[Federal Register Volume 72, Number 169 (Friday, August 31, 2007)]
[Proposed Rules]
[Pages 50544-50577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4262]



[[Page 50543]]

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Part V





Department of the Treasury





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Internal Revenue Service



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26 CFR Part 1



Benefit Restrictions for Underfunded Pension Plans; Proposed Rule

  Federal Register / Vol. 72 , No. 169 / Friday, August 31, 2007 / 
Proposed Rules  

[[Page 50544]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113891-07]
RIN 1545-BG72


Benefit Restrictions for Underfunded Pension Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
regarding the use of certain funding balances maintained for defined 
benefit pension plans and regarding benefit restrictions for certain 
underfunded defined benefit pension plans. The proposed regulations 
reflect changes made by the Pension Protection Act of 2006. These 
regulations affect sponsors, administrators, participants, and 
beneficiaries of single employer defined benefit pension plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 29, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113891-07), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. to 4 p.m. to CC:PA:LPD:PR (REG-
113891-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-113891-07).

FOR FURTHER INFORMATION CONTACT: Lauson C. Green or Linda S.F. Marshall 
at (202) 622-6090; concerning submissions and requests for a public 
hearing, contact Kelly Banks at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by October 30, 2007. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.430(f)-1(f) and Sec. Sec.  1.436-1(f) and 1.436-1(h). This 
information is required in order 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. In addition, 
these proposed regulations provide for several written elections to be 
made by the plan sponsor upon occasion. This information is voluntary 
to obtain a benefit. The likely respondents are qualified retirement 
plan sponsors and enrolled actuaries.
    Estimated total annual reporting burden: 60,000 hours.
    Estimated average annual burden hours per respondent: 0.75 hours.
    Estimated number of respondents: 80,000.
    Estimated annual frequency of responses: occasional.
    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 assigned by the Office of Management and Budget.
    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 proposed Income Tax Regulations (26 CFR part 
1) under sections 430(f) and 436, as added to the Code by the Pension 
Protection Act of 2006 (PPA '06), Public Law 109-280, 120 Stat. 780.
    Section 412 contains minimum funding rules that generally apply to 
defined benefit plans.\1\ The minimum funding rules that apply 
specifically to single employer defined benefit plans (including 
multiple employer plans within the meaning of section 413(c)) are set 
forth in new section 430.
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    \1\ 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, section 303 of ERISA 
sets forth additional funding rules for defined benefit plans (other 
than multiemployer plans) that are parallel to those in section 430 
of the Code, and section 206(g) of ERISA sets forth funding-based 
limitations for defined benefit plans (other than multiemployer 
plans) that are parallel to those in section 436 of the Code. Under 
section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and 
section 302 of ERISA, the Secretary of the Treasury has interpretive 
jurisdiction over the subject matter addressed in these proposed 
regulations for purposes of ERISA, as well as the Code. Thus, these 
proposed Treasury regulations issued under sections 430(f) and 436 
of the Code apply as well for purposes of ERISA sections 303(f) and 
206(g), respectively.
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    Section 430 generally provides that the minimum required 
contribution for a year is the sum of the target normal cost for the 
year and the shortfall and waiver amortization charges. 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)(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. Under section 
430(f)(6), the prefunding balance represents the accumulation of the 
contributions that an employer makes for a plan year that exceed the 
minimum required contribution for the year. Thus, an employer that 
makes additional contributions for a plan year is permitted in certain 
circumstances to use those excess contributions in order to satisfy the 
minimum funding requirement in a subsequent plan year.
    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 new limits on the ability of 
a

[[Page 50545]]

poorly funded plan to use the prefunding balance and the funding 
standard carryover balance for a 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 the 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 the plan 
assets, section 430(f)(5) permits an employer to elect to reduce the 
balances.
    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 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 not based on compensation, but only if the rate of increase 
does not exceed the contemporaneous rate of increase in average wages 
of the 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 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 
(an annuity contract), 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 future 
benefit accruals under the plan must cease as of the valuation date for 
the plan year. 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 under which the 
limitations of section 436 will not apply to a plan. Under section 
436(f)(1), an employer is permitted to provide security to the plan (in 
the form of a surety bond, cash, or other forms 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 contribution and the employer may not use a prefunding 
balance or funding standard carryover balance in lieu of making the 
specified contribution. In addition, a contribution to avoid a benefit 
limitation is disregarded in determining whether the minimum required 
contribution under section 430 has been made and in determining the 
plan's prefunding balance.
    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 FTAP (because the 
result of the election is a higher asset value used to determine the 
FTAP) and could lead to the plan not being subject to a benefit 
limitation under section 436. 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),

[[Page 50546]]

436(c), and 436(e), but only in the case of a plan maintained pursuant 
to a collective bargaining agreement. In either case, this deeming rule 
applies only if the prefunding balance and funding standard carryover 
balances are large enough to avoid the application of a 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. Under section 436(h)(3), if any 
of these limitations did not apply to the plan for the preceding year, 
but the plan's AFTAP for the preceding year was within 10 percentage 
points of the limitation's threshold, the plan's AFTAP is presumed to 
be reduced by 10 percentage points as of the first day of the 4th month 
of the current plan year, unless the plan's enrolled actuary has 
certified the plan's AFTAP for the current year by that day (and that 
day is deemed to be the plan's valuation date for purposes of applying 
the benefit limitations). If the plan's enrolled actuary has not 
certified the plan's AFTAP by the first day of the 10th month of the 
current plan year, section 436(h)(2) provides that the plan's AFTAP is 
conclusively presumed to be less than 60 percent as of that day (and 
that day is deemed to be the valuation date for purposes of applying 
the benefit limitations).
    Under section 436(i), unless the plan provides otherwise, if a 
limitation on prohibited payments or future benefit accruals under 
section 436(d) or (e) ceases to apply to a plan, all such 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 plan's AFTAP. In general, the 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) 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.

Explanation of Provisions

I. Section 430(f)--Effect of Prefunding Balance and Funding Standard 
Carryover Balance

A. Overview
    1. In general. The proposed regulations would be the second in a 
series of proposed regulations under new section 430.\2\ These 
regulations would provide guidance on the application of section 
430(f), relating to the establishment and maintenance of a funding 
standard carryover balance and a prefunding balance for purposes of 
sections 430 and 436. The Treasury Department and the IRS intend to 
issue additional proposed regulations relating to other portions of the 
rules under section 430 later in 2007.
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    \2\ Proposed regulation Sec. Sec.  1.430(h)(3)-1 and 
1.430(h)(3)-2, relating to the mortality tables used to determine 
liabilities under section 430(h)(3), were issued May 29, 2007 (REG-
143601-06, 72 FR 29456).
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    2. Multiple employer plans. The proposed regulations under section 
430(f) apply to plans subject to section 412 that are maintained by one 
employer or 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 proposed regulations would be 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 proposed regulations under section 430(f) would apply as if 
all participants in the plan were employed by a single employer.
B. Establishment of Prefunding Balance and Funding Standard Carryover 
Balance
    The proposed regulations would provide that an employer is 
permitted to establish a prefunding balance for a plan that represents 
the accumulation of contributions made for plan years beginning on or 
after the effective date of section 430 with respect to the plan (the 
first effective plan year) that are in excess of the minimum required 
contributions (determined without regard to the prefunding balance and 
funding standard carryover balance) for those plan years. Specifically, 
for the first effective plan year of a plan, the prefunding balance is 
initialized at zero dollars and an employer is permitted to elect to 
add some or all of the excess contributions made to a plan for each 
plan year to the prefunding balance as of the first day of the next 
plan year. For this purpose, the excess contributions are generally 
determined as the amount by which the employer contributions to the 
plan for the plan year exceed the minimum required contribution for the 
plan year, with appropriate adjustments for interest determined at the 
effective interest rate under section 430(h)(2)(A). However, the 
proposed regulations would provide that any contribution that is made 
to avoid the application of a benefit limitation under section 436 is 
not taken into account in determining the amount of excess 
contributions.
    The proposed regulations would also provide that the minimum 
required contribution for purposes of determining the amount of excess 
contributions for the year is determined without regard to any offset 
of the minimum required contribution for the year as a result of the 
use of the prefunding or funding standard carryover balances. 
Accordingly, an employer would not be permitted to add to the 
prefunding balance any amount of contributions that are ``excess'' by 
reason of an offset of the minimum required contribution for the year 
through the use of the prefunding balance or funding standard carryover 
balance. This prohibition precludes 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 adjustments with respect to minimum required contributions for 
the plan year).

[[Page 50547]]

    The proposed regulations would provide that the funding standard 
carryover balance is initialized as the balance in the funding standard 
account as of the last day of the last plan year before section 430 
applies to a plan (the pre-effective plan year). This is generally the 
last plan year beginning in 2007, but could be a later year in the case 
of a plan to which a delayed effective date applies under the rules of 
sections 104 through 106 of PPA '06.
C. Maintenance of Prefunding Balance and Funding Standard Carryover 
Balance
    The proposed regulations would provide that a plan's prefunding 
balance and funding standard carryover balance as of the beginning of a 
plan year are adjusted to reflect the actual rate of return on plan 
assets for the plan year. This calculation of the actual rate of return 
on plan assets for the 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 the 
year. The adjustment for investment return is applied to the prefunding 
balance and funding standard carryover balance after any reductions to 
those balances as described under the following two headings in this 
preamble. In addition, the proposed regulations would provide special 
rules in the case of a plan with a valuation date that is not the first 
day of the plan year.
D. Use of Prefunding Balance and Funding Standard Carryover Balance To 
Offset Minimum Funding Requirements for a Year
    The proposed regulations would provide that the employer may elect 
to use some or all of the prefunding balance or funding standard 
carryover balance to offset the otherwise applicable minimum required 
contribution for a plan year, provided that the plan met a funding 
percentage threshold for the preceding plan year. Specifically, an 
employer is permitted to make such an election only if the plan's prior 
year funding ratio was at least 80 percent. For this purpose, the 
plan's prior year funding ratio generally is a 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)).
    The proposed regulations would provide a transition rule to 
determine a plan's prior year funding ratio for the first effective 
plan year. Under this transition rule, the current liability for the 
plan for the pre-effective plan year is substituted for the funding 
target of the plan for that plan year. In addition, the transition rule 
provides that the value of plan assets is determined under section 
412(c)(2) as in effect for that pre-effective plan year, except that 
the value of plan assets must be limited so that it is not less than 90 
percent and not more than 110 percent of the fair market value of plan 
assets.
    The proposed regulations would reflect the rule in section 
430(f)(3)(B) that requires the plan sponsor to have reduced the funding 
standard carryover balance in full (either by using the funding 
standard carryover balance to offset the minimum required contribution 
for a year or through a voluntary reduction under section 430(f)(5)) 
before the prefunding balance is permitted to be used to offset a 
current year minimum funding requirement.
E. Subtraction From Plan Assets and Employer Election To Reduce 
Balances
    The proposed regulations would reflect the rules under section 
430(f)(4) which provide that the prefunding balance and funding 
standard carryover balance are subtracted from the plan assets for 
certain purposes. These include the determination of the FTAP, which is 
also relevant for purposes of applying the benefit limitations of 
section 436.
    In accordance with section 430(f)(4)(A), the proposed regulations 
would provide that the amount of the prefunding balance is subtracted 
from the value of plan assets for purposes of determining whether a 
plan is exempt from the requirement to establish a new shortfall 
amortization base under section 430(c)(5) only if an election to use 
the prefunding balance to offset the minimum required contribution is 
made for the plan year. In addition, pursuant to section 
430(f)(4)(B)(ii), the proposed regulations would provide that the 
prefunding balance and funding standard carryover balance are not 
subtracted from plan assets for purposes of determining the funding 
shortfall under section 430(c)(4) to the extent that there is a binding 
written agreement with the Pension Benefit Guaranty Corporation (PBGC) 
which provides that all or a portion of those balances cannot be used 
to offset the minimum required contribution for a plan year. 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.
    In addition, section 436(j) sets forth an exception from the 
requirement to subtract the plan's prefunding balance and funding 
standard carryover balance from the value of plan assets in determining 
a plan's FTAP for purposes of the benefit limitation rules of section 
436 provided that the plan's FTAP would meet certain standards if it 
were calculated without subtracting the balances from plan assets.
    Section 430(f)(5) provides that an employer may elect to reduce the 
amount of the prefunding balance and the funding standard carryover 
balance. This will have the effect of increasing the plan assets for 
various purposes. For example, the increase in plan assets will 
increase the FTAP, which may allow the plan to avoid the application of 
section 436 limitations. The proposed regulations would reflect the 
rule in section 430(f)(5)(B) that requires the employer to reduce the 
funding standard carryover balance in full (either by using the funding 
standard carryover balance to offset the minimum required contribution 
for a year or through a voluntary reduction under section 430(f)(5)) 
before any reduction is permitted for the prefunding balance.
F. Elections Under Section 430(f)
    The proposed regulations would provide that an election under 
section 430(f) is made by the plan sponsor by providing written 
notification of the election to the plan's enrolled actuary and the 
plan administrator, must be irrevocable when made, and must satisfy 
certain timing rules. The written notification must set forth the 
relevant details of the election, including the specific amounts 
involved in the election with respect to the prefunding balance and 
funding standard carryover balance. An election under section 430(f) 
generally must be made on or before the due date (with extensions) for 
the filing of the plan's Form 5500 ``Annual Return/Report of Employee 
Benefit Plan'' for the plan year to which the election relates (or, in 
the case of a plan not required to file a Form 5500 for the plan year, 
before the last day of the seventh month after the end of the plan year 
to which the election relates). For this purpose, an election to add to 
the prefunding balance relates to the plan year for which excess 
contributions were made. However, the proposed regulations would 
require any section 430(f)(5) election to reduce a portion of the 
prefunding balance or funding standard carryover balance for a plan 
year to be made by the end of the plan

[[Page 50548]]

year to which the election relates. For example, in the case of a 
calendar year plan required to file Form 5500, an election to add to 
the prefunding balance as of the first day of the 2010 plan year (in an 
amount not in excess of the 2009 interest-adjusted excess 
contributions), must be made no later than the due date for filing the 
2009 Form 5500 (with extensions) while an election to reduce the 
prefunding balance as of the first day of the 2010 plan year must be 
made by the end of the 2010 plan year. In both cases, the election 
would be reported on the 2010 Form 5500 (Schedule SB) that would be 
filed in 2011.
    The proposed regulations would provide that, for purposes of 
elections under section 430(f), any reference in the proposed 
regulations to the plan sponsor generally means the employer or 
employers responsible for making contributions to the plan. However, in 
the case of elections under section 430(f) for multiple employer plans 
to which section 413(c)(4)(A) does not apply, any reference in the 
proposed regulations to the plan sponsor means the plan administrator 
within the meaning of section 414(g).

II. Section 436--Limits on Benefits and Benefit Accruals Under Single 
Employer Defined Benefit Plans

A. Overview and General Rules
    1. In general. The proposed regulations would set forth the rules 
that a defined benefit pension plan that is subject to section 412 and 
that is not a multiemployer plan must satisfy in order to comply with 
the requirement in section 401(a)(29) that the plan meet 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.
    2. New plans. In accordance with section 436(g), the proposed 
regulations would 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. For purposes of applying this new plan rule, 
plan years under a plan are aggregated with plan years under a 
predecessor plan. Thus, the only benefit limitation 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).
    3. Multiple employer plans. The proposed 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 proposed regulations 
would be applied separately for each employer under the plan, as if 
each employer maintained a separate plan. Thus, the benefit limitations 
under section 436 could 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 proposed 
regulations under section 436 would apply as if all participants in the 
plan were employed by a single employer.
    4. Treatment of plan as of close of prohibited or cessation period. 
The proposed regulations would provide that, if a limitation on 
accelerated benefit 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 proposed regulations 
would provide that, if a limitation on benefit accruals under section 
436(e) applies to a plan, 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.
    With respect to a participant who had an annuity starting date 
within a period during which the accelerated benefit payment limitation 
rules of section 436(d) applied to the plan, once the limitation ceases 
to apply, the participant's benefits will continue to be paid in the 
form previously elected unless the plan permits the participant to be 
offered a new election which would modify the prior election. The 
proposed regulations would 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 that new election 
will constitute 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) 
will be credited under the plan once the limitation no longer applies, 
subject to applicable qualification requirements. If a plan provides 
for the restoration of benefit accruals for the period of the 
limitation under preexisting plan terms, the plan is treated as having 
adopted an amendment that has the effect of increasing liabilities 
under the plan if the period of the limitation exceeded 12 months. 
Whether a plan is amended or is treated as having been amended as 
described above, the amendment or pre-existing plan provision is 
subject to the limitations of section 436(c).\3\
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    In addition, the proposed regulations would provide that a plan is 
permitted to be amended to provide that any unpredictable contingent 
event benefits that were limited under the rules of section 436(b) will 
be paid or reinstated when the limitation no longer applies, subject to 
applicable qualification requirements. Any such amendment is subject to 
the limitations of section 436(c). A plan is not permitted to provide 
for restoration of any such unpredictable contingent event benefits 
without an amendment that complies with section 436(c).
    5. Deemed election to reduce prefunding and funding standard 
carryover balances. The proposed regulations would provide that, if a 
limitation on accelerated benefit payments under section 436(d) would 
otherwise apply to a plan, the plan sponsor 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, 80, or 100 
percent, as the case may be) 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 accelerated distributions 
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 any 
accelerated distributions that are subject to the benefit limitation). 
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

[[Page 50549]]

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.
    In addition, the proposed regulations would 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 for purposes 
of section 436 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. The proposed regulations would 
provide that, in the case of a plan with respect to which collective 
bargaining agreements apply to some, but not all, of the plan 
participants, the plan is considered a collectively bargained plan for 
purposes of this provision if at least 25 percent of the participants 
in the plan are members of the collective bargaining units for whom the 
benefit levels under the plan are specified under the collective 
bargaining agreements. As in the case of the deemed reduction in 
funding balances for the accelerated benefit distributions under 
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.
    If the mandatory reduction of funding balances applies to a plan, 
the employer is treated as having made that election on the date as of 
which the applicable benefit restriction would otherwise apply. In 
addition, the proposed regulations would provide that, if a plan 
(whether or not collectively bargained) is presumed to have an AFTAP of 
less than 60 percent under the section 436(h) 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.
    6. Section 436 measurement date. The ``section 436 measurement 
date'' is a defined term under the proposed 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 would 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 occurs within the first nine months 
of the plan year. If the date of an enrolled actuary's certification of 
the AFTAP is between the first day of the 10th month of a plan year and 
the last day of that plan year, that date is not a section 436 
measurement date for purposes of the limitations of section 436(d) or 
436(e) because, in that case, the plan's AFTAP is presumed to be under 
60 percent (however, receipt of the enrolled actuary's certification 
during that period impacts the plan's presumed ``carryover'' AFTAP for 
the following year). The proposed regulations would provide that a 
section 436 measurement date occurs where there is a change in the 
plan's AFTAP under the presumption rules of section 436(h). In 
addition, the proposed regulations would 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 below 
under the heading ``Presumed underfunding for purposes of benefit 
limitations.''
B. Limitation on Plant Shutdown and Other Unpredictable Contingent 
Event Benefits
    In accordance with section 436(b), the proposed regulations would 
provide that a plan that provides for any unpredictable contingent 
event benefit \4\ 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 benefits attributable to the unpredictable contingent 
event were taken into account in determining the AFTAP). 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 employer makes the contribution specified in section 
436(b)(2), as described in paragraph F in this preamble.
---------------------------------------------------------------------------

    \4\ See also Notice 2007-14, IRB 501, (see Sec.  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.
---------------------------------------------------------------------------

    For this purpose, the proposed regulations would provide that 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, 
and an ``unpredictable contingent event'' means 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. Thus, 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, an unpredictable contingent 
event benefit under the proposed regulations includes a benefit payable 
upon the presence 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), so that a plan that provides those benefits upon a 
participant's severance from employment in those circumstances, but not 
upon a severance from employment that does not involve those 
circumstances, is providing 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 affected by the limitation as it applies in a subsequent 
period. For example, if a plant shutdown occurs in 2010 and a plan's 
funded status is such that its shutdown benefits are not subject to the 
limitation for that plan year, benefits paid pursuant to that shutdown 
are permitted to be paid in a later plan year even if the plan's AFTAP 
for the subsequent year is less than 60 percent. 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 the 60 
percent threshold for the section 436(b) limitation (subject to

[[Page 50550]]

the rules permitting plan amendments to reinstate previously restricted 
benefits, including unpredictable contingent event benefits, as 
described in paragraph II.A.4 of this preamble).
C. Limitations on Plan Amendments Increasing Liability for Benefits
    In accordance with section 436(c), the proposed regulations would 
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 benefits attributable to 
the amendment were taken into account in determining the AFTAP). 
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 paragraph F of this preamble.
    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. The proposed 
regulations would provide that the determination of the rate of 
increase in average wages is made by taking into consideration the net 
increase in average wages during the period 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 (who will have no increase or decrease in 
wages for this purpose after severance from employment), all covered 
participants must be included in determining the increase in average 
wages of the participants covered by the amendment. Alternatively, the 
employer could adopt two amendments--one that increases benefits for 
currently employed participants and another one that increases benefits 
for the terminated participants. In that case, this exception from 
application of the section 436(c) limitation generally would apply to 
the amendment that increases benefits for currently employed 
participants (based solely on the wages of those current employees), 
but 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 the exception.
    In addition, the proposed regulations would provide that, to the 
extent that any amendment results in (or is made pursuant to) a 
mandatory increase in the vesting of benefits under the Code or ERISA 
(such as vesting rate increases pursuant to statute and plan 
termination amendments under section 411(d)(3)), that amendment does 
not constitute an amendment that changes the rate at which benefits 
become nonforfeitable for purposes of section 436(c).
D. Limitations on Accelerated Benefit Distributions
    1. Funding percentage less than 60 percent. In accordance with 
section 436(d)(1), under the proposed regulations, a plan must provide 
that, if the plan's AFTAP for a plan year is less than 60 percent, the 
plan will not pay any prohibited payment with an annuity starting date 
that is on or after the applicable section 436 measurement date. 
However, if a participant requests such a prohibited distribution, the 
plan must permit the participant to elect another form of benefit 
available under the plan or to defer payment to a later date to the 
extent permitted under applicable qualification requirements. 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).
    2. Bankruptcy. In accordance with section 436(d)(2), under the 
proposed regulations, a plan must provide that the plan will not pay 
any prohibited payment with an annuity starting date that is during any 
period during a plan year 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 is not less than 100 percent.
    3. Limited payment if percentage at least 60 percent but less than 
80 percent. In accordance with section 436(d)(3), under the proposed 
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 is permitted to elect a prohibited payment only 
if the present value of the portion of the payment that is greater than 
the amount of the monthly straight life annuity under the plan (and any 
social security supplement, if applicable) does not exceed 50 percent 
of the present value of the participant's benefits (or if less, 100 
percent of the present value of the maximum guarantee with respect to 
the participant under section 4022 of ERISA). For this purpose, present 
value is determined using the rules of section 417(e) except that, if 
the plan provides a single sum distribution that is larger than the 
present value of the benefit determined using the rules of section 
417(e), then that larger benefit is substituted for the present value 
of the participant's benefits before applying the 50 percent factor. 
Similar rules apply in any case in which a beneficiary is entitled to a 
prohibited payment.
    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 it is a prohibited payment that cannot be paid under the 
preceding paragraph, then the plan must provide a participant who 
elects such an optional form with the option either to defer payment to 
a later date (to the extent permitted under applicable qualification 
requirements) or to bifurcate the benefit into unrestricted and 
restricted portions. If the participant elects to bifurcate the 
benefit, the plan must permit the participant to elect, with respect to 
the unrestricted portion, any optional form of benefit otherwise 
available under the plan with respect to the participant's entire 
benefit (whether or not the optional form of benefit with respect to 
the unrestricted portion is a prohibited payment). The unrestricted 
portion of the benefit is the lesser of (i) 50 percent of the benefit 
and (ii) the benefit that has a present value that does not exceed 100 
percent of the present value of the maximum PBGC guarantee with respect 
to the participant under section 4022 of ERISA. If the participant 
elects payment of the unrestricted portion of the benefit in the form 
of a prohibited payment, then the plan must permit the participant to 
elect payment of the restricted portion in any optional form of benefit 
under the plan that would have been permitted with respect to the 
participant's entire benefit other than a prohibited payment. A plan is 
also permitted (but not required) to offer optional forms of benefit 
that are solely available during the period section 436(d)(3) applies 
to the plan, such as an optional form of benefit that provides

[[Page 50551]]

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.
    A participant who receives a prohibited payment (or a series of 
prohibited payments under a single optional form of benefit) under the 
rule permitting certain prohibited payments cannot receive any 
additional payment that would be a prohibited payment until there is a 
plan year for which none of the limitations on accelerated 
distributions under section 436(d) apply. Benefits provided to a 
participant and any beneficiary are aggregated for purposes of 
determining the limited distribution under section 436(d)(3). The 
proposed regulations would also reflect the rules of section 
436(d)(3)(B)(ii), which describes how this limited distribution is 
allocated among the beneficiaries of a participant.
    4. Exception for certain frozen plans. In accordance with section 
436(d)(4), the limitations under section 436(d) will 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, provided for no benefit accruals 
with respect to any participants. However, if such a plan provides for 
any benefit accruals during a plan year, this exception will cease to 
apply for the plan as of the date those accruals start.
    5. Prohibited payment. In accordance with section 436(d)(5), the 
proposed regulations would provide that the term ``prohibited payment'' 
means:
    (i) 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 (as defined in section 
417(f)(2)) occurs during any period that a limitation on accelerated 
benefit payments is in effect;
    (ii) Any payment for the purchase of an irrevocable commitment from 
an insurer to pay benefits; and
    (iii) Any other payment 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 Sec.  
601.601(d)(2) of this chapter).
    In addition, for purposes of applying the limitations on 
accelerated benefit payments under the requirements of section 436(d), 
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 first day on which all events have occurred (including the 
participant's election, the participant's severance from employment if 
the participant is below normal retirement age, and, if applicable, the 
participant's survival to the date as of which payment is made) which 
entitle the participant to such benefit as described in section 
417(f)(2)(A)(ii);
    (c) In the case of an amount payable on a retroactive annuity 
starting date, the benefit commencement date; and
    (d) The date of any payment for the purchase of an irrevocable 
commitment from an insurer to pay benefits under plan.
E. Limitation on Benefit Accruals
    In accordance with section 436(e), under the proposed regulations, 
a plan must 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 will no longer apply for a plan year if the plan sponsor makes 
the contribution specified in section 436(e)(2), as described in 
paragraph F of this preamble.
F. Rules Relating to Contributions Required To Avoid Benefit 
Limitations
    The proposed regulations provide rules regarding contributions by 
the plan sponsor to avoid benefit limitations under section 436. An 
employer sponsoring a plan that would otherwise be subject to the 
limitations of section 436 can avoid the application of those limits 
through one of four different techniques: 1) reducing the funding 
standard carryover balance and prefunding balance; 2) making additional 
contributions for a prior plan year that are not added to the 
prefunding balance; 3) making the specific contributions described in 
sections 436(b)(2), 436(c)(2), and 436(e)(2); and 4) providing 
security, as described in section 436(f)(1).
    As noted in this preamble, under the first of the techniques, if a 
plan sponsor elects to reduce the plan's funding standard carryover 
balance or the prefunding balance, this will have the effect of 
increasing the plan assets that are taken into account in determining 
the plan's FTAP and AFTAP and, thereby, will raise the AFTAP to a level 
so that the benefit limitations may no longer apply to the plan. 
Alternatively, if the deadline for making prior year contributions has 
not passed, the plan sponsor could utilize the second technique--making 
additional contributions for the prior plan year. If these additional 
contributions are not added to the prefunding balance, then the 
additional contributions will also have the effect of increasing the 
plan's FTAP and AFTAP.
    The third and fourth techniques for avoiding the application of the 
benefit limitations of section 436 are described in Sec.  1.436-1(f) of 
the proposed regulations. Under the third technique, the plan sponsor 
makes additional contributions that are specifically designated at the 
time the contribution is used to avoid the application of a limitation 
under section 436(b), 436(c), or 436(e). The proposed regulations would 
provide for this designation to be provided to the plan's enrolled 
actuary and plan administrator in writing. Furthermore, the designation 
must be irrevocable, except as described below. If the contributions 
are made on a date other than the valuation date for the plan year, the 
contributions must be adjusted for interest (using the plan's effective 
interest rate, except as provided in the proposed regulations). These 
contributions are separate from any minimum required contributions 
required by section 430, and no prefunding balance or funding standard 
carryover balance under section 430(f) may be used as a contribution to 
avoid a section 436 benefit limitation. A plan sponsor that makes such 
a current year contribution will nonetheless fail to satisfy the 
minimum funding requirements if it does not make the minimum required 
contribution under section 430 for the year. In addition, as noted 
above, these contributions are not taken into account in determining 
whether a plan sponsor is making excess contributions for purposes of 
adding to the plan's prefunding balance.
    The fourth 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

[[Page 50552]]

for the plan year in a form meeting certain specified requirements. 
However, this security is not taken into account 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 that are held in escrow by a bank or insurance 
company. The regulations would reflect sections 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 proposed regulations would 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).
G. Presumed Underfunding for Purposes of Benefit Limitations
    The proposed regulations reflect the rules of section 436(h), which 
sets forth a series of presumptions that are used to apply the section 
436 benefit limitations in situations where the plan's enrolled actuary 
has not yet issued a certification of the plan's AFTAP for the plan 
year. In addition, the proposed regulations also set forth rules for 
the application of the limitations prior to and during the period those 
presumptions apply to a plan, and describe the interaction of those 
presumptions with plan operations after the plan's enrolled actuary has 
issued a certification of the plan's AFTAP for the plan year. These 
rules are designed to encourage plans to obtain certifications in a 
timely manner, with a particular emphasis with respect to plans that 
have a greater likelihood of having a new section 436 benefit 
limitation apply because they had an AFTAP for the prior plan year that 
was near a threshold for a benefit limitation to apply.
    The proposed regulations would provide that, in any case in which a 
plan was subject to a benefit limitation on the last day of the prior 
plan year, the first day of the plan year is a section 436 measurement 
date and the AFTAP of the plan for the current plan year is presumed to 
be equal to the preceding year's certified AFTAP until the plan's 
enrolled actuary certifies the AFTAP of the plan for the current plan 
year. Because no plan could be subject to a benefit limitation for a 
plan year that precedes the plan year that begins in 2008, the section 
436(h)(1) presumption generally will not apply to any plan before the 
first plan year beginning in 2009.
    In accordance with section 436(h)(3), the proposed regulations 
would provide that, if the enrolled actuary of the plan has not 
certified the AFTAP of the plan for the current plan year by the first 
day of the 4th month of the plan year and the AFTAP for the preceding 
year was certified to be at least 60 percent but less than 70 percent 
or at least 80 percent but less than 90 percent, then the first day of 
the 4th month of the current plan year is a section 436 measurement 
date, and the AFTAP of the plan is presumed to be equal to 10 
percentage points less than the AFTAP of the plan for the preceding 
plan year. This presumption will apply until the earlier of the date 
the enrolled actuary certifies the AFTAP for the plan year or the first 
day of the 10th month of the plan year.
    In accordance with section 436(h)(2), the proposed regulations 
would provide that, in any case in which no certification of the 
specific AFTAP for the current plan year is made before the first day 
of the 10th month of such year, that date is a section 436 measurement 
date and, as of that date, the plan's AFTAP is conclusively presumed to 
be less than 60 percent. In such a case, the presumed AFTAP of under 60 
percent for the current plan year will continue to apply under the 
rules of section 436(h)(1) for the next plan year, until such time as 
the enrolled actuary certifies the AFTAP for either the current plan 
year or the next plan year.
    The proposed regulations would provide rules that apply the section 
436(h) presumptions for the plan year in cases in which the enrolled 
actuary's certification for the prior plan year is made on or after the 
first day of the 10th month of that prior plan year. If the date of the 
enrolled actuary's certification of the specific AFTAP for a plan year 
occurs on or after the date the conclusive presumption applies but on 
or before the last day of the plan year, the proposed regulations would 
provide that the certified percentage is disregarded for that plan year 
but is used for purposes of the presumption rule of section 436(h)(1) 
starting with the beginning of the following plan year (rather than 
continuing to apply the less-than-60 percent presumption that applied 
before the first day of that following plan year). If the date of the 
enrolled actuary's certification of the specific AFTAP for a plan year 
occurs after the end of the plan year but prior to the first day of the 
4th month in the following plan year, the proposed regulations would 
provide that the certification date is treated as a section 436 
measurement date for that following plan year and that, starting on 
that date, the plan's AFTAP is presumed to be the certified AFTAP for 
the prior year (rather than continuing to apply the less-than-60 
percent presumption that applied before the certification). If the date 
of the enrolled actuary's certification of the specific AFTAP for a 
plan year occurs after the first day of the 4th month in the following 
plan year but before the first day of the 10th month, the proposed 
regulations would provide that the certification date also is a section 
436 measurement date for that following plan year, and the plan's AFTAP 
for that following year beginning on that date is presumed to be the 
certified AFTAP for the prior year (rather than continuing to apply the 
less-than-60 percent presumption that applied before the 
certification). However, in such a case, if a 10 percentage point 
reduction in the AFTAP would have applied on the first day of the 4th 
month of that following plan year if the AFTAP for the prior plan year 
had been certified before that day, then the same 10 percentage point 
reduction applies on the date of the certification. These presumption 
rules based on the prior year AFTAP do not apply once a certification 
of the following year's AFTAP is issued by the plan's enrolled actuary.
    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. As an alternative 
to certifying a specific number for the plan's AFTAP, the regulations 
would provide that the enrolled actuary is permitted to certify during 
the first nine 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 proposed regulations would provide that such 
a ``range'' certification ends the application of the presumptions 
provided that the enrolled actuary follows up with a certification of 
the specific AFTAP before the first day of the 10th month of that year 
and that the certified specific AFTAP is within the range of the 
earlier certification.
    If this ``range'' certification alternative is followed, the plan 
is treated as having a certified AFTAP at the smallest value within the 
applicable range. Thus, for example, if the enrolled actuary certified 
that the AFTAP was more than

[[Page 50553]]

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 earlier of the date of the specific AFTAP 
certification or the first day of the 10th month of the plan year. In 
such a case, if the plan has an unpredictable contingent event or a 
plan amendment 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), as applicable. If the plan sponsor 
makes a contribution under section 436(b)(2) or section 436(c)(2), the 
proposed regulations would 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 not needed to avoid the 
application of the benefit limit, based on the subsequent calculation 
of the specific AFTAP.
    The proposed regulations would specify that the enrolled actuary is 
generally not permitted to certify the AFTAP based on a value of assets 
that includes contributions receivable for the prior year that have not 
actually been made as of the date of the certification. However, this 
rule would 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, which will result 
in a failure to satisfy section 401(a)(29) and section 436 if the 
difference constitutes a material change.
    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 must be applied and a 
determination must be made whether the change in the applicable 
percentage is a material change or an immaterial change. For this 
purpose, the proposed regulations would specify that there is 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. Thus, 
for example, if after the actuary certifies the plan's AFTAP for a plan 
year, the plan sponsor elects to add excess contributions for the prior 
plan year to the plan's prefunding balance, this would have the effect 
of reducing the plan's AFTAP, and such a change could be a material 
change.
    The proposed regulations would specify that an immaterial change is 
a change in an AFTAP that is not a material change. In addition, the 
proposed regulations would provide that if the difference between the 
AFTAP for a plan year and the later revised determination of that 
percentage is the result of additional contributions for the preceding 
year that are made by the plan sponsor after the date of the enrolled 
actuary's certification or results from the plan sponsor's election to 
reduce the prefunding or funding standard carryover balance after the 
date of the certification, such change is always treated as an 
immaterial change (regardless of whether it would otherwise affect the 
application of the section 436 benefit limitations).
    In the case of a material change where 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. In 
addition, in the case of a material change, the rules requiring 
application of a presumed AFTAP under section 436(h) continue to apply 
from and after the date of the prior certification until the date of 
the subsequent certification. In the case of an immaterial change, the 
revised percentage applies prospectively but it does not change the 
inapplicability of the presumptions under section 436(h) for the plan 
year prior to the date of the subsequent certification.
H. Coordination Between Presumptions and Determination of AFTAP
    1. Periods during which a presumption applies to the plan. A plan 
must provide that, for any period during which a presumption under 
section 436(h) applies to the plan, the limitations applicable under 
sections 436(b), 436(c), 436(d), and 436(e) apply to the plan as if the 
actual AFTAP for the year were the presumed AFTAP. During that period, 
the rules relating to the deemed election to reduce the funding 
standard carryover balance and the prefunding balance must be applied 
based on the presumed percentage with respect to the applicable 
limitations. Thus, a plan's prefunding balance and funding standard 
carryover balance must be reduced if the reduction would be sufficient 
to avoid the applicable limitation. The proposed regulations provide 
rules for determining the amount of the reduction in balances.
    If the presumed AFTAP for the plan year changes during the year 
because of application of the presumption in section 436(h)(3), the 
rules regarding the deemed election to reduce funding balances must be 
reapplied based on the new presumed AFTAP. This reapplication of the 
deemed election 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 436(e) is greater than the amount 
that was initially reduced.
    2. Periods prior to certification where no presumption applies. If 
no presumptions under section 436(h) apply to a plan for a period and 
the plan's enrolled actuary has not yet issued the certification of the 
plan's AFTAP for the plan year, the plan is not permitted to limit the 
payment of unpredictable contingent event benefits or the accrual of 
benefits based on an expectation that the limitations under section 
436(d) or 436(e) will apply to the plan once the enrolled actuary's 
certification of the AFTAP is issued. In addition, the proposed 
regulations would provide that, 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 AFTAP for the plan year, the 
limitations under sections 436(b) and 436(c) that apply to 
unpredictable contingent event benefits and certain plan amendments, 
respectively, during that period must be applied following the special 
rules described below in paragraph H.3. of this preamble. Thus, if 
after application of those rules the plan would be treated as having an 
AFTAP below the applicable threshold under section 436(b) or 436(c), 
the limitation will apply unless the plan sponsor makes a contribution 
to avoid application of the applicable benefit limitations described in 
section 436(b)(2) or 436(c)(2). In such case, following the 
certification of the AFTAP for the current plan year by the plan's 
enrolled actuary, the proposed regulations would provide that those

[[Page 50554]]

contributions are recharacterized as employer contributions under 
section 430 for the current plan year to the extent they exceed the 
amount necessary to avoid application of the applicable limitation 
under section 436(b) or 436(c) based on the certified percentage.
    3. Periods prior to certification--special rules for unpredictable 
contingent event benefits and plan amendments that increase liability. 
The proposed regulations would provide that, during the pre-
certification period, the rules relating to the deemed election to 
reduce the funding standard carryover balance and the prefunding 
balance must be applied based on the plan's presumed AFTAP. The 
proposed regulations would provide rules for determining the amount of 
the reduction in those balances that would apply in such a situation 
and provide that, in making such determination, the presumed adjusted 
funding target is increased to take into account the benefits 
attributable to the unpredictable contingent event or the plan 
amendment described in section 436(b) and 436(c), respectively. For 
this purpose, if no presumption applies under the rules of section 
436(h) (for example, because the plan's actual AFTAP for the prior year 
was certified to be at least 80 percent), then that prior year's actual 
AFTAP is substituted for the presumed AFTAP for the plan year in 
determining the presumed adjusted funding target. In the case of a plan 
that is not a collectively bargained plan with a funding standard 
account carryover balance or a prefunding balance, the deemed election 
rules do not apply for purposes of sections 436(b) and 436(c), and the 
plan sponsor is permitted (but not required) to reduce those balances 
in order to increase the adjusted plan assets that are compared to the 
presumed AFTAP.
    If, after application of such funding balance reductions and the 
other calculations set forth in the proposed regulations, the plan's 
AFTAP (taking into account the additional benefits) is less than the 
applicable threshold under section 436(b) or 436(c), as applicable, 
then the plan is not permitted to provide any benefits attributable to 
the unpredictable contingent event or plan amendment 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 go into effect under the rules of section 
436(b)(2) or 436(c)(2).
    If, after application of such funding balance reductions, the 
plan's AFTAP (taking into account the additional benefits) is greater 
than or equal to the applicable threshold under section 436(b) or 
436(c), as applicable, then the plan is not permitted to limit the 
payment of unpredictable contingent event benefits under section 436(b) 
or to restrict a plan amendment increasing liability for benefits from 
taking effect under section 436(c) based on an expectation that those 
limitations will apply to the plan once the enrolled actuary's 
certification is issued.
    4. Limitations based on AFTAP. The proposed regulations would 
provide that, on and after the date the enrolled actuary for the plan 
issues a certification of the AFTAP for the current plan year, the plan 
must apply that certified percentage (however, if the certification is 
issued on or after the first day of the 10th month of the current plan 
year but before the first day of the following plan year, the certified 
percentage applies under the presumption rules beginning on the first 
day of that following plan year). For example, the plan sponsor must 
apply the certified AFTAP for a plan year to an unpredictable 
contingent event that occurs or a plan amendment that is effective on 
or after the date of the enrolled actuary's certification during the 
plan year. 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 if the unpredictable contingent 
event benefits or the increase in liability attributable to the plan 
amendment were taken into account.
    After the AFTAP for a plan year is certified by the plan's enrolled 
actuary, with respect to the application of limitations under sections 
436(d) and 436(e) (accelerated benefit payments and benefit accruals, 
respectively) for the plan year, the deemed election to reduce funding 
balances must be reapplied based on the actual funding target for the 
year (provided the certification is issued by the first day of the 10th 
month). This reapplication of the deemed election 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 those limitations is greater than the 
amount of a prior reduction for the plan year. The proposed regulations 
would also reflect section 436(d)(2), which provides that no prohibited 
payments under section 436(d)(5) are permitted to be paid by a plan 
during any period in which the plan sponsor is a debtor in a case under 
title 11, United States Code, or any similar Federal or State law, if 
the plan's enrolled actuary has not yet certified the plan's AFTAP for 
the plan year to be at least 100 percent. Thus, the presumptions do not 
apply for purposes of section 436(d)(2).
    The proposed regulations would provide that the enrolled actuary's 
certification of the AFTAP does not affect the application of the 
limitation under section 436(d) for participants with annuity starting 
dates before the certification. Similarly, the enrolled actuary's 
certification for the plan year does not affect the application of the 
limitation under section 436(e) of this section prior to the date of 
that certification.
    With respect to the impact of the enrolled actuary's certification 
of the AFTAP for a plan year on periods prior to the certification, the 
proposed regulations would provide that the certification does not 
affect the application of limitations under sections 436(b) and 436(c) 
for periods prior to the date the certification is issued, regardless 
of the extent to which the certified percentage varies from the 
presumed percentage. Notwithstanding the foregoing, in the case of a 
plan that, for a plan year, did not provide benefits attributable to an 
unpredictable contingent event or plan amendment based on the preceding 
year's certified AFTAP (and where sufficient contributions under 
section 436(b)(2) or 436(c)(2) were not made), the plan must provide 
any benefits that were not so provided if those benefits would be 
permitted under the rules of section 436 based on the certified AFTAP, 
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.
    A special rule applies if a plan is providing benefits with respect 
to one or more unpredictable contingent events occurring within the 
plan year or amendments taking effect within the plan year. In such a 
case, the restrictions on unpredictable contingent event benefits and 
plan amendments are applied with respect to a subsequent unpredictable 
contingent event or amendment by treating the increase in the funding 
target attributable to the subsequent event or amendment as if it 
included the increases in the funding target attributable to all such 
earlier events or amendments.
I. Determination of Funding Target Attainment Percentage
    For purposes of section 436, the funding target means the funding 
target

[[Page 50555]]

under section 430(d) or section 430(i), as applicable to the plan for a 
plan year.
    For purposes of section 436, the funding target attainment 
percentage (FTAP) for any plan year is the fraction (expressed as a 
percentage), the numerator of which is the value of net plan assets, 
and the denominator of which is the plan's funding target (determined 
without regard to the at-risk rules under section 430(i) even in the 
case of a plan that is in at-risk status). For this purpose, pursuant 
to section 430(f)(4), the value of net plan assets for the plan year is 
generally determined by subtracting the plan's funding standard 
carryover balance and prefunding balance (if any) for the plan year 
from the value of plan assets.
    The adjusted funding target attainment percentage (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 net plan 
assets, increased by the aggregate amount of purchases of annuities for 
employees other than highly compensated employees (as defined in 
section 414(q)) which were made by the plan during the preceding 2 plan 
years. The proposed regulations would provide that the adjusted funding 
target equals the funding target for the plan year (determined without 
regard to the at-risk rules under section 430(i)), increased by the 
aggregate amount of purchases of annuities for employees other than 
highly compensated employees (as defined in section 414(q)) which were 
made by the plan during the preceding 2 plan years.
    If the FTAP for a plan year, determined without regard to the 
section 430(f)(4) subtraction of the funding standard carryover balance 
and the prefunding balance from the value of plan assets, would be 100 
percent or more, then, for purposes of section 436 (but not section 
430(d)), the value of net plan assets used in the determination of the 
FTAP and the AFTAP is determined without regard to any subtraction of 
funding balances under section 430(f)(4). The proposed regulations 
would reflect the transition rule of section 436(j)(3)(B) under which a 
plan is permitted to phase up to 100 percent for purposes of the 
preceding sentence.
    The proposed regulations would also provide that, in the case of 
the first plan year beginning in 2008, the FTAP for the preceding plan 
year is determined as a fraction (expressed as a percentage), the 
numerator of which is the value of net plan assets, and the denominator 
of which is the plan's current liability determined pursuant to section 
412(l)(7) on the valuation date for the last plan year that begins 
before 2008 (the 2007 plan year). For this purpose, 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 above 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) on the valuation date for the 2007 plan year.
    In the case of the first plan year beginning in 2008, for purposes 
of determining the AFTAP for the 2007 plan year, the proposed 
regulations provide that the adjusted funding target is equal to the 
current liability determined pursuant to section 412(l)(7) on the 
valuation date for the 2007 plan year, increased by the aggregate 
amount of purchases of annuities for employees other than highly 
compensated employees (as defined in section 414(q)) which were made by 
the plan during the preceding 2 plan years. 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.
    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 proposed Sec.  1.430(f)-
1(e), then the present value (determined as of the valuation date for 
the prior 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. Thus, an employer's election to reduce the funding 
standard carryover balance in 2008 will have the effect of reducing the 
amount that must be subtracted from the assets in determining the 2007 
AFTAP for purposes of applying the presumptions under section 436(h)(3) 
as of the first day of the 4th month of the plan year beginning in 
2008.

Proposed Legislation

    As of the date of issuance of these proposed regulations, bills 
have been introduced in the House of Representatives and the Senate 
that would exclude mandatory cash-out distributions under section 
411(a)(11) from application of the accelerated payments limitation 
under section 436(d) and that would provide the Treasury Department 
with authority to address application of the presumptions under section 
436(h) to plans that have valuation dates that are later than the first 
day of the plan year.\5\ Proposed Sec.  1.436-1(d)(6) and Sec.  1.436-
1(h)(5), respectively, are reserved in order to accommodate such 
changes.
---------------------------------------------------------------------------

    \5\ H.R. 3361 (August 3, 2007) and S. 1974 (August 2, 2007), at 
sections 2(c)(1)(C), 2(c)(2)(C), 2(c)(1)(F), and 2(c)(2)(F).
---------------------------------------------------------------------------

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 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). As described in 
Rev. Proc. 2007-44, 2007-28 IRB 54, this amendment deadline applies to 
both interim and discretionary amendments that are made pursuant to PPA 
'06 statutory provisions or any regulation issued under PPA '06. See 
Sec.  601.601(d)(2) of this chapter. 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 provided by the Secretary of the Treasury.\6\ For 
example, section

[[Page 50556]]

411(d)(6) relief would be available for plan amendments that would 
prohibit single sum or other accelerated distributions if the plan's 
AFTAP was less than 60 percent, in accordance with section 436(d) and 
Sec.  1.436-1(d) of the proposed regulations. Plan sponsors should note 
that the IRS and the Treasury Department are reviewing whether sample 
plan amendments should be issued with respect to section 436 and the 
Sec.  1.436-1 regulations.
---------------------------------------------------------------------------

    \6\ Except to the extent permitted under section 411(d)(6) and 
the Sec.  1.411(d)-4 regulations, 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 the amendment is adopted and effective before 
the benefits accrue.
---------------------------------------------------------------------------

ERISA Notice to Participants and Beneficiaries
    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:
     The date the plan has become subject to a restriction 
described in the ERISA provisions that are parallel to paragraphs (b) 
and (d) of Code section 436;
     In the case of a plan that is subject to the ERISA 
provisions that are parallel to paragraph (e) of Code section 436, the 
valuation date for the plan year for which the plan's AFTAP is less 
than 60 percent (or, if earlier, the date the AFTAP is presumed to be 
less than 60 percent under the ERISA provisions that parallel the 
presumption rules in paragraph (h) of Code section 436); and
     At such other time as may be determined by the Secretary 
of the Treasury. The notice is required to 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.

Effective/Applicability Dates

1. Section 1.430(f)-1

    In general, these regulations under section 430(f) are proposed to 
apply to plan years beginning on or after January 1, 2008. However, in 
the case of a plan for which the effective date of section 430 is 
delayed in accordance with sections 104 through 106 of the Pension 
Protection Act of 2006, Public Law 109-280, 120 Stat. 780, the 
regulations under section 430(f) are proposed to apply to plan years 
beginning on or after the effective date of section 430 with respect to 
the plan. Unlike section 436, section 430 and the regulations under 
section 430(f) do not include a delayed effective date for collectively 
bargained plans.

2. Section 1.436-1

    In general, the regulations under section 436 are proposed to apply 
to plan years beginning on or after January 1, 2008. However, in the 
case of a plan for which the effective date of section 436 is delayed 
in accordance with sections 104 through 106 of the Pension Protection 
Act of 2006, Public Law 109-280, 120 Stat. 780, the regulations under 
section 436 are proposed to apply to plan years beginning on or after 
the effective date of section 436 with respect to the plan. In 
addition, in the case of a collectively bargained plan maintained 
pursuant to one or more collective bargaining agreements between 
employee representatives and one or more employers ratified before 
January 1, 2008, the regulations under section 436 would not apply to 
plan years beginning before the earlier of: (1) the later of the date 
on which the last collective bargaining agreement relating to the plan 
terminates (determined without regard to any extension thereof agreed 
to after August 17, 2006), or the first day of the first plan year to 
which the proposed regulations under section 436 would otherwise apply, 
or (2) January 1, 2010. For this purpose, any plan amendment made 
pursuant to a collective bargaining agreement relating to the plan 
which amends the plan solely to conform to any requirement under the 
proposed regulations would not be treated as a termination of the 
collective bargaining agreement. The determination of whether a plan is 
a collectively bargained plan is the same as described above in 
paragraph II.A.5 of this preamble with respect to a plan sponsor's 
deemed election to reduce funding balances.

3. Reliance on Proposed Regulations

    For periods following the issuance of these proposed regulations 
and before final regulations are issued, these proposed regulations may 
be relied upon for plan qualification purposes, provided that such 
reliance is on a consistent and reasonable basis.

4. Effect on Plans Subject to Section 402 of PPA '06

    The IRS and the Treasury Department are reviewing the applicability 
of section 436 and the funding balance rules of section 430(f) to plans 
that have made elections under section 402 of PPA '06 (taking into 
account the amendments to section 402 of PPA '06 by section 6615 of the 
U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq 
Accountability Appropriations Act, 2007 (Public Law 110-28)) and any 
special rules for such plans will be addressed in future guidance.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not required. The estimated burden imposed by 
the collection of information contained in these proposed regulations 
is 0.75 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 proposed 
regulations provide for several written elections to be made by the 
plan sponsor upon occasion; these written elections will require 
minimal time to prepare. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (one signed and eight (8) 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department specifically request comments on the 
clarity of the proposed regulations and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing will be scheduled if requested in writing by 
any person who timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place of the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Lauson C. Green and 
Linda S.F. Marshall, Office of Division Counsel/Associate Chief Counsel 
(Tax

[[Page 50557]]

Exempt and Government Entities). However, other personnel from the IRS 
and the Treasury Department participated in the development of these 
regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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(f)-1 is added to read as follows:


Sec.  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 balances 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 sponsor's election to 
maintain a funding standard carryover balance or a prefunding 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 transitional provisions.
    (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) Election to maintain balances--(1) Prefunding balance--(i) In 
general. A plan sponsor is permitted 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 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 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 
each 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 interest-adjusted excess contributions for 
the preceding plan year determined under paragraph (b)(1)(ii)(B) of 
this section.
    (B) Interest-adjusted excess contribution. For purposes of this 
paragraph (b)(1)(ii), the interest-adjusted excess contribution for the 
preceding plan year is the amount, increased with interest in 
accordance with the rules of paragraph (b)(1)(iv)(A) of this section, 
of the excess, if any, of--
    (1) The present value of the employer contributions (other than 
contributions to avoid or terminate benefit limitations described in 
Sec.  1.436-1(f)(2)) to the plan for the preceding plan year determined 
under the rules of paragraph (b)(1)(iv)(B) of this section; over
    (2) The minimum required contribution for the preceding plan year 
(determined without regard to any election to offset the minimum 
required contribution under paragraph (d) of this section for the 
preceding plan year).
    (iii) Decreases. The prefunding balance of a plan is decreased (but 
not below zero) by the sum of--
    (A) As of the first day of each plan year after the first effective 
plan year for the plan, 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) As of the first day of each plan year, any reduction in the 
prefunding balance under paragraph (e) of this section for the plan 
year.
    (iv) Adjustments for interest--(A) Adjustment of excess 
contribution. The amount 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 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.
    (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 only permitted to be maintained by a plan 
that had a positive balance in the funding standard account under 
section 412(b) 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 of the end of the pre-
effective plan year for the plan, 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. The funding standard carryover balance of a plan is 
decreased (but not below zero) by the sum of--
    (A) As of the first day of each plan year after the first effective 
plan year for the plan, 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) As of the first day of each plan year, any reduction in the 
funding standard carryover balance under paragraph (e) of this section 
for the plan year.
    (3) Adjustments for investment experience. In determining a plan's 
prefunding balance under paragraph (b)(1) of this section or a plan's 
funding standard carryover balance under paragraph (b)(2) of this 
section as of the first day of a plan year, the balance must be 
adjusted to reflect the actual rate of return on plan assets for the 
preceding

[[Page 50558]]

plan year. This adjustment is applied to the balance after subtracting 
amounts used to offset the minimum required contribution for the 
preceding plan year pursuant to paragraph (d) of this section and after 
any reduction of balances for that preceding plan year under paragraph 
(e) of this section. 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.
    (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, solely for purposes of applying paragraphs (c), (d), and (e) of 
this section, the plan's prefunding balance and funding standard 
carryover balance (if any) determined under this paragraph (b) are 
increased 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. For 
purposes of applying the rules regarding the adjustments for investment 
experience in paragraph (b)(3) of this section, in the case of a plan 
with a valuation date that is not the first day of the plan year, the 
amount of the funding balances that must be subtracted from plan assets 
under paragraph (d) of this section (because they are used to offset 
the minimum required contribution for the plan year) must be adjusted 
to the first day of the plan year using the effective interest rate 
under section 430(h)(2)(A) for that year.
    (c) Effect of balances on 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 must be subtracted from the value 
of plan assets for purposes of sections 430 and 436, except as provided 
in paragraphs (c)(2), (c)(3), and (c)(4) of this section.
    (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 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 PBGC 
agreement provides that $5 million of a plan's balances is unavailable 
to offset the minimum required contribution for a plan year, the sum of 
the plan's prefunding balance and funding standard carryover balance is 
$20 million, and the plan's assets are $100 million, 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.
    (4) Exception for section 436(j) and (k) special adjustment rules. 
See section 436(j) and (k) and Sec.  1.436-1(j)(2)(ii) and (iii) for 
exceptions from the requirement to subtract the prefunding and funding 
standard carryover balances from plan assets in determining a plan's 
funding target attainment percentage for purposes of section 436.
    (d) Election to apply balances against minimum required 
contribution--(1) In general. Subject to the limitations provided in 
paragraphs (d)(2) and (d)(3) of this section, in the case of any plan 
year in 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 current 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.
    (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. An election to apply a 
funding standard carryover balance or a prefunding balance under 
paragraph (d)(1) of this section is not available for a plan year if 
the plan's prior year funding ratio is less than 80 percent. For 
purposes of this paragraph (d)(3), except as provided in paragraph 
(h)(5) of this section, the plan's prior year funding ratio is the 
fraction (expressed as a percentage)--
    (i) 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
    (ii) The denominator of which is the funding target of the plan for 
the preceding plan year (determined without regard to section 
430(i)(1)).
    (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 balance and funding standard carryover balance under this 
paragraph (e). If such an election is made, the amount of those 
balances that must be subtracted from plan assets pursuant to paragraph 
(c)(1) of this section will be smaller and, accordingly, the plan 
assets taken into account for purposes of sections 430 and 436 will be 
larger. Thus, this election to reduce a plan's prefunding balance and 
funding standard carryover balance is taken into account in the 
determination of plan assets for the plan year and applies for all 
purposes under sections 430 and 436, including for purposes of 
determining the plan's prior year funding ratio under paragraph (d)(3) 
of this section for the following plan year. See also section 436(f)(3) 
and Sec.  1.436-1(a)(5) for a rule under which the plan sponsor is 
deemed to make the election described in this paragraph (e).
    (2) Coordination between prefunding balance and funding standard 
carryover 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

[[Page 50559]]

(e)(1) of this section with respect to its prefunding balance.
    (f) Elections--(1) Method of making elections. 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 amounts 
involved in the election with respect to the prefunding balance and 
funding standard carryover balance.
    (2) Timing of elections--(i) General rule. Except as provided in 
paragraph (f)(2)(ii) of this section, any election under this section 
must be made on or before the due date (with extensions) for the filing 
of the plan's Form 5500 ``Annual Return/Report of Employee Benefit 
Plan'' for the plan year to which the election relates (or, in the case 
of a plan not required to file a Form 5500 for the plan year, on or 
before the last day of the seventh month after the end of the plan year 
to which the election relates). For this purpose, an election to add to 
the prefunding balance relates to the plan year for which excess 
contributions were made. For example, in the case of a plan required to 
file a Form 5500, an election to add to the prefunding balance as of 
the first day of the 2010 plan year (in an amount not in excess of the 
2009 interest-adjusted excess contributions under the rules of 
paragraph (b)(1)(ii) of this section) must be made no later than the 
due date for filing the 2009 Form 5500 even though the election is 
reported on the 2010 Form 5500 (Schedule SB).
    (ii) 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 a 
benefit restriction under section 436) must be made by the end of the 
plan year to which the election relates.
    (3) Irrevocability of elections. A plan sponsor's election under 
this section with respect to the plan's funding standard carryover 
balance or prefunding balance is irrevocable (and must be 
unconditional).
    (4) Plan sponsor--(i) In general. For purposes of the elections 
described in this section, except as 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 application 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 as of the 
beginning of the 2008 plan year. The sponsor of Plan P, Sponsor S, 
does not elect in 2008, pursuant to paragraph (e)(1) of this 
section, to reduce any portion of the funding standard account 
carryover balance prior to the determination of the value of plan 
assets. The actual rate of return on plan P's assets in 2008 is 2%. 
The effective interest rate in 2008 for plan P is 6%. The minimum 
required contribution for Plan P under section 430 for 2008 is 
$100,000. The prior year funding ratio for Plan P for 2008, as 
determined under paragraph (h)(5) of this section, is not less than 
80%.
    (ii) Sponsor S makes a contribution to Plan P of $150,000 on 
December 1, 2008, for the 2008 plan year and makes no other 
contributions for the 2008 plan year. Because this contribution was 
made on a date other than the valuation date for the 2008 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 rate of interest for the 2008 
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 2008 over the 
minimum required contribution for 2008, 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, 2009, cannot exceed $44,730 
(which is the excess contribution of $42,198 adjusted for 12 months 
of interest at an effective interest rate of 6%).
    (iv) Furthermore, if Sponsor S does not elect to apply any 
portion of the funding standard carryover balance toward the minimum 
contribution in 2008, the funding standard carryover balance as of 
January 1, 2009, is $25,500 (which is the funding standard account 
balance as of January 1, 2008, adjusted for investment experience at 
an effective interest 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, 2009, for 
the 2008 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, 2009, 
cannot exceed $43,273 (which is the excess contribution of $40,824 
adjusted for 12 months of interest at an effective interest rate of 
6%).
    Example 3. (i) The facts are the same as in Example 1 except 
that Sponsor S contributes $85,000 to Plan P on January 1, 2008, for 
the 2008 plan year and makes no other contributions to Plan P for 
the 2008 plan year. In addition, Sponsor S elects to use $15,000 of 
the funding standard carryover balance to offset P's minimum 
required contribution in 2008, pursuant to paragraph (d)(1) of this 
section.
    (ii) With respect to the 2009 plan year, the adjustment for 
investment experience under paragraph (b)(3) of this section for the 
funding standard carryover balance for the preceding plan year is 
$200, determined as the actual rate of return on plan assets for 
2008 as applied to the 2008 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%).
    (iii) The funding standard carryover balance, as of January 1, 
2009, is $10,200, determined as the 2008 funding standard carryover 
balance less the amount used to offset the 2008 minimum required 
contribution, adjusted for investment experience during the 2008 
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 $90,000 (instead of $85,000) to Plan P on 
January 1, 2008, for the 2008 plan year.
    (ii) Notwithstanding the fact that the amount that Sponsor S 
contributed to Plan P exceeds the minimum required contribution 
($85,000) after it has been offset as a result of the use of the 
funding standard carryover balance, the maximum amount that Sponsor 
S may add to the prefunding balance as of January 1, 2009, is $0. 
This is because the maximum amount that may be added to the 
prefunding balance is the excess of $90,000 over $100,000. See 
paragraphs (b)(1)(ii)(A) and (B) of this section.
    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, 2009, the beginning of the 2009 plan year. The prefunding 
balance of Plan Q as of the beginning of the 2009 plan year is $0. 
The actual rate of return on plan Q's assets in 2009 is 10%. The 
effective interest rate for Plan Q for 2009 is 5%. The funding ratio 
for Plan Q in 2008 is 85%, as determined under paragraph (d)(3) of 
this section. Thus, the prior year funding ratio for 2009 is not 
less than 80%.
    (ii) Pursuant to paragraph (b)(4) of this section, the funding 
standard carryover balance is increased to $51,235 as of July 1, 
2009 (that is, an increase to reflect 6 months of interest at an 
effective interest rate of 5%). Sponsor T does not elect in 2009 to 
reduce any portion of the funding standard carryover balance 
pursuant to paragraph (e) of this section. The funding standard 
carryover balance ($51,235) is subtracted from the value of plan 
assets, as of July 1, 2009, prior to the determination of the 
minimum funding contribution and, accordingly, $51,235 is the 
maximum amount that may be applied against the minimum required 
contribution.
    (iii) The minimum required contribution for Plan Q for 2009 is 
$200,000. Sponsor T

[[Page 50560]]

makes a contribution to Plan T of $190,000 on July 1, 2009, for the 
2009 plan year, and makes no other contributions for the 2009 plan 
year. Sponsor T elects to use $10,000 of the funding standard 
carryover balance to offset Plan Q's minimum required contribution 
in 2009. Accordingly, the value of the funding standard carryover 
balance as of July 1, 2009, prior to adjustment for investment 
experience, is $41,235 (that is, $51,235 less $10,000).
    (iv) The value of the funding standard carryover balance as of 
January 1, 2010, is determined by first discounting the value as of 
July 1, 2009, after amounts have been used to offset the minimum 
required contribution, to January 1, 2009, at the effective interest 
rate and then crediting this so determined amount with a full year's 
investment experience at a rate equal to the actual rate of return. 
Thus, the July 1, 2009, value of $41,235 is discounted for 6 months 
of interest, at an effective interest rate of 5%, to obtain a 
January 1, 2009, value of $40,241. Accordingly, the value of the 
funding standard carryover balance as of January 1, 2010, is $44,265 
(that is, $40,241 increased with one year's investment return at a 
rate of 10%).

    (h) Effective/applicability date and transition rules--(1) General 
effective/applicability date. Except as provided in paragraph (h)(2) of 
this section, this section applies to plan years beginning on or after 
January 1, 2008.
    (2) Plans with delayed effective date. In the case of a plan for 
which the effective date of section 430 is delayed in accordance with 
sections 104 through 106 of the Pension Protection Act of 2006, Public 
Law 109-280, 120 Stat. 780, this section applies to plan years 
beginning on or after the effective date of section 430 with respect to 
the plan.
    (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 
this section applies under paragraph (h)(1) or (h)(2) of this section.
    (4) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
the first effective date applicable under paragraph (h)(1) or (h)(2) of 
this section. Thus, except for plans with a delayed effective date 
under paragraph (h)(2) of this section, the pre-effective plan year for 
a plan is the last plan year beginning before January 1, 2008.
    (5) Special lookback rule for pre-effective plan year's funding 
ratio--(i) Plan assets. For purposes of determining a plan's prior year 
funding ratio pursuant to paragraph (d)(3) of this section for the 
first effective plan year, the value of plan assets on the valuation 
date of the preceding plan year is determined under section 412(c)(2) 
as in effect for that pre-effective plan year, except that--
    (A) If the value of plan assets is less than 90 percent of the fair 
market value of plan assets for the pre-effective plan year on that 
date, for this purpose 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 on the valuation date for the pre-
effective plan year on that date, for this purpose such value is 
considered to be 110 percent of the fair market value.
    (ii) Funding target. For purposes of determining a plan's prior 
year funding ratio pursuant to paragraph (d)(3) of this section for the 
first effective plan year, the funding target of the plan for the 
preceding plan year is equal to the plan's current liability under 
section 412(l)(7) on the valuation date for the plan's pre-effective 
plan year.
    Par. 3. Section 1.436-1 is added to read as follows:


Sec.  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 a limitation 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 accelerated benefit payments. 
Paragraph (e) of this section describes limitations on benefit 
accruals. Paragraph (f) of this section provides rules relating to 
methods to avoid 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. 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. For purposes of 
applying this rule, plan years of a plan are aggregated with plan years 
of a predecessor plan in accordance with section 414(a) or Sec.  
1.415(f)-1(c).
    (ii) 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 this section 436 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.
    (4) Treatment of plan as of close of prohibited or cessation 
period--(i) Resumption of benefit payments and accruals--(A) Resumption 
of accelerated payments. If a limitation on accelerated benefit 
payments under paragraph (d) 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 the prohibition 
on paying accelerated benefits under the plan does not apply to 
benefits with annuity starting dates that are on or after that later 
section 436 measurement date. Any amendment to eliminate the payment of 
accelerated benefit payments for periods in which they are not 
restricted under section 436 is subject to the rules of section 
411(d)(6).
    (B) Resumption of benefit accruals. Unless the plan provides 
otherwise, benefit accruals under the plan resume effective as of the 
section 436 measurement date on which benefit accruals are no longer 
restricted under paragraph (e) of this section.
    (ii) Missed benefit payments and accruals--(A) Option to amend plan 
to restore benefits. A plan is permitted to be amended to provide 
participants who had an annuity starting date within a period during 
which the rules of paragraph (d) of this section applied to the plan 
with the opportunity to have a new election under which the form of 
benefit previously elected may be

[[Page 50561]]

modified, subject to applicable qualification requirements. A 
participant who makes such a new election is treated as having a new 
annuity starting date under section 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 requirements of section 436(c) and paragraph (c) of this 
section.
    (B) Automatic plan provisions to restore benefits. A plan is 
permitted to provide that participants who had an annuity starting date 
within a period during which the rules of paragraph (d) of this section 
applied to the plan are automatically provided with the opportunity to 
have a new annuity starting date (which would constitute a new annuity 
starting date under section 417) under which the form of benefit 
previously elected may be modified, subject to applicable qualification 
requirements, once the rules of paragraph (d) of this section cease to 
apply. In addition, 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, as described in paragraph (a)(4)(ii)(A) of this 
section. However, if a plan provides for the automatic restoration of 
those benefit accruals and the period of the limitation exceeds 12 
months, the plan will be treated as having adopted, effective as of the 
section 436 measurement date on which the limitation ceases to apply, a 
plan amendment that has the effect of increasing liabilities under the 
plan. Such an amendment is subject to the limitations of paragraph (c) 
of this section.
    (iii) Shutdown and other unpredictable contingent event benefits--
(A) In general. If any unpredictable contingent event benefits under 
paragraph (b) of this section are limited with respect to an 
unpredictable contingent event, that limitation applies to all such 
benefits that otherwise would have been paid to any plan participant 
with respect to that unpredictable contingent event.
    (B) Benefits not paid. Notwithstanding paragraph (a)(4)(iii)(A) of 
this section, a plan is permitted to be amended to provide that any 
unpredictable contingent event benefits that were limited under the 
rules of paragraph (b) of this section will be paid or reinstated as of 
the section 436 measurement date on which the limitation no longer 
applies, subject to applicable qualification requirements. Such a plan 
amendment is subject to the requirements of section 436(c) and 
paragraph (c) of this section. A plan is not permitted to provide for 
restoration of any such unpredictable contingent event benefits without 
an amendment that complies with section 436(c).
    (iv) Example. The following example illustrates the application 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 accelerated benefit 
distributions under paragraph (d)(3) of this section based on a 
presumed adjusted funding target attainment percentage (AFTAP) of 
75%, and can therefore only pay a portion (generally 50%) of the 
accelerated benefit distributions otherwise payable to participants 
who commence benefit payments while the restriction is in effect.
    (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. However, because U elected a form of payment that is a 
prohibited payment that is not permitted to be paid under paragraph 
(d)(3)(i) of this section, U elects in accordance with paragraph 
(d)(3)(ii) of this section to receive 50% of his benefit in a single 
sum 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 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, is still 80%. The amendment is permitted to 
take effect because Plan T has 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 accelerated benefit payments under paragraphs (d)(1) 
and (d)(3) of this section. Accordingly, Participant U may elect, 
subject to otherwise applicable qualification rules, including 
spousal consent, to receive the remainder of his benefits in the 
form of a single sum on or after March 1, 2011.

    (5) Deemed election to reduce funding balances--(i) Limitations on 
accelerated benefit payments. If a benefit limitation under paragraph 
(d) 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 or above the applicable threshold (60, 
80, or 100 percent, as the case may be) in order for the benefit 
limitation not to apply to the plan. In such a case, the employer is 
treated as having made that election on the section 436 measurement 
date as of which the benefit limitation would otherwise apply (without 
regard to whether a participant is eligible for or requests a payment 
that is a prohibited payment described in paragraph (d)(5) of this 
section).
    (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 or above the applicable threshold in order 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 employer is treated as having made that 
election on the date as of which the applicable benefit limitation 
would otherwise apply.
    (B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which collective bargaining agreements apply to some, but not all, of 
the plan participants, the plan is considered a collectively bargained 
plan for purposes of this paragraph (a)(5)(ii) 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.
    (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 year. Thus, if the plan's prefunding and 
funding standard carryover balances were reduced to zero and the 
resulting

[[Page 50562]]

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. If a plan is presumed to have an adjusted funding 
target attainment percentage of less than 60 percent under paragraph 
(h)(3) of this section, then the plan is treated as if the funding 
standard carryover balance and the prefunding balance are insufficient 
to increase the adjusted funding target attainment percentage to the 
threshold percentage of 60 percent. Accordingly, paragraphs (a)(5)(i) 
and (a)(5)(ii) of this section do not apply to such a plan.
    (iv) Example. The following example illustrates the application 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. Sponsor X is 
not in bankruptcy.
    (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 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)(3) of this section for increases with respect to a 
formula not based on compensation 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. This percentage is below the 80% threshold for the 
plan amendment limitation under paragraph (c) of this section.
    (iii) Because the AFTAP would be below the 80% threshold if the 
benefits attributable to the plan amendment were taken into account, 
Sponsor X is deemed to have made an election under paragraph 
(a)(5)(ii) of this section to reduce Plan W's prefunding balance and 
funding standard carryover balance by the amount necessary for the 
AFTAP to reach the 80% threshold (reflecting the increase in funding 
target attributable to the plan amendment) in order for the 
limitation under paragraph (c) of this section not to apply.
    (iv) In this case, provided the reduction in funding balances is 
sufficient for the limitation not to apply, the plan amendment will 
go into effect on its effective date (May 1). See paragraph (f) of 
this section for other methods to avoid benefit limitations (where, 
for example, the amount necessary for a benefit limitation not to 
apply for a plan year exceeds the aggregate funding balances).

    (b) Limitation on shutdown benefits and other unpredictable 
contingent event benefits--(1) In general. A plan that contains an 
unpredictable contingent event benefit satisfies section 436(b) and 
this section only if it provides that the benefit will not be paid to a 
plan participant during a plan year if the adjusted funding target 
attainment percentage for the plan year--
    (i) Is less than 60 percent; or
    (ii) Is 60 percent or more, but would be less than 60 percent if 
the benefits attributable to the unpredictable contingent event were 
taken into account in determining the adjusted funding target 
attainment percentage.
    (2) Exemption--(i) In general. The prohibition on payment of 
unpredictable contingent event benefits under paragraph (b)(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) of this section.
    (ii) 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 shutdown benefits related to that shutdown are not 
subject to the limitation described in this paragraph (b) for that 
calendar plan year, this paragraph (b) will not apply to restrict 
payment of those shutdown benefits even if another shutdown occurs in 
2012 that results in shutdown benefits related to that later shutdown 
being restricted under this paragraph (b) (where the plan's adjusted 
funding target attainment percentage for 2012 is less than 60 percent 
taking into account the liability attributable to those shutdown 
benefits).
    (3) Unpredictable contingent event. For purposes of this section, 
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 other than the 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability. Thus, 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 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, the plan is providing an unpredictable 
contingent event benefit.
    (c) Limitations on plan amendments increasing liability for 
benefits--(1) In general. Except as provided in this paragraph (c), a 
plan satisfies section 436(c) and this section 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 takes effect 
if the adjusted funding target attainment percentage for the plan year 
is--
    (i) Less than 80 percent; or
    (ii) Is 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. The limitations on plan amendments in paragraph 
(c)(1) of this section cease to apply and 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 upon payment by the plan sponsor of the 
contribution described in paragraph (f)(2) of this section.
    (3) Exception for certain benefit increases--(i) In general. The 
limitation on plan amendments under paragraph (c)(1) of this section 
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. 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

[[Page 50563]]

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.
    (ii) Application to terminated participants. If an amendment 
applies to both currently employed and terminated participants, all 
such participants must be included in determining the increase in 
average wages of the participants covered by the amendment. For this 
purpose, terminated participants are treated as having no increase or 
decrease in wages for the period after severance from employment.
    (iii) Separate amendments for different plan populations. In lieu 
of a single amendment that applies to both currently employed 
participants and terminated participants as described in paragraph 
(c)(3)(ii) of this section, the employer could adopt two amendments--
one that increases benefits for currently employed participants and 
another one that increases benefits for terminated participants. In 
that case, the two amendments are considered separately in determining 
the increase in average wages, and the exception in this paragraph 
(c)(3) from application of the section 436(c) limitation would apply 
separately to each amendment (so that an amendment providing for 
increases in benefits for currently employed participants could go into 
effect, but an amendment providing for increases in benefits for 
terminated participants who received no increase in wages from the 
employer during the period over which the increase in average wages is 
determined could not go into effect).
    (4) Exception for statutorily required vesting. To the extent that 
any amendment results in (or is made pursuant to) a mandatory increase 
in the vesting of benefits under the Code or ERISA (such as vesting 
rate increases pursuant to statute, plan termination amendments under 
section 411(d)(3), and amendments that lead to vesting increases 
required by top heavy rules under section 416), that amendment does not 
constitute an amendment that changes the rate at which benefits become 
nonforfeitable for purposes of section 436(c) and this paragraph (c).
    (d) Limitations on accelerated benefit payments--(1) Funding 
percentage less than 60 percent--(i) In general. 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, the plan will not 
pay any prohibited payment with an annuity starting date on or after 
the applicable section 436 measurement date.
    (ii) Request for prohibited distribution. If a participant or 
beneficiary requests a distribution that is prohibited under paragraph 
(d)(1)(i) of this section, the plan must permit the participant or 
beneficiary to elect another form of benefit available under the plan 
or to defer payment to a later date to the extent permitted under 
applicable qualification requirements.
    (2) Bankruptcy. A plan satisfies the requirements of section 
436(d)(2) and this paragraph (d)(2) only if the plan provides that the 
plan will not pay any prohibited payment with an annuity starting date 
that is 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 with an annuity starting date within a 
plan year that is 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. The rules 
of paragraph (d)(1)(ii) of this section apply if payments are 
prohibited under this paragraph (d)(2).
    (3) Limited payment if percentage 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 permitted to elect the 
payment of a benefit with an annuity starting date on or after the 
applicable section 436 measurement date in the form of a prohibited 
payment only if the present value, determined in accordance with 
section 417(e)(3), of the portion of the payment that is greater than 
the amount of the straight life annuity under the plan (as described in 
paragraph (d)(5)(i)(A) of this section) does not exceed the lesser of--
    (A) 50 percent of the present value of the benefits, determined in 
accordance with section 417(e)(3) (or, if greater, 50 percent of the 
amount of any single sum that would be payable without regard to this 
paragraph (d)); or
    (B) 100 percent of the PBGC guarantee amount described in paragraph 
(d)(3)(iv) of this section.
    (ii) Bifurcation if optional form unavailable--(A) General rule. 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 provide a participant or beneficiary who elects such an optional 
form with the option either to defer payment to a later date (to the 
extent permitted under applicable qualification requirements) or to 
bifurcate the benefit into unrestricted and restricted portions. If the 
participant or beneficiary elects to bifurcate the benefit, the plan 
must permit the participant or beneficiary to elect, with respect to 
the unrestricted portion, any optional form of benefit otherwise 
available under the plan with respect to the participant's or 
beneficiary's entire benefit (whether or not the optional form of 
benefit with respect to the unrestricted portion is a prohibited 
payment). In such a case, if the participant or beneficiary elects 
payment of the unrestricted portion of the benefit described in 
paragraph (d)(3)(ii)(B) of this section in the form of a prohibited 
payment, the plan must permit the participant or beneficiary to elect 
payment of the restricted portion described in paragraph (d)(3)(ii)(C) 
of this section in any optional form of benefit under the plan that is 
not a prohibited payment and that would have been permitted with 
respect to the participant's or beneficiary's entire benefit. A plan is 
also permitted to offer optional forms of benefit that are solely 
available during the period this paragraph (d)(3) applies to the plan, 
such as 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.
    (B) Unrestricted portion of the benefit. The unrestricted portion 
of the benefit is the lesser of--
    (1) 50 percent of the benefit; and
    (2) The portion of the benefit that has a present value equal to 
the PBGC guarantee amount described in paragraph (d)(3)(iv) of this 
section.
    (C) Restricted portion of the benefit. The restricted portion of 
the benefit is the portion of the benefit that is not described in 
paragraph (d)(3)(ii)(B) of this section.
    (iii) One-time application--(A) In general. A plan satisfies the 
requirements of this paragraph (d) only if the plan provides that, in 
the case of a participant who receives a prohibited payment (or series 
of prohibited payments under a single optional form of benefit) 
pursuant to paragraph (d)(3)(i) or (ii) of this section, the 
participant cannot thereafter receive any additional prohibited payment 
during any period of consecutive plan years to which the limitations 
under either this

[[Page 50564]]

paragraph (d)(3), paragraph (d)(1) of this section, or paragraph (d)(2) 
of this section apply.
    (B) Treatment of beneficiaries. For purposes of this paragraph 
(d)(3), benefits provided to a participant and any beneficiary 
(including an alternate payee, as defined in section 414(p)(8)) are 
aggregated. If the accrued benefit of a participant is allocated to 
such an alternate payee and one or more other persons, the unrestricted 
amount under paragraphs (d)(3)(i) and (d)(3)(ii) 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.
    (iv) Present value of PBGC maximum benefit guarantee. The amount 
described in this paragraph (d)(3)(iv) is, with respect to a 
participant, 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 under section 4022 of the Employee Retirement Income Security 
Act of 1974, as amended.
    (v) Examples. The following examples illustrate the application of 
this paragraph (d)(3):

    Example 1. (i) Plan A is subject to the restriction on 
accelerated benefit distributions under paragraph (d)(3) of this 
section for the 2010 plan year, and can therefore only pay a portion 
of the accelerated benefit payments otherwise payable to 
participants whose annuity starting date occurs while the 
restriction applies.
    (ii) 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.
    (iii) The PBGC guaranteed monthly benefit for a straight life 
annuity payable at age 65 in 2010 (for purposes of this example) is 
$4,500. The present value of the PBGC guaranteed benefit using 
actuarial assumptions under section 417(e) is $637,200.
    (iv) 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 portion of Participant P's benefit that is 
greater than a straight life annuity exceeds the lesser of 50% of 
the benefit otherwise payable, or the present value of the PBGC 
guaranteed benefit, it cannot be paid under paragraph (d)(3)(i) of 
this section. Accordingly, the maximum single sum that Participant P 
can receive is $637,200 (that is, the lesser of 50% of $1,416,000 or 
$637,200).
    (v) Pursuant to paragraph (d)(3)(ii) of this section, the plan 
must offer P the option to bifurcate the benefit into restricted and 
unrestricted 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 of a single sum, then, with respect to the 
$5,500 restricted portion, the plan must permit P to elect any form 
of benefit that would otherwise be permitted with respect to the 
full $10,000 that is not a prohibited payment. Alternatively, the 
plan could permit P 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. The present value of the PBGC guarantee payable at age 
65 in the form of a straight life annuity is determined to be 
$637,200 for the purposes of this Example 2.
    (iii) Under the bifurcation approach of paragraph (d)(3)(ii) of 
this section, Q can receive the partial single sum payment available 
under the terms of Plan A as long as the amount of the single sum 
does not exceed the unrestricted portion of the benefit under 
paragraph (d)(3)(ii)(B) of this section. The unrestricted portion of 
Q's benefit is the lesser of 50% of the benefit otherwise payable, 
or the present value of the PBGC guaranteed benefit. Accordingly, 
the maximum single sum that Q can receive is $212,400 (that is, the 
lesser of 50% of $424,800, or $637,200).
    (iv) Because the present value of the portion of Q's benefit 
that is greater than the straight life annuity ($99,120) is less 
than the lesser of 50% of the present value of benefits (50% of 
$424,800) and $637,200 (100% of the PBGC guaranteed benefit), the 
optional form described in paragraph (i) of this Example 2 is 
permitted to be paid under paragraph (d)(3)(i) of this section.

    (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 after September 1, 2005, this paragraph (d)(4) ceases to apply 
for the plan as of the date any benefits accrue under the plan.
    (5) Prohibited payment--(i) In general. For purpose of this 
paragraph (d), 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 this paragraph (d) is in effect;
    (B) Any payment for the purchase of an irrevocable commitment from 
an insurer to pay benefits; and
    (C) Any other payment 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 Sec.  
601.601(d)(2) of this chapter).
    (ii) Annuity starting date. Solely for purposes of applying the 
limitations on accelerated benefit payments under this paragraph (d), 
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 first day on which all events have occurred (including the 
participant's election, the participant's severance from employment if 
the participant is below normal retirement age, and, if applicable, the 
participant's survival to the date as of which payment is made) which 
entitle the participant to such benefit as described in section 
417(f)(2)(A)(ii);
    (C) In the case of an amount payable on a retroactive annuity 
starting date, the benefit commencement date; and
    (D) The date of any payment for the purchase of an irrevocable 
commitment from an insurer to pay benefits under plan.
    (6) Involuntary distributions under section 411(a)(11). [Reserved].

[[Page 50565]]

    (e) Limitation on benefit accruals for plans with severe funding 
shortfalls--(1) In general. 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)(3) of this section.
    (2) Exemption. The prohibition on additional benefit accruals under 
a plan described in paragraph (e)(1) of this section ceases to apply 
with respect to any 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) of this section.
    (f) Methods to avoid benefit limitations--(1) In general. This 
paragraph (f) sets forth rules relating to employer contributions and 
other methods to avoid 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) which 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 
contribution to avoid 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 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 year under section 
430(h)(2)(A) is subsequently determined to be less than that highest 
rate, the excess is recharacterized as a section 430 contribution for 
the current plan year.
    (B) 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--(A) In general. The contributions described in this 
paragraph (f)(2) are contributions described in section 436(b)(2), 
(c)(2), and (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 will fail 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 prefunding 
balance under section 430(f)(6) and Sec.  1.430(f)-1(b)(1)(i).
    (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) and, except as specifically provided in 
paragraph (g) or (h) of this section, cannot subsequently be 
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 Sec.  1.430(f)-1(f) with 
respect to funding balances.
    (iii) Contribution for unpredictable contingent event benefits. In 
the case of a contribution to avoid the application of the limitation 
on benefits attributable to an unpredictable contingent event under 
section 436(b)--
    (A) If 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, then 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) If 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, then 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--
    (1) The benefits attributable to the unpredictable contingent event 
were included in the determination of the funding target; and
    (2) The contribution were included as part of the assets of the 
plan.
    (iv) Contribution for plan amendments increasing liability for 
benefits. In the case of a contribution to avoid the application of the 
limitation on benefits attributable to a plan amendment under 436(c)--
    (A) If 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, then 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) If 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, then the 
amount of the contribution under

[[Page 50566]]

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 percent if--
    (1) The liabilities attributable to the plan amendment were 
included in the determination of the funding target; and
    (2) The contribution were included as part of the assets of the 
plan.
    (v) Contribution required for continued benefit accruals. In the 
case of a contribution to avoid 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 were included as part of the assets of the 
plan.
    (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 the Employee 
Retirement Income Security Act of 1974, as amended; 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 60 percent (without regard to any security provided under 
this paragraph (f)(3)) for a consecutive period of 7 years, the 
valuation date for the last 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 together with any interest accrued thereon) as provided in the 
agreement governing the escrow, 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)).
    (v) Contribution of security to plan. Any amount of 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 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.
    (4) Examples. The following examples illustrate the application 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 did not purchase any annuities in 2009 or 2010. As of January 1, 
2011, Plan Z does not have a funding standard carryover balance or a 
prefunding balance. 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 rate of interest 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 funding 
target due to this 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 this amendment to be permitted to become 
effective, 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 liability attributable to the plan amendment were included 
in the funding target, the AFTAP would be 81.36% (because the 
adjusted plan assets would have been $2,400,000 and the adjusted 
funding target would have been $2,950,000 (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 that would otherwise have accrued between the valuation 
date and the date of the contribution, at Plan Z's effective rate of 
interest 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. 
Accordingly, the contribution is not applied toward minimum funding 
requirements under section 430, and is not eligible for inclusion in 
the prefunding balance under Sec.  1.430(f)-1(b)(1). Since this 
contribution meets the requirements of paragraph (f)(2) of this 
section, the plan amendment can take effect.
    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 
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 
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 this amendment to be permitted to become 
effective, 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)

[[Page 50567]]

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 that would otherwise have accrued between the valuation 
date and the date of the contribution, at Plan Z's effective rate of 
interest 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. 
Accordingly, the contribution is not applied toward minimum funding 
requirements under section 430, and is not eligible for inclusion in 
the prefunding balance under Sec.  1.430(f)-1(b)(1). Since this 
contribution meets the requirements of paragraph (f)(2) of this 
section, the plan amendment can take effect.
    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%. The highest of the three segment rates applicable to the 
2011 plan year under section 430(h)(2)(C) is 6%.
    (ii) Because the enrolled actuary has not certified the actual 
AFTAP as of January 1, 2011, and the amendment is scheduled to take 
effect after April 1, 2011, the rules of paragraph (h)(2)(ii) 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 
section (f)(2)(iv)(A) 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 that would otherwise have accrued between the 
valuation date and 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) Once the plan's effective interest rate has been determined, 
if that rate for the year is less than 6%, the amount of excess 
interest previously contributed is recharacterized as a section 430 
contribution for the current plan year.

    (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 a plan year. This 
paragraph (g) sets forth rules for the application of limitations under 
sections 436(b), 436(c), 436(d), and 436(e) prior to and during the 
period those presumptions apply to a 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) applies. Paragraph (g)(3) of 
this section sets forth rules that apply to periods during which no 
presumptions under section 436(h) 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 that apply after the enrolled actuary's 
certification of the plan's adjusted funding target attainment 
percentage for a plan year. Paragraph (g)(5) of this section sets forth 
additional rules that apply prior to the enrolled actuary's 
certification of the adjusted funding target attainment percentage for 
a plan year with respect to the limitations on unpredictable contingent 
event benefits and plan amendments that increase liabilities under 
paragraphs (b) and (c) of this section, respectively. Paragraph (g)(6) 
of this section sets forth rules for multiple unpredictable contingent 
events and amendments during a plan year. Paragraph (g)(7) of this 
section sets forth examples of the application of 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 paragraph (h)(1), (2), or (3) of this 
section applies to the plan, the limitations applicable under 
paragraphs (b), (c), (d), and (e) of this section apply to the plan as 
if the actual adjusted funding target attainment percentage for the 
year were the presumed adjusted funding target attainment percentage 
determined under the rules of paragraph (h) of this section.
    (ii) Determination of amount of reduction in balances--(A) 
Valuation date adjustment. 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 percentage with respect to the limitations under 
paragraphs (b), (c), (d), and (e) of this section. In order to 
determine the amount of the reduction in those balances that would 
apply in such a situation, a presumed adjusted funding target must be 
established, which is then compared to the interim value of adjusted 
plan assets as of the valuation date for the current plan year. For 
this purpose, the interim value of adjusted plan assets is equal to the 
value of adjusted plan assets as of the valuation date, determined 
without regard to future contributions, future elections to add to the 
prefunding balance for the prior year, and future 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.
    (B) Change in presumed percentage in 4th month. If the presumed 
adjusted funding target attainment percentage for the plan year changes 
during the year because of application of the presumption in paragraph 
(h)(2) of this section, the rules regarding the deemed election to 
reduce funding 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 later if the enrolled 
actuary's certification of the adjusted funding target attainment 
percentage for a plan year occurs after the first day of the 4th month 
of the following plan year. In

[[Page 50568]]

order to perform this reapplication, a new adjusted funding target must 
be determined based on the new presumed adjusted funding target 
attainment percentage and must be compared to an updated interim value 
of adjusted plan assets. For this purpose, the new presumed adjusted 
funding target is redetermined based on the new presumed adjusted 
funding target attainment percentage, and is compared to the adjusted 
plan assets updated to take into account the plan sponsor's 
contributions made for the prior plan year and section 430(f) elections 
with respect to the plan's prefunding and funding standard carryover 
balances since the earlier determination of the interim plan assets. 
This reapplication of the deemed election 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 paragraph (d) or (e) of this 
section is greater than the amount that was initially reduced. Prior 
reductions of funding balances continue to apply in accordance with the 
rules of paragraph (g)(4)(i)(C) of this section.
    (iii) 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), 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, no prohibited payments within the meaning of paragraph 
(d)(5) of this section may be paid. 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)(iii).
    (iv) Application to unpredictable contingent events and plan 
amendments. For purposes of applying the limitations under paragraphs 
(b) and (c) of this section during the period described in this 
paragraph (g)(2), the presumed adjusted funding target under paragraph 
(g)(2)(ii) of this section is adjusted to reflect the increase in the 
funding target that would be attributable to the unpredictable 
contingent event or the plan amendment if the unpredictable contingent 
event benefits or the increase in liability attributable to the plan 
amendment were taken into account. See paragraph (g)(5)(i) of this 
section for related rules regarding funding balances that apply in the 
case of unpredictable contingent event benefits or plan amendments 
increasing benefit liabilities.
    (3) Periods prior to certification during which no presumption 
applies--(i) Accelerated benefit 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 the payment of 
accelerated benefits 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. However, see paragraph (g)(2)(iii) 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 or plan amendments increasing benefit liability under paragraph 
(c) of this section during that period must be applied following the 
rules of paragraph (g)(5) of this section, based on the preceding 
year's certified adjusted funding target attainment percentage. Thus, 
if after application of those rules the plan would be treated as having 
an adjusted funding target attainment percentage below the applicable 
threshold under paragraph (b) or (c) of this section (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 go into effect, unless the contribution described in 
paragraph (g)(5)(ii) of this section is made.
    (B) Recharacterization of contributions to avoid benefit 
limitations. If, pursuant to paragraph (g)(3)(ii)(A) of this section, 
the plan sponsor makes contributions described in paragraph (g)(5)(ii) 
of this section to avoid application of the applicable benefit 
limitations, then, after the certification of the adjusted funding 
target attainment percentage for the current plan year is issued by the 
plan's enrolled actuary, those contributions are recharacterized as 
employer contributions under section 430 for the current plan year to 
the extent they exceed the amount necessary to avoid application of the 
applicable limitation under paragraph (b) or (c) of this section based 
on the certified percentage.
    (4) Periods after certification of adjusted funding target 
attainment percentage--(i) Plan must follow certified percentage--(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. Thus, for example, the plan must provide 
that paragraph (d) of this section applies 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. In addition, 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 is effective on or after the date of the enrolled 
actuary's certification. Thus, the plan administrator must determine if 
the adjusted funding target attainment percentage 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 if the unpredictable contingent event benefits or the 
increase in liability attributable to the plan amendment were taken 
into account.
    (B) Application of rule for deemed election to reduce funding 
balances. After the adjusted funding target

[[Page 50569]]

attainment percentage for a plan year is certified by the plan's 
enrolled actuary, the deemed election to reduce funding 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 month of the plan year). This 
reapplication of the deemed election 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 paragraph (d) or (e) of this 
section is greater than the amount that was reduced under paragraph 
(g)(2) or (g)(3) of this section.
    (C) Prior reductions continue to apply. If the amount of the 
reduction in funding balances that is necessary to reach the applicable 
threshold to avoid the application of the benefit limitation is less 
than the amount that was reduced under paragraph (g)(2) or (g)(3) of 
this section, 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 amount of the funding 
balances, then the prior reduction continues to apply and no further 
reduction under paragraph (a)(5) of this section is provided.
    (ii) Applicability to prior periods--(A) In general. Except as 
provided in paragraph (g)(4)(ii)(B) of this section, 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) of this section with 
respect to unpredictable contingent events that occur during the 
periods to which paragraphs (g)(2) and (g)(3) of this section apply. 
Except as provided in paragraph (g)(4)(ii)(B) of this section, 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 (c) of this section 
to a plan amendment that increases liability for benefits where the 
amendment is first effective during the periods to which paragraphs 
(g)(2) and (g)(3) apply. 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 
(d) of this section for distributions with annuity starting dates 
before the certification. Similarly, 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 (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.
    (B) Special rule for unpredictable contingent event benefits and 
plan amendments that increase liability. If a plan does not pay 
benefits attributable to an unpredictable contingent event or plan 
amendment because of the application of paragraph (g)(5)(ii) of this 
section, 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 adjusted funding target 
attainment percentage, 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.
    (5) Additional rules regarding limitations on unpredictable 
contingent event benefits and certain plan amendments based on presumed 
adjusted funding target prior to certification--(i) Reduction in 
funding balances--(A) Mandatory reduction for collectively bargained 
plans. During the period described in paragraph (g)(2) or (g)(3) of 
this section, 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 
percentage. In order to determine the amount of the reduction in those 
balances that would apply to a collectively bargained plan during that 
period with respect to an unpredictable contingent event or a plan 
amendment that increases liability for benefits, the rules of paragraph 
(g)(2)(ii) of this section are applied, except that the presumed 
adjusted funding target is increased to take into account the benefits 
attributable to the unpredictable contingent event or the plan 
amendment. For this purpose, if no presumption applies under the rules 
of paragraph (h) of this section (for example, because the plan's 
actual adjusted funding target attainment percentage for the prior year 
was certified to be at least 80 percent), then that prior year's actual 
adjusted funding target attainment percentage is substituted for the 
presumed adjusted funding target attainment percentage for the plan 
year in determining the presumed adjusted funding target.
    (B) 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 account carryover balance and the prefunding balance under the 
rules of paragraph (a)(5) of this section) is permitted to reduce those 
balances in order to increase the interim value of adjusted plan assets 
(as defined in paragraph (g)(2)(ii)(A) of this section) that is 
compared to the presumed adjusted funding target determined under this 
paragraph (g)(5)(i).
    (ii) Plans funded below the threshold. If, after application of 
paragraph (g)(5)(i) of this section, the ratio of the interim value of 
adjusted plan assets (as defined in paragraph (g)(2)(ii)(A) of this 
section) to the presumed adjusted funding target determined under that 
paragraph is less than the applicable threshold under section 436(b) or 
436(c), as applicable, then the plan is not permitted to provide any 
benefits attributable to the unpredictable contingent event or plan 
amendment 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 go into effect under 
the rules of paragraph (b)(2) or (c)(2) of this section.
    (iii) Plans funded at or above the threshold. If, after application 
of paragraph (g)(5)(i) of this section, the ratio of the interim value 
of adjusted plan assets (as defined in paragraph (g)(2)(ii)(A) of this 
section) to the presumed adjusted funding target is greater than or 
equal to the applicable threshold under section 436(b) or 436(c), as 
applicable, 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 liability described in paragraph (c) of this section 
from becoming effective based on an expectation that the limitations 
under paragraph (b) or (c) of this section will apply to the plan once 
an actuarial certification is received.
    (6) Application to multiple events and amendments. For purposes of 
this paragraph (g), if a plan is providing benefits with respect to one 
or more unpredictable contingent events occurring within the plan year 
or amendments taking effect within the plan year, then paragraphs (b) 
and (c) of this section are applied with respect to a subsequent 
unpredictable contingent event or amendment by treating the increase in 
the funding target attributable to the subsequent event or amendment as 
if it included the increases in the funding target

[[Page 50570]]

attributable to all such earlier events or amendments.
    (7) Examples. The following examples illustrate the application 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; the first effective 
plan year is 2008; the plan sponsor is not in bankruptcy; and no 
annuity purchases have been made from the plan. No plan is in at-risk 
status for the years discussed in the examples.

    Example 1. (i) As of January 1, 2011, Plan A has assets of 
$3,300,000 and a prefunding balance of $300,000. Plan A has no 
funding standard carryover balance. 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 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 
plan assets for Plan A is $3,000,000 (that is, the asset value of 
$3,300,000 reduced by the prefunding balance of $300,000). The 
presumed adjusted funding target for Plan A is the interim value of 
the adjusted plan assets divided by the presumed AFTAP, or 
$4,000,000 (that is, $3,000,000 divided by 75%).
    (iv) In order to avoid the restriction on prohibited payments in 
paragraph (d)(3) of this section, Plan A's presumed AFTAP must be 
increased to 80%. This requires an increase in Plan A's adjusted 
plan assets of $200,000 (that is, 80% of the presumed adjusted 
funding target of $4,000,000, minus the interim value of the 
adjusted plan assets of $3,000,000). Plan A's prefunding balance as 
of January 1, 2011, is reduced by $200,000 under the deemed election 
provisions of paragraph (a)(5) of this section. Accordingly, Plan 
A's prefunding balance is $100,000 (that is, $300,000 minus 
$200,000) and the interim value of adjusted plan assets is increased 
to $3,200,000 (that is, $3,300,000 minus the reduced prefunding 
balance of $100,000). 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 65%, 10 percentage points lower than the 2010 AFTAP, 
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 funding 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)(B) of this section, 
a new 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 AFTAP is equal to the interim 
value of adjusted plan assets as of the valuation date of 
$3,000,000, without reflecting the deemed election to reduce the 
prefunding balance that was made under paragraph (a)(5) of this 
section. The new presumed adjusted funding target is $3,000,000 
divided by the presumed AFTAP of 65%, or $4,615,385.
    (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 $492,308 (that is, 80% of the new presumed 
adjusted funding target of $4,615,385, 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.
    Example 3. (i) The facts are the same as in Example 2. On July 
1, 2011, the enrolled actuary for Plan A calculates the actual 
adjusted funding target as $3,700,000 as of January 1, 2011. 
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)(4)(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. Plan B has no funding standard carryover balance. 
Beginning on January 1, 2011, Plan B's AFTAP for 2011 is presumed to 
be 83% under the rules of paragraph (g)(3) of this section and based 
on the certified AFTAP for 2010.
    (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)(5) of this section, the presumed adjusted funding 
target is calculated, and then the presumed adjusted funding target 
is increased to take into account the benefits attributable to the 
plan amendment.
    (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 a presumed 
adjusted funding target of $3,181,325 and 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 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 less than 80% when the 
amendment is reflected, 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 presumed AFTAP 
(reflecting the increase due to the amendment) is increased to 80%. 
This would require an additional amount of $195,060 (that is, 80% of 
the presumed adjusted funding target of $3,181,325 less the interim 
value of adjusted plan assets of $2,350,000).
    (v) Plan B's prefunding balance of $150,000 is not large enough 
for Plan B to avoid the restriction on plan amendments, and 
therefore the deemed election to reduce the prefunding balance under 
paragraph (a)(5) of this section does not apply and the amendment 
cannot take effect.
    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. Pursuant to paragraph (f)(2)(i)(A)(2) of 
this section, Plan B's effective rate of interest for 2011 is 
treated as 5.25%.
    (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

[[Page 50571]]

reflect interest that would otherwise have accrued between the 
valuation date and the date of the contribution, at Plan B's 
effective rate of interest for the 2011 plan year. The amount of the 
required contribution after adjustment is $195,894, determined as 
$195,060 increased for one month of compound interest at an 
effective annual interest rate of 5.25%.
    (iii) As of April 1, 2011, the enrolled actuary for the plan has 
not certified the 2011 AFTAP. Therefore, beginning April 1, 2011, 
Plan A's presumed AFTAP is presumed to be 73%, 10 percentage points 
lower than the 2010 AFTAP, in accordance with paragraph (h)(2) of 
this section. However, paragraph (g)(2)(ii)(B) of this section does 
not require reapplication of the deemed election if necessary to 
avoid the application of benefit restrictions under paragraph (c) of 
this section. Therefore, since the effective date of the plan 
amendment occurred prior to April 1, 2011, no additional reduction 
in the prefunding balance is required and no additional contribution 
is required for the plan amendment to remain in effect.
    (iv) 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 certifies 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%.
    (v) Based on the certified AFTAP, the amount necessary to avoid 
the benefit restriction under paragraph (c) of this section is 
$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, is $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).
    (vi) Under paragraph (g)(3)(ii)(B) of this section, the 
contribution made under paragraph (g)(5)(ii) of this section is 
recharacterized as an employer contribution under section 430 to the 
extent that it exceeds the amount necessary to avoid application of 
the restriction on plan amendments under paragraph (c) of this 
section. Therefore, $105,509 (that is, the $195,894 actual 
contribution paid on February 1, 2011, minus the $90,385 required 
contribution based on the actual certified 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.
    Example 6. (i) The facts are the same as in Example 5, 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)(4)(ii)(A) of this 
section, the enrolled actuary's certification of the 2011 AFTAP does 
not affect the application of the limitation under paragraph (c) of 
this section regardless of the extent to which the certified 
percentage varies from the presumed percentage, because the 
amendment to Plan B was effective 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.

    (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 which a limitation under paragraph (b), 
(c), (d), or (e) of this section applied to the plan on the last day of 
the plan year preceding the current 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 until it is changed under this paragraph (h).
    (ii) Rule where preceding year certification issued during 
preceding year. 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 year before the first day of the current year, 
the adjusted funding target attainment percentage of the plan for the 
current plan year is presumed to be equal to the preceding year's 
actual adjusted funding target attainment percentage until the plan's 
enrolled actuary issues a certification of the adjusted funding target 
attainment percentage of the plan for the current plan year under 
paragraph (h)(4) of this section or until changed under paragraph 
(h)(2) or (h)(3) of this section.
    (iii) No certification for preceding year issued during preceding 
year--(A) Deemed percentage under 60 percent. 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 preceding the current year 
during that prior plan year, the adjusted funding target attainment 
percentage of the plan for the current plan year is presumed to be less 
than 60 percent until changed under paragraph (h)(1)(iii)(B) of this 
section or where the plan's enrolled actuary issues the certification 
of the adjusted funding target attainment percentage for the current 
year under paragraph (h)(4) of this section.
    (B) Enrolled actuary's certification in first 3 months of 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 year on or after the first day of the current 
year but before the first day of the 4th month of that year, the date 
of that prior year certification is a new section 436 measurement date 
for the plan year. In such a case, until it is changed by a 
certification of the current year's adjusted funding target attainment 
percentage under paragraph (h)(4) of this section or otherwise changed 
under paragraph (h)(2) or (h)(3) of this section, the presumed 
percentage for the current year beginning on the date of certification 
is equal to the certified percentage for the preceding year.
    (2) Presumption of underfunding after first day of 4th month for 
nearly underfunded plans--(i) In general. This paragraph (h)(2) applies 
to a plan for which the actual adjusted funding target attainment 
percentage for the plan year preceding the current plan year was 
certified for that prior plan year to be at least 60 percent but less 
than 70 percent, or was certified for that prior plan year to be at 
least 80 percent but less than 90 percent, and where the enrolled 
actuary for the plan has not issued a certification of the adjusted 
funding target attainment percentage for the plan year by the first day 
of the 4th month of the plan year. If this paragraph (h)(2) applies to 
a plan, the presumed adjusted funding target attainment percentage for 
the plan is the percentage under paragraph (h)(2)(ii) or (iii) of this 
section, as applicable.
    (ii) Presumed adjusted funding target attainment percentage. If 
this paragraph (h)(2) applies to a plan, and the date of the enrolled 
actuary's certification under paragraph (h)(4) of this section for the 
plan year preceding the current year occurred before the first day of 
the 4th month of the current plan year, then, commencing on the first 
day of the 4th

[[Page 50572]]

month of the current plan year and continuing until the earlier of 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 or the first day of the 10th month of the plan year 
as described in paragraph (h)(3) of this section--
    (A) The adjusted funding target attainment percentage of the plan 
as of the valuation date for the plan year is presumed to be equal to 
10 percentage points less than the actual adjusted funding target 
attainment percentage of the plan for the preceding plan year; and
    (B) The first day of the 4th month of the plan year is treated as a 
section 436 measurement date.
    (iii) Certification for prior year. If this paragraph (h)(2) 
applies to a plan, and the date of the enrolled actuary's certification 
under paragraph (h)(4) of this section of the actual adjusted funding 
target attainment percentage for the plan year preceding the current 
year occurs on or after the first day of the 4th month of the current 
plan year, then, commencing on the date of that prior year 
certification and continuing until the earlier of 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 
or the first day of the 10th month of the plan year as described in 
paragraph (h)(3) of this section--
    (A) The adjusted funding target attainment percentage of the plan 
as of the valuation date for the plan year is presumed to be equal to 
10 percentage points less than the actual adjusted funding target 
attainment percentage of the plan for the preceding plan year; and
    (B) The date of the prior year certification is treated as a 
section 436 measurement date.
    (3) Presumption of underfunding on and after first day of 10th 
month--(i) Section 436 measurement date. 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 that first day is treated as a 
section 436 measurement date.
    (ii) Presumed percentage under 60 percent. 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, the plan's adjusted funding target 
attainment percentage is presumed to be less than 60 percent beginning 
on that date and continuing through the remainder of the plan year.
    (4) Certification of adjusted funding target attainment 
percentage--(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 provided to the plan 
administrator, and, except as provided in paragraph (h)(4)(ii) of this 
section, must certify the plan's adjusted funding target attainment 
percentage for the plan year (including setting forth the aggregate 
amount of annuity purchases taken into account under paragraph 
(j)(3)(ii) of this section).
    (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 take into 
account assets that have not been contributed to the plan by the 
certification date. For example, 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 paragraph (h)(4)(iii) 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 the first nine months of a plan year that 
the plan's adjusted funding target attainment percentage for that plan 
year either is 60 percent or higher (but is less than 80 percent), is 
80 percent or higher, or is 100 percent or higher. If the enrolled 
actuary has issued such a range certification for a plan year and the 
enrolled actuary subsequently issues a certification of the specific 
adjusted funding target attainment percentage for the plan before the 
first day of the 10th month of that plan year, 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. If the enrolled actuary has issued a range 
certification for a plan year but no specific certification of the 
adjusted funding target attainment percentage of the plan for the plan 
year is issued by the plan's enrolled actuary before the first day of 
the 10th month of that plan year, then the rules of paragraph (h)(3) of 
this section apply and the change in the applicable percentage to under 
60 percent on that date is treated as a change in the applicable 
percentage which is subject to the rules of paragraph (h)(4)(iii) of 
this section.
    (B) Effect of range certification--(1) Before certification of 
specific percentage. If a plan's enrolled actuary issues a range 
certification pursuant to this paragraph (h)(4)(ii), then, for all 
purposes under this section (for example, applying the limitations of 
sections 436(b) and (c), making contributions described in sections 
436(b)(2), 436(c)(2), and 436(e)(2), and the mandatory reduction of 
funding 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.
    (2) 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 (before the first 
day of the 10th month of the plan year), that 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 will be 
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 before the first day of the 10th month 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 
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, that later percentage must be applied.
    (B) Determination of materiality--(1) In general. With respect to 
the effect of that subsequent determination of the

[[Page 50573]]

adjusted funding target attainment percentage on the plan for the 
period during which the plan's operation was based on the prior 
percentage, a determination must be made whether the change in the 
applicable percentage is a material change or an immaterial change.
    (2) Definition of material change. For this purpose, there is a 
material change in a plan's certified adjusted funding target 
attainment percentage 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. However, if the 
difference between the adjusted funding target attainment percentage 
for a plan year and the later revised determination of that percentage 
is the result of additional contributions for the preceding year that 
are made by the plan sponsor after the date of the enrolled actuary's 
certification or results from the plan sponsor's election to reduce the 
prefunding balance or funding standard carryover balance after the date 
of the certification, such change is not treated as a material change.
    (3) Definition of immaterial change. An immaterial change is any 
change in an adjusted funding target attainment percentage for a plan 
year that is not a material change.
    (C) Effect of change in percentage--(1) Material change. In the 
case of a material change where the plan was operated in accordance 
with the prior certification of the adjusted funding target attainment 
percentage 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 adjusted funding target attainment 
percentage during the period of time the prior certification applied, 
then the plan will not have been operated in accordance with its terms. 
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 prior certification until the date 
of the subsequent certification.
    (2) Effect of immaterial change. If the enrolled actuary for a plan 
provides a certification of the adjusted funding target attainment 
percentage of the plan for the plan year under this paragraph (h)(4) 
and that certified percentage is superseded by a subsequent 
determination of the adjusted funding target attainment percentage for 
that plan year that does not result in a material change under 
paragraph (h)(4)(iii)(B) of this section, the revised percentage 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.
    (5) Application to plan with valuation date after first day of plan 
year. [Reserved].
    (6) Examples of application of paragraphs (h)(1), (h)(2), and 
(h)(3) of this section. The following examples illustrate the 
application of paragraphs (h)(1), (h)(2), and (h)(3) of this section. 
Unless otherwise indicated, the examples in this section are based on 
the information in this paragraph. Each plan is a non-collectively 
bargained defined benefit plan with a plan year that is the calendar 
year and a valuation date of January 1. The first effective plan year 
is 2008. The plan does not have a funding standard carryover balance or 
a carryforward 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.

    Example 1. (i) On July 15, 2010, the adjusted funding target 
attainment percentage (``AFTAP'') for Plan T 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 accelerated benefit distributions 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 accelerated benefit 
distributions 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. Accordingly, Plan T's AFTAP for 2011 is 
presumed to be equal to the AFTAP for 2010 of 65% from January 1, 
2011, through March 31, 2011, and Plan T is subject to the 
restriction on accelerated benefit distributions under paragraph 
(d)(3) of this section during this period.
    (ii) Beginning April 1, 2011, the provisions of paragraph 
(h)(2)(ii) of this section apply because the enrolled actuary for 
the plan still has not certified the actual AFTAP as of January 1, 
2011. Under the provisions of paragraph (h)(2)(ii) of this section, 
the AFTAP for Plan T is presumed to be 10 percentage points lower, 
or 55%, beginning April 1, 2011. Accordingly, Plan T is now subject 
to the restriction in paragraph (d)(1) of this section, and so 
cannot pay any accelerated benefit distributions otherwise payable 
to plan participants who have annuity starting dates on or after 
April 1, 2011.
    (iii) On June 1, 2011, the enrolled actuary for the plan 
certifies that the AFTAP for 2011 for Plan T is 66%. Accordingly, 
Plan T is no longer subject to the restriction under paragraph 
(d)(1) of this section, but it is subject to the restriction under 
paragraph (d)(3) of this section.
    (iv) Since Plan T is no longer subject to the restriction on 
payment of accelerated benefit distributions under paragraph (d)(1) 
of this section, Plan T must resume paying the accelerated benefit 
distributions, 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.
    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 restriction in paragraph 
(d)(1) of this section, and cannot pay any accelerated benefit 
distributions to participants whose annuity starting date occurs on 
or after 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 October 1, 2011, the certification does 
not constitute a new section 436 measurement date, and Plan T 
continues to be subject to the restrictions on accelerated benefit 
distributions and benefit accruals under paragraphs (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 accelerated benefit distributions under paragraph 
(d)(1) of this section, and Plan T must resume paying accelerated 
benefit distributions, 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

[[Page 50574]]

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 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 restriction on accelerated benefit 
distributions in paragraph (d)(1) and the restriction on 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 accelerated benefit distributions under 
paragraph (d)(1) of this section no longer applies; however the 
partial restriction on accelerated benefit distributions under 
paragraph (d)(3) of this section applies beginning on February 1, 
2012. Therefore, Plan T must pay a portion of accelerated benefit 
distributions elected by participants with annuity starting dates on 
or after February 1, 2012. Furthermore, based on the presumed AFTAP 
of 65%, the restriction on benefit accruals under paragraph (e) of 
this section no longer applies, and 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 restriction on 
accelerated benefit distributions in paragraph (d)(1) of this 
section and the restriction 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)(2)(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 restriction on accelerated benefit 
distributions and benefit accruals under paragraphs (d)(1) and (e) 
of this section.
    (iv) On May 1, 2012, the enrolled actuary for the plan certifies 
that the actual AFTAP for 2011 for Plan T is 65%. Because the 
enrolled actuary for the plan has not issued a certification of the 
actual AFTAP as of January 1, 2012, the provisions of paragraph 
(h)(2)(ii) 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 (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 accelerated benefit 
distributions 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 accelerated benefit distributions 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 accelerated benefit 
distributions 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 restriction on the 
payment of accelerated benefit distributions under paragraph (d)(1) 
of this section and the restriction on benefit accruals under 
paragraph (e) of this section apply. Accordingly, Plan V cannot pay 
any accelerated benefit distributions to participants with an 
annuity starting date on or after April 1, 2011, and benefit 
accruals cease as of March 31, 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 
accelerated benefit distributions and benefit accruals in paragraphs 
(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 a portion of the 
accelerated benefit distributions elected by participants with an 
annuity starting date on or after June 1, 2011, and 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 period from April 1, 2011, through May 31, 
2011, would be able to elect a new 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)(A) 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)(A) 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.

    (7) Examples of application of paragraph (h)(4) of this section. 
The following examples illustrate the application 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 not added to the prefunding 
balance.

[[Page 50575]]

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)(B)(2) of this section because it 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) Funding target. For purposes of section 436, the funding target 
means the funding target under section 430(d) or 430(i), as applicable 
to the plan for the plan year.
    (2) Funding target attainment percentage--(i) In general. For 
purposes of section 436, the funding target attainment percentage for 
any plan year is the fraction (expressed as a percentage), the 
numerator of which is the value of net plan assets for the plan year, 
and the denominator of which is the plan's funding target for the plan 
year (but determined without regard to the at-risk rules under section 
430(i) even in the case of a plan that is in at-risk status). For this 
purpose, pursuant to section 430(f)(4), the value of net plan assets 
for the plan year is generally determined by subtracting the plan's 
funding standard carryover balance and prefunding balance (if any) for 
the plan year from the value of plan assets. A plan with a value of net 
plan assets for a plan year of zero is treated as having a funding 
target attainment percentage of zero, regardless of the amount of the 
plan's funding target.
    (ii) Application to plans that are fully funded without regard to 
subtraction of funding balances from plan assets--(A) In general. If 
the funding target attainment percentage for a plan year, determined 
without regard to the section 430(f)(4) subtraction of the funding 
standard carryover balance and the prefunding balance from the value of 
plan assets, would be 100 percent or more, then, solely for purposes of 
section 436 and this section (but not section 430(d)), the value of net 
plan assets used in the determination of the funding target attainment 
percentage described in this paragraph (j)(2) (and the adjusted funding 
target attainment percentage described in paragraph (j)(3) of this 
section) is determined without regard to any subtraction of funding 
balances under section 430(f)(4).
    (B) Transition rule. Paragraph (j)(2)(ii)(A) 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      The applicable
                        year:                            percentage is:
------------------------------------------------------------------------
2008.................................................                 92
2009.................................................                 94
2010.................................................                 96
------------------------------------------------------------------------

    (C) Limitation. Paragraph (j)(2)(ii)(B) of this section does not 
apply with respect to any plan year after 2008 unless the funding 
target attainment percentage (determined without regard to the section 
430(f)(4) subtraction of the funding standard carryover balance and the 
prefunding balance from the value of plan assets) of the plan for each 
preceding plan year (after 2007) was not less than the applicable 
percentage with respect to such preceding plan year determined under 
paragraph (j)(2)(ii)(B) of this section.
    (iii) Special rules for first effective plan year--(A) In general. 
In the case of the plan's first effective plan year, the funding target 
attainment percentage under section 436 for the plan's pre-effective 
plan year is determined as the fraction (expressed as a percentage), 
the numerator of which is the net plan assets determined under 
paragraph (j)(2)(iii)(B) of this section, and the denominator of which 
is the plan's current liability determined pursuant to section 
412(l)(7) on the valuation date for the plan's pre-effective plan year.
    (B) General determination of value of net plan assets--(1) In 
general. The value of net plan assets for purposes of this paragraph 
(j)(2)(iii) is determined under section 412(c)(2) as in effect for the 
plan's pre-effective plan year, except that the value of plan assets 
prior to subtracting the plan's funding standard account credit balance 
described in paragraph (j)(2)(iii)(B)(2) of this section 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.
    (2) Subtraction of credit balance. If a plan has a funding standard 
account credit balance as of the valuation date for the plan's pre-
effective plan year, that balance is subtracted from the net asset 
value described in paragraph (j)(2)(iii)(B)(1) of this section as of 
that valuation date. However, the subtraction does not apply if the 
value of plan assets determined in paragraph (j)(2)(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 plan determined under 
paragraph (j)(2)(iii)(A) of this section.
    (3) Effect of funding standard carryover balance reduction for 
first effective plan year. Notwithstanding paragraph (j)(2)(iii)(B)(2) 
of this section, if, for the first effective plan year, 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 
Sec.  1.430(f)-1(e), then the present value (determined as of the 
valuation date for the pre-effective plan year using the valuation 
interest rate for that pre-effective plan year) of the amount so 
reduced is not treated as part of the funding standard account credit 
balance when that balance is subtracted from the asset value under 
paragraph (j)(2)(iii)(B)(2) of this section.
    (3) Adjusted funding target attainment percentage--(i) In general. 
The adjusted funding target attainment percentage for any plan year is 
the fraction (expressed as a percentage), the numerator of which is the 
adjusted plan assets described in paragraph (j)(3)(ii) of this section 
and the denominator of which is the adjusted funding target described 
in paragraph (j)(3)(iii) of this section.
    (ii) Adjusted plan assets. The adjusted plan assets equals the net 
plan assets (determined under paragraph (j)(2) of this section), 
increased by the aggregate amount of purchases of annuities for 
employees other than highly compensated employees (as defined in 
section 414(q)) which were made by the plan during the preceding 2 plan 
years.
    (iii) Adjusted funding target--(A) In general. The adjusted funding 
target equals the funding target for the plan year (determined in 
accordance with paragraph (j)(1) of this section but without regard to 
the at-risk rules under section 430(i)), increased by the aggregate 
amount of purchases of annuities for employees other than highly 
compensated employees (as defined in section 414(q)) which were made by 
the plan during the preceding 2 plan years.
    (B) Special rule for first effective plan year. In the case of the 
plan's first effective plan year, for purposes of determining the 
adjusted funding target attainment percentage for the pre-effective 
plan year, the adjusted funding target is equal to the current 
liability determined pursuant to section 412(l)(7) as of the plan's 
valuation date for the pre-effective plan year, increased by the 
aggregate amount of purchases of annuities for employees other than 
highly compensated employees (as

[[Page 50576]]

defined in section 414(q)) which were made by the plan during the 
preceding 2 plan years.
    (iv) Special rule where current liability not certified for pre-
effective plan year. In any case in which the plan's enrolled actuary 
has not issued a certification under paragraph (h)(4)(i) of this 
section of the adjusted funding target attainment percentage of the 
plan for the pre-effective plan year, the adjusted funding target 
attainment percentage of the plan for the first effective plan year is 
presumed to be less than 60 percent until the adjusted funding target 
attainment percentage of the plan for the pre-effective plan year has 
been certified. The preceding sentence applies for purposes of 
paragraphs (b) and (c) of this section at the beginning of the first 
effective plan year and applies for purposes of paragraphs (d) and (e) 
of this section as of the first day of the 4th month of the first 
effective plan year. See paragraph (h) of this section for rules that 
apply after the adjusted funding target percentage for the plan has 
been certified for either the pre-effective plan year or the first 
effective plan year.
    (4) Section 436 measurement date. The section 436 measurement date 
is the date that is used to stop or start 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 paragraphs (b) 
and (c) of this section. See paragraph (h) of this section regarding 
section 436 measurement dates that result from application of the 
presumptions under that paragraph (h) of this section.
    (5) Examples. The following examples illustrate the application of 
this paragraph (j):

    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.
    (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 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 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. The 
first effective plan year for Plan R is 2008. The valuation interest 
rate for the 2007 plan year for Plan R is 7%. The fair market value 
of assets of Plan R as of January 1, 2007, is $1,000,000. The 
actuarial value of assets of Plan R as of January 1, 2007, is 
$1,200,000. The current liability of Plan R as of January 1, 2007, 
is $1,500,000. The funding 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 Sec.  1.430(f)-1 by 
$45,000.
    (ii) Pursuant to paragraph (j)(2)(iii)(B)(1) of this section, 
the asset value used to determine the funding target attainment 
percentage (FTAP) 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)(2)(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 FTAP for 
the 2007 plan year. However, pursuant to paragraph (j)(2)(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 account 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).

    (k) Effective/applicability dates--(1) In general. In general, this 
section applies to plan years beginning on or after January 1, 2008.
    (2) Plans with delayed effective/applicability date. In the case of 
a plan for which the effective date of section 436 is delayed in 
accordance with sections 104 through 106 of the Pension Protection Act 
of 2006, Public Law 109-280, 120 Stat. 780, this section applies to 
plan years beginning on or after the effective date of section 436 with 
respect to the plan.
    (3) Collective bargaining 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, this section 
does not apply to plan years beginning before the earlier of--
    (A) The date described in paragraph (k)(3)(ii) of this section; or
    (B) January 1, 2010.
    (ii) Termination of collective bargaining agreement. The date 
described in this paragraph (k)(3)(ii) is the later of--
    (A) The date on which the last collective bargaining agreement 
relating to the plan terminates (determined in accordance with 
paragraph (k)(3)(iii) of this section and without regard to any 
extension thereof agreed to after August 17, 2006); or
    (B) The first day of the first plan year to which this section 
would (but for this paragraph (k)(3)) apply.
    (iii) Treatment of certain plan amendments. 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.
    (iv) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which a collective bargaining agreement applies to some, but not all, 
of the plan

[[Page 50577]]

participants, the plan is considered a collectively bargained plan for 
purposes of this paragraph (k)(3) if it is considered a collectively 
bargained plan under the rules of paragraph (a)(5)(ii)(B) of this 
section.
    (4) First effective plan year. For purposes of this section, the 
first effective plan year for a plan is the first plan year to which 
this section applies under paragraph (k)(1), (k)(2), or (k)(3) of this 
section.
    (5) Pre-effective plan year. For purposes of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
the first effective date applicable under paragraph (k)(1), (k)(2), or 
(k)(3) of this section. Thus, except for plans with a delayed effective 
date under paragraph (k)(2) or (k)(3) of this section, the pre-
effective plan year for a plan is the last plan year beginning before 
January 1, 2008.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 07-4262 Filed 8-28-07; 8:45 am]
BILLING CODE 4830-01-P