimum required
contribution under section 4971(c)(4)
taking into account any contributions
that are or are not made. In addition, a
plan sponsor may provide a standing
election in writing to the plan’s enrolled
actuary to add the maximum amount
possible 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 actuary
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’’) for the plan for 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
respect 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 prefunding balance relates
to the plan year for which excess
contributions were made. For example,
an election to add to the prefunding

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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 in enrolled actuary
for the plan year which would result in
a revocation of the standing election
under the rule of paragraph (f)(1)(ii)(B)
of this section, 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 funding standard carryover
balance for a plan year (for example, in
order to avoid or terminate 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
election can be made. A plan sponsor is
permitted 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
election under this section with respect
to the plan’s prefunding balance or
funding standard carryover balance is
irrevocable (and must be
unconditional). A standing election by
the plan sponsor may be revoked by
providing written notification of the
revocation 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
offset 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

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contribution requirements (including an
election used to satisfy the quarterly
contribution requirements) exceeds the
minimum required contribution for a
plan year (determined without regard to
the election under paragraph (d) of this
section) 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 deadline set forth
in paragraph (f)(3)(iii) of this section. If
no such revocation is made, then, under
paragraph (b) of this section, the
funding standard carryover balance or
prefunding balance 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
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 Benefit 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 reference to the plan
sponsor means the employer or
employers responsible for making
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 not apply, any
reference to the plan sponsor means the
plan administrator 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 valuation date of January 1. The
funding standard carryover balance of Plan P
is $25,000 and the prefunding 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 portion of the funding

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
standard carryover balance prior to the
determination of the value of plan assets for
2010, pursuant to paragraph (e)(1) of this
section. The actual 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
section 430 for 2010 is $100,000, and no
quarterly installments 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 as of January 1, 2011,
cannot exceed $44,730 (which is the present
value of the excess 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 funding standard carryover
balance as of January 1, 2010, adjusted for
investment experience during 2010 at a rate
of 2%).
Example 2. (i) The facts are the same as in
Example 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
adjustment 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 as of January 1, 2011,
cannot exceed $43,273 (which is the present
value of the excess 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 in Example 1 of 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 January 1, 2011, is $68,773.
Example 3. (i) The facts are the same as
in Example 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,

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Sponsor S elects to use $15,000 of the
funding standard carryover balance to offset
P’s minimum required contribution 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 contribution 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 experience during the 2010 plan
year, 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
contribution, adjusted for investment
experience during the 2010 year ($25,000 less
$15,000 plus $200).
Example 4. (i) The facts are the same as
in Example 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 offset 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 funding

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53051

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
contribution before offset by the funding
standard carryover balance.
(iv) The portion of the excess contribution
resulting solely because the minimum
required contribution was offset by a portion
of the funding standard carryover balance is
adjusted for investment experience 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 effective interest
rate for 2010, pursuant to paragraph
(b)(1)(iv)(A) of this section. Accordingly, this
portion 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
contribution, adjusted for investment
experience during the 2010 plan year as
developed in Example 3 ($25,000 less
$15,000 plus $200).
(vii) Sponsor S elects to increase the
prefunding 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 standard
carryover balance and the prefunding balance
as of January 1, 2011, of $68,773, the same
amount as that developed in Example 2.
Example 5. (i) Plan Q is a defined benefit
plan with a plan year that is the calendar
year and a valuation 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
prefunding 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 respect to 2010, as determined under
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

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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 under 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
carryover 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 required 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 balance. The resulting
amount is adjusted for investment experience
to January 1, 2011, using a rate equal to the
actual rate of return on plan assets of 10%
during 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
standard carryover balance as of January 1,
2010, solely for purposes of determining the
adjustment for investment experience during
2010, is $40,299 ($50,000—$9,701), and the
adjustment for investment experience is
$4,030 ($40,299 × 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
in Example 5, except that Sponsor T
contributes $200,000 on July 1, 2010, for the
2010 plan year.
(ii) The cash contribution required for
2010, after offsetting the minimum required
contribution by $10,000 of the funding
standard carryover balance in accordance
with T’s election, is $190,000. The difference,
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 contribution 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
section, for a present value of the excess
contribution adjusted for interest of $10,671
($9,701 × 1.10) as of January 1, 2011.
Example 7. (i) The facts are the same as
in Example 4. Plan P’s effective interest rate

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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
standard 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 required
quarterly installment then due.
(ii) When adjusting Plan P’s prefunding
and funding 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 prefunding balance. The
prefunding balance is reduced by the
remaining $39,800 ($50,000 total election
minus $10,200 from the funding standard
carryover balance).
(iii) The amount available for Sponsor S’s
election to use Plan P’s prefunding and
funding standard 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) The facts are the same as in
Example 7, except that based on the enrolled
actuary’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 prefunding balance is
deemed to occur on the first day of the plan
year, and before the date of any election 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 minimum contribution because that
election was made on February 1, 2012,
before the date of the deemed election,
July 1, 2012.
(iii) As shown in Example 7, the available
prefunding balance as of January 1, 2012,
after reflecting the February 1, 2012, election
to offset the 2011 minimum required
contribution but before reflecting the
April 15, 2012, election to offset the 2012
minimum 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

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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 remaining $5,087 prefunding
balance is considered unpaid retroactive to
April 15, 2012.
Example 9. (i) The facts are the same as
in Example 8, except that Sponsor S does not
make the election to offset the 2011
minimum required contribution 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 reduce Plan P’s
prefunding and funding standard carryover
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 funding standard carryover balances are
adjusted to January 1, 2012, using Plan P’s
rate of investment return for 2011 of 7%.
This results in an available funding standard
carryover balance of $10,914 ($10,200 × 1.07)
and an available prefunding balance of
$62,673 (58,573 × 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. Accordingly, the funding
standard carryover balance is eliminated, and
the prefunding balance is reduced by the
remaining $57,586 ($68,500 ¥ $10,914),
resulting 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 January 1, 2011, to
determine the amount available to offset the
2011 minimum required contribution. This
adjustment is done by dividing the remaining
balance by 1 plus the rate of investment
return for 2011. Accordingly, the amount
available to offset the 2011 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 required 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 × 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.

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
Example 10. (i) Plan V is a defined benefit
plan with a plan year that is the calendar
year and a valuation 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 funding standard carryover balance is $0
and its prefunding balance is $125,000. Plan
V’s effective interest rate for 2010 is 5.5%.
The enrolled actuary’s certification 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 accordance with paragraph (b)(4)(i)
of this section, the amount of the prefunding
balance subtracted from plan assets is
increased from the first day of the plan year
to the valuation date using the effective
interest rate of 5.5% for 2009. Accordingly,
the prefunding balance used for this purpose
is $116,050 [($125,000 ¥ $15,000 deemed
reduction) × 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
in Example 10. The minimum contribution
for Plan V for the 2010 plan year is $45,000;
no quarterly installments 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
balance 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 prefunding 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
investment 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) ×
1.10].
Example 12. (i) The facts are the same as
in Example 11, except that the enrolled
actuary’s certification 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

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prefunding balance is applied before the
election to use the prefunding balance to
offset the balance of the minimum required
contribution 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 reduction 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
2009 minimum required contribution as of
December 31, 2010, is $44,118 ($41,818 ×
1.055). This amount is larger than the
election made by Plan V’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
generally 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 delayed for
certain plans in accordance with
sections 104 through 106 of PPA ’06.
(2) 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
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) If the value of plan assets is less
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
determining a plan’s prior plan year
funding ratio under paragraph (d)(3) of
this section with respect to the first plan

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53053

year beginning on or after January 1,
2008, the funding target of the plan for
the preceding plan year is equal to the
plan’s current liability under 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,
mergers, and spinoffs. In the case of a
plan described 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 first plan year
beginning on or after January 1, 2008 is
determined using rules similar to the
rules of paragraphs (d)(3)(ii), (d)(3)(iii),
and (d)(3)(iv) of this section.
(4) First effective plan year. For
purposes of this section, the term first
effective plan year means the first plan
year beginning 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
purposes of this section, the term preeffective plan year means the plan year
immediately preceding the first effective
plan year.
■ Par. 4. Section 1.430(g)–1 is added to
read as follows:
§ 1.430(g)–1 Valuation date and valuation
of plan assets.

(a) In general—(1) Overview. This
section provides rules relating to a
plan’s valuation date and the valuation
of a plan’s assets 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
section 413(c)) that are subject to the
rules of section 412, but do not apply to
multiemployer plans (as defined in
section 414(f)). Paragraph (b) of this
section describes valuation date rules.
Paragraph (c) of this section describes
rules regarding the determination of the
asset value for purposes of a plan’s
actuarial valuation. Paragraph (d) of this
section contains rules for taking
employer contributions into account in
the determination of the value of plan
assets. Paragraph (e) of this section
contains examples. Paragraph (f) of this
section sets forth effective/applicability
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 maintained 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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations

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 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 provided 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
preceding plan year, a plan had 100 or
fewer participants determined by
applying the rules of § 1.430(d)–1(e)(1)
and (2) (including 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 participants 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,
employed any employees of the
employer who are covered by the plan.
(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 having 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 exception under this paragraph
(b)(2) for a plan year because the
number of participants exceeded 100 in
the prior plan year, then the resulting
change in the valuation date to the first

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day of the plan year is automatically
approved by the Commissioner.
(c) Determination of asset value—(1)
In general—(i) General use of fair
market value. Except as otherwise
provided in this paragraph (c), the value
of plan assets 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 valuation
date are taken into account to the extent
provided in paragraph (d) of this
section.
(ii) Fair market value. 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 Commissioner, any
guidance on the valuation of insurance
contracts under Subchapter D of
Chapter 1 the Internal Revenue Code
applies for purposes of this paragraph
(c)(1)(ii).
(2) Averaging of fair market values—
(i) In general. Subject to the plan asset
corridor 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 adjusted fair
market value of assets determined for
one or more earlier determination 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 funding
method and, accordingly, may only be
changed with the consent of the
Commissioner.
(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 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 situation, 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

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determination date is the fair market
value of plan assets on that date,
increased for contributions included in
the plan’s asset 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 ending
immediately before the valuation date,
and adjusted for expected earnings as
described 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 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). If
the contribution that is receivable as of
the determination date is for a plan year
beginning on or after January 1, 2008,
then only the present value as of the
determination 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.
(C) Treatment of spin-offs and planto-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 otherwise 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-toplan transfer described in § 1.414(l)–
1(b)(3) are treated in the same manner
as contributions.
(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.
[Reserved]
(iii) Restriction to 90–110 percent
corridor—(A) In general. This paragraph
(c)(2)(iii) provides rules for applying the
90 to 110 percent corridor set forth in
section 430(g)(3)(B)(iii). The rules for
accounting 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 paragraph (c)(2)(iii).
(B) Asset value less than 90 percent of
fair market value. If the value of plan

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
assets 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 market value of plan
assets.
(C) Asset value greater than 110
percent of fair market value. If the value
of plan assets determined under
paragraph (c)(2)(i) of this section is
greater than 110 percent of the fair
market value of plan assets, 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
receipts—(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 valuation 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 section 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
contributions. 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 contribution is for the
immediately preceding plan year and is
made by the deadline for contributions
for that preceding plan year under
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 precedes the first plan year
that begins on or after January 1, 2008,
and is not described in paragraph
(d)(1)(ii)(A) of this section, then the

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rules of paragraph (d)(1)(i) apply to the
contribution except that the present
value is determined using the valuation
interest 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
before 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 determining the value of plan assets
under paragraph (c) of this section, if an
employer makes a contribution for a
plan year before that year’s valuation
date, that contribution (and any interest
on the contribution for the period
between the contribution date and the
valuation date, determined using the
effective interest rate under section
430(h)(2)(A) for the plan year) must be
subtracted from plan assets in
determining the value of plan assets as
of the valuation date. If the result of this
subtraction 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
generally 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 delayed 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
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.
(ii) Permission to use averaging for
2008. For purposes of determining the
actuarial value of assets for a plan year
beginning 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
valuation 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

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53055

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 specific
prior approval. In addition, 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 rules of this section 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
section 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 defined benefit plans
(including multiple employer 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 describes the monthly
corporate bond yield curve that is used
to develop the segment rates. Paragraph
(e) of this section describes certain
elections that are permitted to be made
under this section. Paragraph (f) of this
section describes other rules related to
interest rates. Paragraph (g) of this
section contains examples. Paragraph
(h) of this section contains effective/
applicability 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 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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations

in the plan were employed by a single
employer.
(b) Interest rates for determining plan
liabilities—(1) In general. The interest
rates used in determining 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 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 valuation 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 paragraph (c)(2)(i) of this
section.
(ii) Plans with valuation dates other
than the first day of the plan year.
[Reserved]
(3) Benefits payable after 5 years and
within 20 years. In the case of benefits
expected to be payable during the 15year period beginning after the end of
the period described in paragraph (b)(2)
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 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
otherwise provided in paragraph (e) of
this section, the term applicable month
for 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
Accountability Appropriations Act,
2007, Public Law 110–28 (121 Stat.
112), for a plan sponsor that makes the
election described in section 402(a)(2) of
the Pension Protection Act of 2006 (PPA
’06), Public Law 109–280 (120 Stat.
780), the interest rate required to be

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used to determine the plan’s funding
target for each of the 10 years under 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 target normal cost.
(c) Segment rates—(1) Overview. This
paragraph (c) sets forth rules for
determining the first, second, and third
segment rates for purposes of paragraph
(b) of this section. The first, second, and
third segment rates are set forth in
revenue 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 paragraph (h)(4)
of this section for a transition rule under
which the definition of the segment
rates is modified for plan years
beginning in 2008 and 2009.
(2) Definition of segment rates—(i)
First segment rate. For purposes of this
section, except as otherwise provided
under the transition rule of paragraph
(h)(4) of this section, the first segment
rate is, 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 first
5 years of each of those yield curves.
(ii) Second segment rate. For purposes
of this section, except as otherwise
provided under the transition rule of
paragraph (h)(4) of this section, the
second segment rate is, 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
15-year period that follows the end of
the 5-year period described in paragraph
(c)(2)(i) of this section.
(iii) Third segment rate. For purposes
of this section, except as otherwise
provided under the transition rule of
paragraph (h)(4) of this section, the third
segment rate is, with respect to any
month, the single rate of interest
determined by the Commissioner on the
basis of the average of the monthly

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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, the monthly corporate bond
yield curve is, with respect to any
month, a yield curve that is prescribed
by the Commissioner for that month
based on yields for that month on
investment grade corporate bonds with
varying maturities that are in the top
three quality levels available.
(2) Determination and publication of
yield curve. A description of the
methodology for determining the
monthly corporate bond yield curve is
provided in guidance 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
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.
(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 actuary.
Any election in this paragraph (e) may
be adopted for a plan year without
obtaining 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 applicable
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 applicable 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 normal cost, and for all other
purposes under section 430 (including
the determination of shortfall

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
amortization installments, waiver
installments, and the present values of
those installments as described in
paragraph (f)(2) of this section), the plan
sponsor may elect to use interest rates
under the monthly corporate bond yield
curve described in paragraph (d) of this
section for the month preceding the
month that includes the valuation date
in lieu of the segment rates determined
under paragraph (c) of this section. In
order to address the timing of benefit
payments during a year, reasonable
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
under 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 benefit were
being paid for the entire year. See
§ 1.430(d)–1(f)(7) for additional
reasonable techniques that can be used
in determining 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
responsible 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 administrator within the
meaning of section 414(g).
(f) Interest rates used for other
purposes—(1) Effective interest
rate—(i) In general. Except as otherwise
provided in paragraph (f)(2) of this
section, the effective 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 calculations 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
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 target normal cost for the plan
year, would result in an amount equal
to the plan’s target normal cost

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determined for the plan year 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. The
interest 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 installments are
assumed to be paid, using the same
timing rules that apply in determining
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 installments 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 amortization
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 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 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 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 Revenue 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
January 1, 2009. This figure is based on the

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53057

male nonannuitant 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 interest 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) The facts are the same as
for Example 1, except that Plan P offers a
single-sum distribution equal to the present
value of the accrued benefit based on the
applicable interest rates under section
417(e)(3) or an interest rate of 6.25%,
whichever produces the higher amount. The
applicable mortality table under section
417(e)(3) is used for both calculations.
(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
mortality 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 interest
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 12 for additional
details.)
(iii) The effective interest rate is the single
interest rate that will produce the same
funding target if substituted for the segment
interest rates keeping all other assumptions
the same, including the fixed interest rate
used by the plan to determine single-sum
payments. 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 calculation,
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,

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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
generally 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 delayed for
certain plans in accordance with
sections 104 through 106 of PPA’06.
(2) Effective date/applicability date of
regulations. This section applies to plan
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
paragraph (c)(2) of this section, for plan
years beginning 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—
(A) The product of that rate for that
month determined without regard to
this paragraph (h)(4), multiplied by the
applicable percentage; and
(B) The product of the weighted
average interest rate determined under
the rules of paragraph (h)(4)(iii) of this
section, multiplied by a percentage
equal to 100 percent minus the
applicable percentage.
(ii) Applicable percentage. For
purposes of this paragraph (h)(4), the
applicable percentage is 331⁄3 percent
for plan years beginning in 2008 and
662⁄3 percent 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
valuation date (if the applicable month

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(i) The funding target attainment
percentage for the preceding plan year
(determined under paragraph (b)(3) of
this section) is less than 80 percent; and
(ii) The at-risk funding target
attainment percentage for the preceding
plan year (determined under paragraph
(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
(including both active and inactive
§ 1.430(i)–1 Special rules for plans in atparticipants), determined in accordance
risk status.
with the same rules that apply for
(a) In general—(1) Overview. This
section provides special rules related to purposes of § 1.430(g)–1(b)(2)(ii), then
the plan is not treated as being in at-risk
determining the funding target and
status for the plan year.
making other computations for certain
(3) Funding target attainment
defined benefit plans that are in at-risk
percentage.
For purposes of this section,
status for the plan year. Section 430(i)
except as otherwise provided in
and this section apply to single
paragraph (b)(5) of this section, the
employer defined benefit plans
(including multiple employer plans) but funding target attainment percentage of
do not apply to multiemployer plans (as a plan for a plan year is the funding
defined in section 414(f)). Paragraph (b) target attainment percentage as defined
in § 1.430(d)–1(b)(3).
of this section describes rules for
(4) At-risk funding target attainment
determining whether a plan is in at-risk
percentage. Except as otherwise
status for a plan year, including the
determination of a plan’s funding target provided in paragraph (b)(5) of this
section, the at-risk funding target
attainment percentage and at-risk
attainment percentage of a plan for a
funding target attainment percentage.
plan year is a fraction (expressed as a
Paragraph (c) of this section describes
percentage)—
the funding target for a plan in at-risk
(i) The numerator of which is the
status. Paragraph (d) of this section
value of plan assets for the plan year
describes the target normal cost for a
after subtraction of the prefunding
plan in at-risk status. Paragraph (e) of
balance and the funding standard
this section describes rules regarding
carryover balance under section
how the funding target and the target
430(f)(4)(B); and
normal cost are determined for a plan
(ii) The denominator of which is the
that has been in at-risk status for fewer
at-risk funding target of the plan for the
than 5 consecutive plan years.
plan year (determined under paragraph
Paragraph (f) of this section sets forth
(c) of this section, but without regard to
effective/applicability dates and
the loading factor imposed under
transition rules.
paragraph (c)(2)(ii) of this section).
(2) Special rules for multiple
(5) Special rules—(i) Special rule for
employer plans. In the case of a multiple
new plans. Except as otherwise
employer plan to which section
413(c)(4)(A) applies, the rules of section provided in paragraph (b)(5)(iii) of this
section, in the case of a new plan that
430 and this section are applied
was neither the result of a merger nor
separately for each employer under the
involved in a spinoff, the funding target
plan, as if each employer maintained a
attainment percentage under paragraph
separate plan. For example, at-risk
(b)(3) of this section and the at-risk
status is determined separately for each
funding target attainment percentage
employer under such a multiple
employer plan. In the case of a multiple under paragraph (b)(4) of this section
are equal to 100 percent for years before
employer plan to which section
the plan exists.
413(c)(4)(A) does not apply (that is, a
(ii) Special rule for plans with zero
plan described in section 413(c)(4)(B)
funding target. Except as otherwise
that has not made the election for
provided in paragraph (b)(5)(iii) of this
section 413(c)(4)(A) to apply), the rules
section, if the funding target of the plan
of section 430 and this section are
is equal to zero for a plan year, then the
applied as if all participants in the plan
funding target attainment percentage
were employed by a single employer.
under paragraph (b)(3) of this section
(b) Determination of at-risk status of
and the at-risk funding target attainment
a plan—(1) General rule. Except as
percentage under paragraph (b)(4) of
otherwise provided in this section, a
this section are equal to 100 percent for
plan is in at-risk status for a plan year
that plan year.
if—
is determined under paragraph (b)(5) of
this section); or
(C) The applicable month (if the
applicable month is determined under
paragraph (e)(2) of this section).
(iv) New plans ineligible. The
transition rule of this paragraph (h)(4)
does not apply if the first plan year of
the plan begins on or after January 1,
2008.
■ Par. 6. Section 1.430(i)–1 is added to
read as follows:

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
(iii) Exception when plan has
predecessor plan that was in at-risk
status. [Reserved]
(iv) Special rules for plans that are the
result of a merger. [Reserved]
(v) Special rules for plans that are
involved 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 atrisk 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 preceding 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 benefits accrued or earned under
the plan as of the beginning of the plan
year, as determined in accordance with
§ 1.430(d)–1 but using the additional
actuarial assumptions described in
paragraph (c)(3) of this section.
(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.
Notwithstanding 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 determined
without regard to this section.
(3) Additional actuarial
assumptions—(i) In general. The
actuarial assumptions used to determine
a plan’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
assumption—(A) Participants eligible to
retire and collect benefits within 11
years. Subject to paragraph (c)(3)(ii)(B)

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of this section, if a participant would be
eligible to commence an immediate
distribution by the end of the 10th plan
year after the current plan year (that is,
the end of the 11th plan year beginning
with the current plan year), that
participant is assumed to commence 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 age assumption of paragraph
(c)(3)(ii)(A) of this section does not
apply to a participant to the extent the
participant is otherwise assumed to
commence benefits during the current
plan year under the actuarial
assumptions for the plan. For example,
if generally applicable retirement
assumptions would provide for a 25
percent probability that a participant
will commence benefits during the
current plan year, the special retirement
age assumption of paragraph (c)(3)(ii)(A)
of this 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
receiving 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
valuable benefit. All participants and
beneficiaries 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
reasonable techniques in determining
the actuarial 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 atrisk status—(1) General rule. If the plan
has been in at-risk status for 5
consecutive years, including the current
plan year, then the target normal cost for
the plan is the at-risk target normal cost
determined under paragraph (d)(2) of

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53059

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 atrisk target normal 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
determined in accordance with
§ 1.430(d)–1 but using the additional
actuarial assumptions described in
paragraph (c)(3) of this section.
(B) Special adjustments. The target
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 expenses expected to be
paid from plan assets during the plan
year and subtracting the amount of any
mandatory employee contributions
expected to be made during the plan
year.
(C) Plan-related expenses. For
purposes of this paragraph (d)(2), planrelated 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
factor 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 service for the plan year
under the applicable 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
target 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
funding 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
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 funding target
determined under paragraph (c)(2) of
this section (determined taking into
account paragraph (e)(4) of this section);
over

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(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
determined under paragraph (d)(2) of
this section (determined taking into
account paragraph (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
percentage is 20 percent multiplied by
the number of consecutive plan years
that the plan has been in at-risk status
(including the current plan year) and
not taking into account years before the
first effective plan year for a plan.
(4) Transition funding target and
target 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 atrisk funding target 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
date/applicability date—(i) General
rule. Section 430 generally 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
delayed for certain plans in accordance
with sections 104 through 106 of the

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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 adjustments of paragraph
(d)(2)(i)(B) 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 (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 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. 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
rely on the provisions set forth in this
section for purposes of satisfying the
requirements of section 430.
(3) First effective plan year. For
purposes 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 required contribution.
(4) Transition rule for determining atrisk status. In the case of plan years
beginning in 2008, 2009, and 2010,
paragraph (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
prohibited 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 contribution
is made.

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(3) Rules of application.
(4) Prior unpredictable contingent event.
(c) Limitations on plan amendments
increasing liability for benefits.
(1) In general.
(2) Exemption if section 436 contribution
is made.
(3) Rules of application regarding preexisting plan provisions.
(4) Exceptions.
(5) Rule for determining when an
amendment takes effect.
(6) Treatment of mergers, consolidations,
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 permitted
without consent of the participant under
section 411(a)(11).
(e) Limitation on benefit accruals for plans
with severe funding shortfalls.
(1) In general.
(2) Exemption if section 436 contribution
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 benefit
limitations.
(1) In general.
(2) Current year contributions to avoid or
terminate benefit limitations.
(3) Security to increase adjusted funding
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 purposes of
benefit limitations.
(1) Presumption of continued
underfunding.
(2) Presumption of underfunding beginning
on first day of 4th month for certain
underfunded plans.
(3) Presumption of underfunding beginning
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 paragraph
(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.

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(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 exception.
(3) Effective date/applicability date of
regulations.

Par. 8. Section 1.436–1 is added to
read as follows:

■

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§ 1.436–1 Limits on benefits and benefit
accruals under single employer defined
benefit plans.

(a) General rules—(1) Qualification
requirement. 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 meaning of section 414(f)) is a
qualified plan only if it satisfies the
requirements of section 436. This
section provides rules relating to
funding-based limitations on certain
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 (including 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 limitations on plan
amendments increasing liabilities.
Paragraph (d) of this section 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 provided by the
Commissioner in guidance of general
applicability, plan years of the plan

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include the following (in addition to
plan years during which the plan was
maintained by the employer or plan
sponsor):
(A) Plan years when the plan was
maintained 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
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 maintained by the
predecessor employer).
(C) 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 defined
benefit plan.
(ii) Application of section 436 after
termination of a plan—(A) In general.
Except as otherwise provided in
paragraph (a)(3)(ii)(B) of this section,
any section 436 limitations in effect
immediately before the termination of a
plan do not cease to apply thereafter.
(B) Exception for payments pursuant
to plan termination. The limitations
under section 436(d) and paragraph (d)
of this section do not apply to
prohibited payments (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 commitment from an insurer
to pay benefit liabilities in connection
with the standard termination of a plan
in accordance with section 4041(b)(3) of
the Employee Retirement 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. In the
case of a multiple employer plan to
which section 413(c)(4)(A) applies, this
section applies separately with respect
to each employer under the plan, as if
each employer maintained a separate
plan. Thus, the benefit limitations under
section 436 and this section could apply
differently to participants who are
employees of different employers 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
section 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 employer.

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(4) Treatment of plan as of close of
prohibited or cessation period—(i)
Application to prohibited payments and
accruals—(A) Resumption of prohibited
payments. If a limitation on prohibited
payments under paragraph (d) of this
section applied to a plan as of a section
436 measurement date (as defined in
paragraph (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 paragraph (j)(2) of this
section) that are on or after that later
section 436 measurement date. Any
amendment to eliminate an optional
form of benefit that contains a
prohibited payment with respect to an
annuity starting date during a period in
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. If
a limitation on benefit accruals under
paragraph (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 benefit 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 resume when
the limitation ceases to apply. The plan
must comply with the rules relating 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 opportunity to make
a new election under which the form of
benefit previously elected is modified,
subject to applicable qualification
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 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. Any such
plan amendment with respect to a new
annuity starting date or crediting of
benefit accruals is subject to the

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requirements of section 436(c) and
paragraph (c) of this section.
(B) Automatic plan provisions. A plan
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 opportunity to have a new
annuity starting date (which would
constitute a new annuity starting date
under sections 415 and 417) under
which the form of benefit previously
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 accruals 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
occurs 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 under paragraph (f)(2) of
this section or pursuant 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
contingent 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
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 paragraph (c) of this section
and other applicable 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 limitations 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 additional
contributions under paragraph (f)(2) of

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this section or pursuant 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)(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 provides otherwise.
(v) Example. The following example
illustrates the rules of this paragraph
(a)(4):
Example. (i) Plan T is a non-collectively
bargained 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 retires on February 1, 2011, and elects to
receive benefits in the form of a single sum.
Plan T may pay only a portion (generally,
50%) of the prohibited payment.
Accordingly, U elects in accordance with
paragraph (d)(3)(ii) of this section to receive
50% of U’s benefit in a single sum (up to the
2011 PBGC maximum benefit guarantee
amount described in paragraph (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.

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(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
section would (but for this paragraph
(a)(5)) apply to a 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 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. The determination of whether a
benefit limitation under paragraph (d) of
this section would apply to a plan is
based on 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
paragraph (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 standard 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
bargained plan for purposes of this
paragraph (a)(5)(ii) if—
(1) At least 50 percent of the
employees 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; or
(2) 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 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 corresponding benefit
limitation not applying for such plan

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year. Thus, if the plan’s prefunding and
funding standard carryover 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 limitation, 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
percent. During any period when a plan
is presumed to have an adjusted funding
target attainment percentage of less than
60 percent as a result of paragraph (h)(3)
of this section, the plan is treated as if
the prefunding balance and the funding
standard carryover balance are
insufficient to increase the adjusted
funding target attainment percentage to
the threshold percentage of 60 percent.
Accordingly, the deemed election to
reduce those balances pursuant to
paragraphs (a)(5)(i) and (a)(5)(ii) of this
section 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
contributions. 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 regard to any contribution
described in paragraph (f)(2) of this
section. Thus, the requirement to reduce
the prefunding balance or funding
standard carryover balance under
paragraph (a)(5)(ii) of this section
cannot be avoided through the use of a
section 436 contribution.
(C) Coordination with elections to
offset minimum required contribution.
See § 1.430(f)–1(d)(1)(ii) for rules on the
coordination of elections to offset the
minimum required contribution and the
deemed election to reduce the
prefunding and funding standard
carryover balances under this paragraph
(a)(5).
(v) Example. The following example
illustrates the rules of this paragraph
(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 certification on March 1, 2010, that the
2010 AFTAP is 81%. Sponsor X adopts an
amendment on March 25, 2010, to increase

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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 paragraph (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 balance
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
participants and beneficiaries within 30
days after certain specified dates, which
depend on whether the plan has become
subject to a restriction described in the
ERISA provisions 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 benefits—(1) In general. Except as
otherwise provided in this paragraph
(b), a plan satisfies section 436(b) and
this paragraph (b) only if it provides that
unpredictable contingent event benefits
with respect to any unpredictable
contingent events occurring during a
plan year will not be paid if the adjusted
funding target attainment percentage 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
funding target attainment percentage
were redetermined applying an actuarial
assumption that the likelihood of
occurrence of the unpredictable
contingent event during the plan year is
100 percent.
(2) Exemption if section 436
contribution is made. The prohibition
on payment of unpredictable contingent
event benefits under paragraph (b)(1) of
this section ceases to apply with respect

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53063

to benefits attributable to an
unpredictable contingent event
occurring during the plan year upon
payment by the plan sponsor of the
contribution 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 contribution. See
paragraph (f) of this section for
additional rules.
(3) Rules of application—(i)
Participant-by-participant application.
The limitations of section 436(b) and
this paragraph (b) apply on a
participant-by-participant 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 participant
satisfies the plan’s eligibility
requirements (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 limitations of
section 436(b) and this paragraph (b)
apply.
(ii) Multiple contingencies. 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
unpredictable contingent event for
purposes of section 436(b) and this
paragraph (b) occurs upon the last to
occur of those unpredictable contingent
events.
(iii) Cessation of benefits. Cessation of
a benefit under a plan upon the
occurrence of a specified event is not an
unpredictable 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 reduction of
any benefits upon occurrence of any
event. However, upon any subsequent
recommencement of benefits (including
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
period 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 the plan’s funded status is
such that benefits contingent upon that

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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 shutdown 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 liabilities 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 become
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
attributable to the amendment were
taken into account in determining the
adjusted funding target attainment
percentage.
(2) Exemption if section 436
contribution is made—(i) General rule.
The limitations on plan amendments in
paragraph (c)(1) of this section cease to
apply with respect to an amendment
upon payment by the plan sponsor of
the contribution described in paragraph
(f)(2)(iv) of this section, 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
section for additional rules.
(ii) Amendments that do not increase
funding target. If the amount of the
contribution described in paragraph
(f)(2)(iv) of this section is $0 (because
the amendment 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 funding
target and the target normal cost in
certain situations.
(3) Rules of application regarding preexisting plan provisions. If a plan
contains a provision that provides for
the automatic restoration of benefit
accruals that were not permitted to
accrue because of the application of

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section 436(e) and paragraph (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
permitted to take effect without regard
to the limits of section 436(c) and this
paragraph (c) if—
(i) The continuous period of the
limitation 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 restored 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),
section 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 compensation, but only if
the rate of increase in benefits does not
exceed the contemporaneous 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 recent benefit increase applicable
to all of those participants who are
covered by the current amendment and
ending on the effective date of the
current amendment.
(B) Application to participants who
are not currently employed. If an
amendment applies to both currently
employed participants and other
participants, all participants to whom
the amendment applies are included in
determining the increase in average
wages of the participants covered by the
amendment for purposes of this
paragraph (c)(4)(i). For this purpose,
participants 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 increase or
decrease in wages for the period after
severance from employment.
(C) Separate amendments for different
plan populations. In lieu of a single
amendment that applies to both
currently 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

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one that increases benefits for other
participants. In that case, the two
amendments are considered separately
in determining the increase in average
wages, and the exception in this
paragraph (c)(4)(i) applies separately to
each amendment. Thus, the increase in
benefits for currently 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
increase in wages from the employer
during the period over which the
increase in average 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
accelerated vesting. To the extent that
any amendment provides for (or any
pre-existing plan provision results in) a
mandatory increase in the vesting of
benefits under the Code or ERISA (such
as vesting rate increases pursuant to
statute, plan termination amendments
or partial terminations under section
411(d)(3), and vesting increases required
by the rules for top-heavy plans under
section 416), that amendment (or preexisting plan provision) does not
constitute an amendment that changes
the rate at which benefits become
nonforfeitable for purposes of section
436(c) and this paragraph (c). However,
this paragraph (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) apply. See
§ 601.601(d)(2) relating to objectives and
standards for publishing regulations,
revenue rulings and revenue procedures
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
under 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 occurrence of death, disability, or
severance from employment).

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
(6) Treatment of mergers,
consolidations, and transfers of plan
assets into a plan. [Reserved]
(d) Limitations on prohibited
payments—(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
requirements of section 436(d)(2) and
this paragraph (d)(2) only if the plan
provides 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 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, except for
payments made within a plan year with
an annuity starting date that occurs on
or after the date on which the enrolled
actuary of the plan certifies 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
maximum benefit guarantee amount

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described in paragraph (d)(3)(iii)(C) of
this section.
(ii) Bifurcation if optional form
unavailable—(A) Requirement to offer
bifurcation. 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 participant’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
payments to the extent described in
paragraph (d)(5) of this section.
(B) Rules relating to bifurcation. If the
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 payment 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 prohibited payment if that
optional form applied to the entire
benefit of the participant or beneficiary.
The rules of § 1.417(e)–1 are applied
separately to the separate optional forms
for the unrestricted portion of the
benefit and the remainder of the benefit
(the restricted portion).
(C) Plan alternative that anticipates
election of payment that includes a
prohibited 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 section, for which no
additional information from the
participant or beneficiary (such as
information regarding a social security
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,

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53065

the rule in the preceding 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.
(iii) Definitions applicable to limited
payment option—(A) In general. The
definitions 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 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 after
the annuity starting date and during the
participant’s lifetime in which no
payments are made as a payment of
zero).
(C) PBGC maximum benefit guarantee
amount. The PBGC maximum benefit
guarantee amount described in this
paragraph (d)(3)(iii)(C) is the present
value (determined under guidance
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.
(D) Unrestricted portion of the
benefit—(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 employee contributions. For
an optional form of benefit that is a
prohibited payment on account of a
social security leveling feature (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 unrestricted portion of the
benefit is the optional form of benefit
that would apply if the participant’s or
beneficiary’s accrued benefit were 50
percent smaller.

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(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
(determined 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 (described in
paragraph (d)(3)(iii)(C) of this section).
(iv) Other rules—(A) One time
application. A plan satisfies the
requirements of this paragraph (d)(3)
only if the plan provides that, in the
case of a participant with respect to
whom a prohibited payment (or series of
prohibited payments under a single
optional form of benefit) is made
pursuant to paragraph (d)(3)(i) or (ii) of
this section, no additional prohibited
payment may be made with respect to
that participant 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),
benefits provided with respect to a
participant and any beneficiary of the
participant (including an alternate
payee, as defined in section 414(p)(8))
are aggregated. If the only benefits paid
under the plan with respect 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 allocated 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 persons
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
and plan transfers. This paragraph
(d)(3)(iv)(C) applies for purposes of
applying paragraphs (d)(3)(i) and (iii)(D)
of this section. In the case of a
prohibited payment described in
paragraph (j)(6)(i)(B) of this section
(relating to purchase 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

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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
liabilities transferred (determined in
accordance with section 414(l)). In
addition, the present value of the
accrued benefit is substituted 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
applies 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 calendar year, and is subject to the
restriction on prohibited payments under
paragraph (d)(3) of this section for the 2010
plan year. Participant P is not married, and
retires at age 65 during 2010, while the
restriction under paragraph (d)(3) of this
section applies 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 single-sum payment
(subject to the restrictions under section 436)
equal to the present value of the participant’s
accrued benefit using actuarial assumptions
under section 417(e). P’s single-sum
payment, determined without regard to this
paragraph (d), is calculated 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
prohibited 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
section, Plan A must offer P the option to
bifurcate the benefit into unrestricted and
restricted portions. The unrestricted portion
is a monthly straight life annuity of $4,500,
which can be paid in a single sum of
$637,200. If P elects to receive the
unrestricted portion of the benefit in the form

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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 would
otherwise be permitted with respect to the
full $10,000 and that is not a prohibited
payment. Alternatively, Plan A may provide
that P is permitted to elect to defer
commencement of the restricted portion,
subject to applicable qualification rules.
Example 2. (i) The facts are the same as in
Example 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 restriction under paragraph (d)(3) of
this section. Participant 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 this Example 2,
Q may elect a partial payment of $99,120
(representing 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
accrued benefit, using actuarial assumptions
under section 417(e), is $424,800.
(iii) Because the present value of the
portion of Q’s benefit that is being paid in a
prohibited payment ($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 this
Example 2 is permitted to be paid under
paragraph (d)(3)(i) of this section.
Example 3. (i) The facts are the same as in
Example 1. In addition, Plan A provides an
optional form of payment under a social
security leveling option (subject to any
benefit restrictions under section 436) that
consists of an increased temporary benefit
payable until age 62, with reduced payments
beginning at age 62. The benefit is structured
so that the combination of the participant’s
pension benefit and Social Security benefit
provides an approximately 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, Participant R elects to
receive a benefit under the social security
leveling optional form of payment.
Participant R’s Social Security benefit
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
minimum 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 ×
$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

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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), Participant 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 security leveling form of
payment. This portion of the benefit is
determined under the social security leveling
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 × $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 under the social
security leveling option is an actuarially
equivalent monthly annuity payable until age
62, with zero payable thereafter. Using the
actuarial equivalence 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 × $1,463 = $1,463
payable until 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 $600 per month beginning 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
apply to a plan for a plan year if the
terms of the plan, as in effect for the
period beginning on September 1, 2005,
provided for no benefit accruals with
respect to any participants. If a plan that
is described in this paragraph (d)(4)
provides for benefit accruals during any
time on or after September 1, 2005
(treating benefit increases pursuant to a

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plan amendment as benefit accruals),
this paragraph (d)(4) ceases to apply for
the plan as of the date any benefits
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 benefits to take into account
increases in the limitations under
section 415(b) on or after September 1,
2005.
(5) Right to delay commencement. If
a participant or beneficiary requests a
distribution in an optional form of
benefit that includes a prohibited
payment that is not permitted to be paid
under paragraph (d)(1), (d)(2), or (d)(3)
of this section, the participant retains
the right to delay commencement of
benefits in accordance with the terms of
the plan and applicable qualification
requirements (such as sections
411(a)(11) and 401(a)(9)).
(6) Plan alternative for special
optional forms. A plan is permitted to
offer optional forms of benefit that are
solely available during the period in
which paragraph (d)(1), (d)(2), or (d)(3)
of this section 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 apply 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 payment 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

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53067

satisfaction of section 417(e) and section
415 (at each annuity starting date).
(7) Exception for distributions
permitted without consent of the
participant under 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 requirements of section
436(e) and this paragraph (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
under the plan will cease as of the
applicable section 436 measurement
date. If a plan is required to cease
benefit accruals under 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
establishment of new benefits. The
preceding sentence applies regardless of
whether an amendment would
otherwise be permissible under
paragraph (c)(2) or (c)(3) of this section.
(2) Exemption if section 436
contribution 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 contribution
described in paragraph (f)(2)(v) of this
section. See paragraph (f) of this section
for additional rules.
(3) Special rule under section 203 of
the Worker, Retiree, and Employer
Recovery Act of 2008. [Reserved]
(f) Methods to avoid or terminate
benefit limitations—(1) In general. This
paragraph (f) sets forth rules relating to
employer contributions and other
methods to avoid or terminate the
application of section 436 limitations
under a plan for a plan year. In general,
there are four methods a plan sponsor
may utilize to avoid or terminate one or
more of the benefit limitations under
this section for a plan year. Two of these
methods (where the plan sponsor elects
to reduce the prefunding balance or
funding standard carryover balance and
where the plan sponsor makes
additional contributions under section
430 for the prior plan year within the
time period provided by section
430(j)(1) that are not added to the
prefunding balance) involve increasing
the amount of plan assets which are
taken into account in determining the
adjusted funding target attainment
percentage. The other two methods
(making a contribution that is
specifically designated as a current year

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contribution to avoid or terminate
application of a benefit 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
contribution—(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 contingent
event benefits, plan amendments that
increase liabilities for benefits, and
benefit accruals.
(2) Interest adjustment. Any
contribution 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 interest
rate for the plan year has not been
determined at the time of the
contribution, then this interest
adjustment must be made using the
highest 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 plan
year under section 430(h)(2)(A) is
subsequently determined to be less than
that highest rate, the excess is
recharacterized as an employer
contribution taken into account under
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 before 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 described 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 described in this paragraph
(f)(2). However, a plan sponsor is
permitted to elect to reduce the funding
standard carryover balance or the
prefunding balance in order to increase
the adjusted funding target attainment
percentage for a plan year. See
paragraph (a)(5) of this section for a rule
mandating such a reduction in certain
situations.
(ii) Section 436 contributions separate
from minimum required contributions—

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(A) In general. The contributions
described in this paragraph (f)(2) are
contributions described in sections
436(b)(2), 436(c)(2), and 436(e)(2), and
are separate from any minimum
required contributions 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 requirements 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
pursuant to this paragraph (f)(2) must be
designated as such at the time the
contribution 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. Except 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
minimum required contribution
obligation, or otherwise. The
designation must be made in accordance
with the rules and procedures that
otherwise apply to elections under
§ 1.430(f)–1(f) with respect to the
prefunding and funding standard
carryover 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 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

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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
funding 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 unpredictable
contingent event were included in the
determination of the funding target.
(B) In the event that the adjusted
funding 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
percentage 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 attributable to a
plan amendment under section 436(c)—
(A) In the event that the adjusted
funding 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 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.
(B) In the event that the adjusted
funding 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 section 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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
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.
(v) Contribution required for
continued benefit accruals. In the case
of a contribution to avoid or terminate
the application of the limitation on
accruals under section 436(e), the
amount of the contribution 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
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) or (g)(5)(i)(B) of
this section, whichever applies.
(3) Security to increase adjusted
funding target attainment percentage—
(i) In general. For purposes of avoiding
benefit limitations under section 436, a
plan sponsor may provide security in
the form described in paragraph (f)(3)(ii)
of this section. 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. However, this security is
not taken into account as a plan asset for
any other purpose, including section
430.
(ii) Form of security. The forms of
security 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 in section 4048 of ERISA;
(2) If there is a failure to make a
payment of the minimum required
contribution 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

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60 percent (without regard to any
security provided under this paragraph
(f)(3)) for a consecutive period of 7 plan
years, the valuation 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
security of any event described in
paragraph (f)(3)(iii)(A) of this section
within 10 days of its occurrence.
(iv) Release of security. The form of
security is permitted to provide that it
will be released (and any amounts
thereunder will be refunded to the plan
sponsor together 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 certified that
the plan’s adjusted funding target
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 paragraph (f)(3)(vi) of
this section.
(v) Contribution of security to plan.
Any security provided under this
paragraph (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 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 paragraph (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 provide new security to the plan
and subsequently or simultaneously
have the original 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
security, 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 period 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
bargained 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,

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53069

2011, Plan Z does not have a funding
standard 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 January 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 valuation 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) The facts are the same as in
Example 1, except that the plan is in at-risk
status under section 430(i). The funding

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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 actuary 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
status 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, the AFTAP would exceed 80%.
(iv) However, because the contribution is
not paid until May 1, 2011, the necessary
contribution amount must be adjusted to
reflect interest from the valuation 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 in
Example 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%.

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(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 contribution 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) of this section.
(iv) However, since the contribution is not
made until May 1, 2011, the amount of the
required contribution must be adjusted to
reflect interest from the valuation date to the
date of the contribution. Since the effective
interest rate has 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 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 percentage 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

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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 presumed adjusted
funding target attainment percentage in
certain situations. Paragraph (g)(5) of
this section sets forth rules that apply
after the enrolled actuary’s certification
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. A
plan must 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 applicable under section
436 and paragraphs (b), (c), (d), and (e)
of this section are applied 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 applicable, 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
reduction in balances—(A) In general.
During 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 balance 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 apply with respect
to unpredictable contingent event

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
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
contributions. The reapplication of the
rules under this paragraph (g)(2)
regarding the deemed election in
paragraph (a)(5) of this section may
require an additional reduction in the
prefunding and funding standard
carryover balances if the amount of the
reduction in those balances that is
necessary to reach the applicable
threshold to avoid the application of a
section 436 limitation exceeds the
amount that was initially reduced. Prior
reductions of the prefunding and
funding standard carryover 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

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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 10th 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) of this section
does not apply to the plan for a plan
year but the last day of the plan year is
before the first day of the 10th 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) of this
section must be applied as of the first
day of the next plan year based on the
presumed adjusted funding 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

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53071

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 threshold.
If, after application of paragraph
(g)(2)(ii)(B) and (C) of this section, the
presumed adjusted funding target
attainment percentage under this
paragraph (g)(2)(ii) is less than the 60
percent threshold under section 436(e),
then no benefit accruals are permitted
under the plan unless the plan sponsor
makes a section 436 contribution as
provided in paragraph (g)(2)(iv)(A) 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
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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations

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
(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
collectively 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 applied by treating the
inclusive presumed adjusted funding
target attainment percentage 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
collectively bargained plan (and, thus, is
not required to reduce the funding
standard carryover 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
updated interim value of adjusted plan
assets that is used to determine the
inclusive presumed adjusted funding
target attainment percentage under this
paragraph (g)(2)(iii).
(D) Plans funded below the threshold.
If, after application of paragraph
(g)(2)(iii)(B) and (C) of this section, the
inclusive 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 percentage of the plan
for the current plan year.
(E) Plans funded at or above the
threshold. If, after application of
paragraph (g)(2)(iii)(B) or (C) of this
section, the inclusive presumed
adjusted funding target attainment

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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 amendment increasing
benefit liabilities described in paragraph
(c) of this section from taking effect,
based on an expectation that the
limitations under paragraph (b) or (c) of
this section will apply following 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
percentage for a plan is less than 60
percent, then no plan amendment
increasing plan liabilities 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
percentage for a plan year of less than
60 percent is determined 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 (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
attainment percentage for the prior plan
year before the first day of the 10th
month of the prior plan year), then
benefits are permitted 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

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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
paragraph (g)(2)(iii)(D) of this section
and neither paragraph (g)(2)(iv)(A) nor
(B) of this section apply to the plan,
then unpredictable contingent event
benefits are permitted 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
under 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 inclusive presumed adjusted
funding target to be less than 60 percent.
(v) Bankruptcy of plan sponsor.
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 (as described in
paragraph (d)(2) of this section), no
prohibited payment within the meaning
of paragraph (j)(6) of this section may be
paid if the plan’s enrolled actuary has
not yet certified the plan’s adjusted
funding target attainment percentage 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) Prohibited payments and benefit
accruals. If no presumptions under
section 436(h) apply 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 paragraph
(d) of this section or the accrual of
benefits under paragraph (e) of this
section based on an expectation that
those paragraphs will apply to the plan
once an actuarial certification is issued.

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
However, see paragraph (g)(2)(v) of this
section for a restriction on prohibited
payments 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.
(ii) Unpredictable contingent event
benefits and plan amendments
increasing benefit liability—(A) In
general. If no presumptions under
section 436(h) apply to a plan during a
period and the plan’s enrolled actuary
has not yet issued a certification of the
plan’s adjusted funding target
attainment percentage for the plan year,
the limitations on unpredictable
contingent event benefits under
paragraph (b) of this section and plan
amendments increasing benefit
liabilities under paragraph (c) of this
section must be applied during that
period by following the rules of
paragraphs (g)(2)(iii) of this section,
based on the inclusive presumed
adjusted funding 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 permitted 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
funding 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 funding target
attainment percentage and then adding
the adjustments described in paragraphs
(g)(2)(iii)(A)(1), (2) and (3) of this
section. If, after application of
paragraphs (g)(2)(iii)(B) and (C) of this
section, that ratio 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 the
contribution described in paragraph
(g)(2)(iv)(C) of this section.
(B) Recharacterization of
contributions made to avoid benefit
limitations. In any case where, pursuant
to paragraph (g)(3)(ii)(A) of this section,
the plan sponsor makes section 436
contributions to avoid the application of
the applicable benefit limitation, to the
extent those contributions 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

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current plan year that takes into account
the increase in the liability attributable
to the unpredictable contingent event
benefits or plan amendment, the excess
section 436 contributions 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. If a
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. The rules of
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.

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53073

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
and plan amendments. In the case of a
plan that has been issued a certification
of the plan’s adjusted funding target
attainment 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, the plan
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 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
adjusted funding target attainment
percentage for the plan year; and
(3) Any earlier section 436
contributions made for the plan year to
the extent those contributions were not
taken into account in the certified
adjusted funding target attainment
percentage.
(C) Application of rule for deemed
election to reduce funding balances.
After the adjusted funding target
attainment percentage for a plan year is
certified by the plan’s enrolled actuary,
the deemed election to reduce 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 (provided the certification is
issued before the first day of the 10th

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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
section may require an additional
reduction in the prefunding and funding
standard carryover balances if the
amount of the reduction in the
prefunding and funding standard
carryover balances that is necessary to
reach the applicable threshold to avoid
the application of a section 436
limitation exceeds the amount that was
initially reduced. 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 actuary’s certification of the
adjusted funding 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 limitation 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 certification. See paragraph
(a)(4) of this section for rules relating to
the period of time after benefits cease to
be limited. Except as otherwise
provided in this paragraph (g)(5)(ii), the
enrolled actuary’s certification of the
adjusted funding target attainment
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 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
contingent event benefits. If a plan does
not pay benefits attributable to an
unpredictable contingent event 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
percentage for the plan year that takes
into account the increase in the funding
target that would be attributable to those
unpredictable contingent event benefits.
(C) Special rule for plan amendments
that increase liability. If a plan
amendment does not take effect because
of the application of paragraph
(g)(2)(iii)(D) or (g)(3)(ii)(A) of this

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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
unpredictable contingent events or plan
amendments. [Reserved]
(6) Examples. The following examples
illustrate the rules of this paragraph (g).
Unless otherwise indicated, these
examples are based on the following
facts: each plan has a plan year that is
the calendar 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 offers a lump sum
form of payment. No plan is in at-risk
status for the years discussed in the
examples. The examples read as
follows:
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 comparing 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

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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) The facts are the same as in
Example 1. As of April 1, 2011, the enrolled
actuary 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 target 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
restriction 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 (including 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) The facts are the same as in
Example 1. On July 1, 2011, the enrolled
actuary for Plan A calculates the actual
adjusted funding target as $3,700,000 as of

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January 1, 2011. Therefore, 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
contingent event 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 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 plan amendment 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

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restriction on plan amendments, and
therefore the deemed election to reduce the
prefunding balance under paragraph (a)(5) of
this section does not apply, and the
amendment cannot take effect unless the
plan sponsor makes a contribution described
in paragraph (f)(2) of this section.
Example 5. (i) The facts are the same as in
Example 4, except that Plan B’s sponsor
decides to make a contribution on February
1, 2011, to avoid the benefit 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
segment interest rates applicable to the 2011
plan year, as provided in paragraph
(f)(2)(i)(A)(2) of this section.
(ii) 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 $195,060.
However, because the contribution is not
paid until February 1, 2011, the necessary
contribution amount must be adjusted to
reflect interest that would otherwise have
accrued between the valuation 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 annual
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) The facts are the same as in
Example 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 target, the amount that was
necessary to avoid the benefit 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), minus 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

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53075

$90,385 (that is, $90,000 adjusted for
compound interest for one month at Plan B’s
effective interest rate of 5.25% per year).
(iii) Under paragraph (g)(3)(ii)(B) of this
section, the contribution made on February 1,
2011, is recharacterized as an employer
contribution under section 430 to the extent
that it exceeded the amount necessary to
avoid application of the restriction on plan
amendments under paragraph (c) of this
section. Therefore, $105,663 (that is, the
$196,048 actual contribution 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 contribution 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. Accordingly, 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 amendment) 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 required to
avoid the restriction on plan amendments
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

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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
purposes of benefit limitations—(1)
Presumption of continued
underfunding—(i) In general. This
paragraph (h)(1) applies to a plan for a
plan year if a limitation under
paragraph (b), (c), (d), or (e) of this
section 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
certification issued during preceding
year—(A) General rule. In any case in
which the plan’s enrolled actuary has
issued a certification under paragraph
(h)(4) of this section of the adjusted
funding target attainment percentage for
the plan year preceding the current plan
year before the first day of the current
plan year, the presumed adjusted
funding target attainment percentage of
the plan for the current plan year is
equal to the prior plan year adjusted
funding 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 account the effect
of any unpredictable contingent event
benefits that are permitted to be paid
based on unpredictable contingent
events that occurred, and any plan
amendments that became effective,
during the prior plan year but before the
certification (and any associated section
436 contributions).
(iii) No certification for preceding
year issued during preceding year—(A)
Deemed percentage continues. In any
case in which the plan’s enrolled
actuary has not issued a certification
under paragraph (h)(4) of this section of
the adjusted funding target attainment
percentage of the plan for the plan year

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preceding the current plan year during
that prior plan year, the presumed
adjusted funding target attainment
percentage of the plan for the current
plan year is equal to the presumed
adjusted funding target attainment
percentage that applied on the last day
of the preceding plan year until the
presumed 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
attainment 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
certification under paragraph (h)(4) of
this section of the adjusted funding
target attainment 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 certification is a new section
436 measurement date for the current
plan year. In such a case, the presumed
adjusted funding target attainment
percentage for the current plan year is
equal to the prior plan year adjusted
funding target attainment percentage
(reduced by 10 percentage points if
paragraph (h)(2)(iv) of this section
applies to the plan) until it is changed
under paragraph (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
certification of the adjusted funding
target attainment percentage for the
prior plan year during the current plan
year.
(iv) Duration of use of presumed
adjusted funding target attainment
percentage. If this paragraph (h)(1)
applies to a plan for a plan year, the
presumed adjusted funding target
attainment percentage determined
under this paragraph (h)(1) applies until
the earliest of—
(A) The first day of the 4th month of
the plan year if paragraph (h)(2) of this
section applies;

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(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
presumed adjusted funding target
attainment percentage under paragraph
(g)(4) of this section; or
(D) The date the enrolled actuary
issues a certification under paragraph
(h)(4) of this section of the adjusted
funding target attainment percentage for
the plan year.
(2) Presumption of underfunding
beginning 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
adjusted funding target attainment
percentage 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
paragraph (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
adjusted funding target attainment
percentage for the plan year before the
first day of the 4th month of the plan
year; and
(B) The prior plan year adjusted
funding 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
certification of the adjusted funding
target attainment percentage under
paragraph (h)(4) of this section for the
prior plan year (taking into account the
special rules for late certifications 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
target 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
certification of the adjusted funding

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target attainment 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 section)
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
target attainment percentage of the plan
for the current plan year is equal to 10
percentage points less than the prior
plan year adjusted funding target
attainment percentage; and
(B) The date of the prior plan year
certification is a section 436
measurement date.
(v) Duration of use of presumed
adjusted funding target attainment
percentage. If this paragraph (h)(2)
applies to a plan for a plan year, the
presumed adjusted funding target
attainment percentage determined
under this paragraph (h)(2) applies 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
presumed adjusted funding target
attainment percentage under paragraph
(g)(4) of this section; or
(C) The date the enrolled actuary
issues a certification under paragraph
(h)(4) of this section of the adjusted
funding target attainment percentage for
the plan year.
(3) Presumption of underfunding
beginning on first day of 10th month. In
any case in which no certification of the
specific adjusted funding target
attainment percentage for the current
plan year under paragraph (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, commencing on the
first day of the 10th month of the
current plan year—
(i) The presumed adjusted funding
target 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

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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 percentage under this
section, the determination is not
permitted to include in plan assets
contributions that have not been made
to the plan by the certification date.
Thus, the enrolled actuary’s certification
of the adjusted funding target
attainment percentage for a plan year
cannot take into account contributions
that are expected to be made after the
certification date. Notwithstanding the
foregoing, for plan years beginning
before January 1, 2009, the enrolled
actuary’s certification of the adjusted
funding target attainment percentage is
permitted to take into account employer
contributions for the prior plan year that
are reasonably expected to be made for
that prior plan year but have not been
contributed by the date of the enrolled
actuary’s certification. 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
paragraph (h)(4)(ii), the plan’s enrolled
actuary is permitted to certify during a
plan year that the plan’s adjusted
funding target attainment percentage for
that plan year either 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

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53077

certification for a plan year and the
enrolled actuary subsequently issues 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
adjusted funding target attainment
percentage 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 reduction of the
prefunding and funding standard
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 percentage 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
attainment 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
adjusted funding target attainment
percentage is issued by the plan’s
enrolled actuary, the certified
percentage applies for all purposes 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 effect, those section 436
contributions are recharacterized as
employer contributions under section
430 to the extent the contributions
exceed the amount necessary to avoid
application of a limitation based on the
specific adjusted funding target
attainment percentage as certified by the
plan’s enrolled actuary on or before the
last day of the plan year.
(iii) Change of certified percentage—
(A) Application of new percentage. If
the enrolled actuary for the plan
provides a certification of the adjusted
funding target attainment percentage of

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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 certification.
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 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
attainment percentage constitutes a
material change for a plan year if plan
operations with respect to benefits that
are addressed by section 436, taking into
account any actual contributions and
elections under section 430(f) made by
the plan sponsor based on the prior
certified percentage, would have been
different based on the subsequent
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
determining the presumed adjusted
funding target attainment percentage in
that following year.
(C) Immaterial change. In general, an
immaterial change is any change in an
adjusted funding target attainment
percentage for a plan year that is not a
material change. In addition, subject to
the requirement to recertify the adjusted
funding target attainment percentage in
paragraph (h)(4)(v)(B) of this section, a
change in adjusted funding target
attainment percentage is deemed to be
an immaterial change if it merely
reflects a change in the funding target
for the plan year or the value of the
adjusted plan assets after the date of the
enrolled actuary’s certification resulting
from—
(1) Additional contributions for the
preceding year that are made by the
plan sponsor;
(2) The plan sponsor’s election to
reduce the prefunding balance or
funding standard carryover balance;
(3) The plan sponsor’s election to
apply the prefunding balance or funding

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standard carryover balance to offset the
prior plan year’s minimum required
contribution;
(4) A change in funding method or
actuarial assumptions, where such
change required actual approval of the
Commissioner (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
benefits which are permitted to be paid
because the plan’s enrolled actuary
determines that the increase in the
funding target attributable to the
occurrence of the unpredictable
contingent event would not cause the
plan’s adjusted funding target
attainment percentage to fall below 60
percent;
(7) A plan amendment which takes
effect because the employer makes the
section 436 contribution described in
paragraph (f)(2)(iv)(A) of this section,
the liability for which was not taken
into account in the certification of the
adjusted funding target attainment
percentage; or
(8) A plan amendment which takes
effect because the plan’s enrolled
actuary determines that the increase in
the funding target attributable to the
plan amendment would not cause the
plan’s adjusted funding target
attainment percentage to fall below 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 percentage—
(A) Material change. In the case of a
material change, if the plan’s prior
operations 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
qualification requirements of section
401(a) because the plan will not have
been operated in accordance with its
terms during the period of time the prior
certification applied. In addition, in the
case of a material change, the rules
requiring application of a presumed
adjusted funding target attainment
percentage under paragraphs (h)(1)
through (h)(3) of this section continue to
apply from and after the date of the

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prior certification until the date of the
subsequent certification.
(B) Immaterial change. An immaterial
change in the adjusted funding target
attainment percentage applies
prospectively only and does not change
the inapplicability 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
certification—(A) In general. This
paragraph (h)(4)(v) sets forth rules
relating to updates 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 require that an
updated adjusted funding target
attainment percentage be certified in
certain situations. Even if the updated
adjusted funding target attainment
percentage 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 attainment
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 applies 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 updated
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

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
funding target attainment percentage
that takes into account such
contribution as well as the 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. If a
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
adjusted funding target attainment
percentage is immaterial, 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.
(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

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indicated, the examples in this section
are based on the information in this
paragraph (h)(5). Each plan is a noncollectively 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
section 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 paragraph (f) of
this section to avoid applicable benefit
restrictions. No range certification under
paragraph (h)(4) of this section has been
issued. The plan sponsor is not in
bankruptcy. The examples read as
follows:
Example 1. (i) On July 15, 2010, the
adjusted funding target attainment
percentage (‘‘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) The facts are the same as in
Example 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
section, 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
certifies 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

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53079

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
in Example 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
actuary 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
in Example 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
presumptions in paragraph (h)(1)(iii) of this
section apply for the 2012 plan year. Because
the enrolled actuary for the plan has not

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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) of this section.
(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 to
apply for events occurring on or after
February 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) The facts are the same as in
Example 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
presumptions in paragraph (h)(1)(iii) of this
section apply for the 2012 plan year. Because
the enrolled actuary 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.

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(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,
through March 31, 2011, and Plan T may
only pay a 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
actuary 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 accelerated form of payment during the

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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
permitting such an election after the
restriction in paragraph (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 paragraph (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 automatically 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
examples illustrate the rules of
paragraph (h)(4) of this section:
Example 1. (i) Plan Y is a non-collectively
bargained 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) of this
section.
(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 in
Example 1, except that the plan sponsor
makes an additional contribution for the
2010 plan year on September 1, 2011, that is

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not added to the prefunding balance.
Reflecting this contribution, the enrolled
actuary 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) of this section
because 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]
(j) Definitions. For purposes of this
section—
(1) Adjusted funding target
attainment percentage—(i) In general.
Except as otherwise provided in this
paragraph (j)(1), the adjusted funding
target attainment percentage for a plan
year is the fraction (expressed as a
percentage)—
(A) The numerator of which is the
adjusted plan assets for the plan year
described in paragraph (j)(1)(ii) of this
section; and
(B) The denominator of which is the
adjusted funding target for the plan year
described in paragraph (j)(1)(iii) of this
section.
(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
standard 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
beneficiaries (other than participants
who, at the time of the purchase, were
highly compensated 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
funding standard carryover balance and
the prefunding balance is not less than
100 percent of the plan’s funding target
determined under section 430 without
regard to section 430(i), then the
adjusted value of plan assets used in the
calculation of the adjusted funding

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target attainment percentage for the plan
year 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. If an employer makes
a 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 permitted to be added to
the plan assets as of the valuation date
for purposes of determining or
redetermining the adjusted funding
target 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 funding 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 ................................
2009 ................................
2010 ................................

92
94
96

(E) Limitation on transition rule.
Paragraph (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 current plan year, the
value of plan assets determined without
subtracting the funding standard
carryover balance and the prefunding
balance is not less than the product of—
(1) The applicable percentage
determined 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
section 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 determining the
plan’s adjusted plan assets under

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53081

paragraph (j)(1)(ii)(A)(2) of this section.
The definition of adjusted funding target
for a plan maintained by a commercial
airline 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
updated certification. After the plan’s
enrolled actuary prepares an updated
certification of the adjusted funding
target attainment percentage under
paragraph (h)(4)(v) of this section, the
adjusted funding 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
involved in a spinoff. [Reserved]
(2) Annuity starting date—(i) General
rule. The term annuity 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
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;
(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
irrevocable 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. If a
participant commences benefits at an
annuity starting date (as defined in
paragraph (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
applying paragraph (j)(2)(i)(A), (B), and

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(C) of this section to the payments to the
beneficiary) if the amounts payable to
all beneficiaries 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. The first
effective plan year for 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 target means the funding target
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
general. Except as otherwise provided
in this paragraph (j)(5), the prior plan
year adjusted funding target attainment
percentage is the adjusted funding target
attainment percentage determined
under paragraph (j)(1) of this section for
the immediately 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 funding 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 terminated, other than in a
distress termination).
(B) Special rules for plans that are the
result of a merger. [Reserved]
(C) Special rules for plans that are
involved in a spinoff. [Reserved]
(iii) Special rules for 2007 plan year—
(A) General determination of 2007
adjusted funding target attainment
percentage. In the case of the first plan
year beginning in 2008, except as
otherwise provided in this paragraph
(j)(5), the adjusted funding target
attainment percentage for the
immediately preceding plan year (the
2007 plan year) is determined as the
fraction (expressed as a percentage)—

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(1) The numerator of which is the
value 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 beneficiaries (other than
participants who, at the time of the
purchase, were highly compensated
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
pursuant 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
purchases of annuities that were added
to the plan assets under the rules of
paragraph (j)(5)(iii)(A)(1) of this section.
(B) General determination of value of
plan assets—(1) In general. The value of
plan assets for purposes of this
paragraph (j)(5)(iii) is determined under
section 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 standard account credit balance
described in paragraph (j)(5)(iii)(B)(2) of
this section 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. If a
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) of
this section 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) of this section is 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
carryover balance reduction for 2007
plan year. Notwithstanding paragraph
(j)(5)(iii)(B)(2) of this section, if, for the
first plan year beginning in 2008, the
employer has made an election to
reduce some or all of the funding
standard carryover 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

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of the funding standard account credit
balance when that balance is subtracted
from the asset value under paragraph
(j)(5)(iii)(B)(2) of this section.
(C) Plan with end-of-year valuation
date. With respect to the first plan year
beginning 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 the 2007 plan
year may be determined as 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 beneficiaries (other than
participants who, at the time of the
purchase, were highly compensated
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
pursuant to section 412(l)(7) (as in effect
prior to amendment by PPA ’06) on the
valuation 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 aggregate 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. If the
adjusted funding target attainment
percentage 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
corridor. The value of plan assets taking
into account the amount of
contributions made for the 2006 plan

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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Rules and Regulations
year is increased or decreased, as
necessary, 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 the 2006 plan year
(taking into account assets attributable
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)
of this section. 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. Rules similar to the rules of
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) General
rule. The term prohibited 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 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 under paragraph
(d) of this section is in effect;
(B) Any payment for the purchase of
an irrevocable commitment from an
insurer to pay benefits;
(C) 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; and
(D) Any other amount that is
identified as a prohibited payment by
the Commissioner in revenue rulings
and procedures, notices, and 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).
(ii) Special rule for beneficiaries. In
the case of a beneficiary that is not an
individual, 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

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amount payable in installments over
240 months that is actuarially
equivalent to the benefit payable to the
beneficiary.
(7) Section 436 contributions. Section
436 contributions are the contributions
described in paragraph (f)(2) of this
section that are made in order to avoid
the application of section 436
limitations under a plan for a plan year.
(8) Section 436 measurement date. A
section 436 measurement date is the
date that is used to determine when the
limitations of sections 436(d) and 436(e)
apply 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
measurement dates that result from
application of the presumptions under
paragraph (h) of this section.
(9) Unpredictable contingent event.
An unpredictable 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, an
unpredictable 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, performance 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
retirement 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 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
(including the absence) of
circumstances specified in the plan
(other than the attainment of any age,
performance 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
examples illustrate the rules of this
paragraph (j):

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53083

Example 1. (i) Plan S 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 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
employees. No annuities were purchased
during 2007. On May 1, 2008, the enrolled
actuary for the plan determines 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) The facts are the same as
in Example 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 required
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 actuary 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
account 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 valuation 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.

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The current liability of Plan R as of January
1, 2007, is $1,500,000. The funding standard
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
annuities were purchased using plan assets
during 2005 or 2006.
(ii) Pursuant to paragraph (j)(5)(iii)(B)(1) of
this 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 subtracted 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
determine the FTAP for the 2007 plan year
is $1,100,000 less $37,944, or $1,062,056.
Accordingly, for purposes 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
bargained 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 effective 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 total of $400,000 in annuities for
employees other than highly compensated
employees. The funding target for Plan T
(without regard to the at-risk rules of section
430(i)) is $3,200,000 as of January 1, 2009.
(ii) The plan’s funding status is calculated
in accordance 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
prefunding balance is 93.75% of the plan’s

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17:47 Oct 14, 2009

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funding target ($3,000,000 ÷ $3,200,000). The
applicable transitional 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
generally 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 delayed for
certain plans in accordance with
sections 104 through 106 of PPA ‘06.
(2) Collectively bargained plan
exception—(i) In general. In the case of
a collectively bargained plan that is
maintained pursuant to one or more
collective bargaining agreements
between employee representatives and
one or more employers ratified before
January 1, 2008, section 436 does not
apply to plan years beginning before the
earlier of—
(A) January 1, 2010; or
(B) The later of—
(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
amendments. For purposes of this
paragraph (k)(2), 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.

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Fmt 4701

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(iii) Treatment of plans with both
collectively bargained and noncollectively 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
rely on the provisions set forth in this
section for purposes of satisfying the
requirements 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 .............................
1.430(g)–1 ............................
1.430(h)(2)–1 ........................
1.436–1 .................................
*

*

*

*

*
1545–2095
1545–2095
1545–2095
1545–2095
*

Steven Miller,
Acting Deputy Commissioner for Services and
Enforcement.
Approved: September 24, 2009.
Michael Mundaca,
Acting Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. E9–24284 Filed 10–14–09; 8:45 am]
BILLING CODE 4830–01–P

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